REPAY HOLDINGS CORPORATION The following discussion and analysis of financial condition and results of operations should be read together with our audited consolidated financial statements and the related notes to those statements included under Item 8, hereof. For purposes of this section, "Repay", the "Company", "we", or "our" refer to (i)Hawk Parent Holdings, LLC and its subsidiaries ("Predecessor") for the years endedDecember 31, 2017 ,December 31, 2018 and the period fromJanuary 1, 2019 throughJuly 10, 2019 (each referred to herein as a "Predecessor Period") prior to the consummation of the Business Combination and (ii)Repay Holdings Corporation and its subsidiaries (the "Successor ") for the period fromJuly 11, 2019 throughDecember 31, 2019 (the "Successor Period") after the consummation of the Business Combination, unless the context otherwise requires. Certain figures have been rounded for ease of presentation and may not sum due to rounding. The combined year endedDecember 31, 2019 represents the aggregated total of the Predecessor Period and Successor Period.
Overview
We provide integrated payment processing solutions to industry-oriented markets in which merchants have specific transaction processing needs. We refer to these markets as "vertical markets" or "verticals." Our proprietary, integrated payment technology platform reduces the complexity of the electronic payments process for businesses, while enhancing their consumers' overall experience. We intend to continue to strategically target verticals where we believe our ability to tailor payment solutions to our customer needs, our deep knowledge of our vertical markets and the embedded nature of our integrated payment solutions will drive strong growth by attracting new customers and fostering long-term customer relationships. Since a significant portion of our revenue is derived from volume-based payment processing fees, card payment volume is a key operating metric that we use to evaluate our business. We processed approximately$10.7 billion of total card payment volume for the year endingDecember 31, 2019 , and our year-over-year card payment volume growth was approximately 44%.
Business Combination
The Company was formed upon closing of the merger (the "Business Combination") ofHawk Parent Holdings LLC (together withRepay Holdings, LLC and its other subsidiaries, "Hawk Parent") with a subsidiary of Thunder Bridge Acquisition, Ltd, ("Thunder Bridge"), a special purpose acquisition company, onJuly 11, 2019 (the "Closing Date"). On the Closing Date, Thunder Bridge changed its name to "Repay Holdings Corporation ." As a result of the Business Combination, Thunder Bridge was identified as the acquirer for accounting purposes, and Hawk Parent, which is the business conducted prior to the closing of the Business Combination, is the acquiree and accounting Predecessor. The acquisition was accounted for as a business combination using the acquisition method of accounting, and the Successor's financial statements reflect a new basis of accounting that is based on the fair value of net assets acquired. As a result of the application of the acquisition method of accounting as of the effective time of the Business Combination, the financial statements for the Predecessor period and for the Successor period are presented on different bases. The historical financial information of Thunder Bridge prior to the Business Combination has not been reflected in the Predecessor period financial statements.
Key Factors Affecting Our Business
Key factors that we believe impact our business, results of operations and financial condition include, but are not limited to, the following:
? the dollar amount volume and the number of transactions that are
processed by the customers that we currently serve;
? our ability to attract new merchants and onboard them as active
processing customers;
? our ability to (i) successfully integrate recent acquisitions and (ii)
complete future acquisitions;
? our ability to offer new and competitive payment technology solutions to
our customers; and
? general economic conditions and consumer finance trends.
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Acquisitions
OnAugust 14, 2019 , the Company announced the acquisition of TriSource, for up to$65.0 million , which includes a$5.0 million performance based earn-out. The acquisition was financed with a combination of cash on hand and proceeds from borrowings under the New Credit Agreement. See Note 4 to the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. OnOctober 11, 2019 , the Company announced the acquisition of APS, for up to$60.0 million , which includes a$30.0 million performance based earn-out. The acquisition was financed with a combination of cash on hand and proceeds from borrowings under the New Credit Agreement. See Note 4 to the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Key Components of Our Revenues and Expenses
Revenues
Revenue. As our customers process increased volumes of payments, our revenues
increase as a result of the fees we charge for processing these payments. Most
of our revenues are derived from volume-based payment processing fees ("discount
fees") and other related fixed per transaction fees. Discount fees represent a
percentage of the dollar amount of each credit or debit transaction processed
and include fees relating to processing and services that we provide. The
transaction price for such processing services are determined, based on the
judgment of the Company's management, considering factors such as margin
objectives, pricing practices and controls, customer segment pricing strategies,
the product life cycle and the observable price of the service charged to
similarly situated customers. We believe our chargeback rate was less than 1% of
our card payment volume, during the years ended December 31, 2019 , 2018 and
2017.
As discussed in Note 3 in the Notes to the Consolidated Financial Statements,
Repay adopted ASC 606 on January 1, 2019 , using the modified retrospective
method and applying the standard to all contracts not completed on the date of
adoption. Results for the reporting period beginning January 1, 2019 are
presented under ASC 606, while prior period amounts continue to be reported in
accordance with the Company's historic accounting practices under previous
guidance.
The primary impact to the Company's consolidated financial statements as a
result of the adoption of ASC 606 is a change in total net revenue attributable
to the presentation of interchange, network and other fees on a net basis,
driven by changes in principal and agent considerations, as compared to
previously being presented on a gross basis. Under the modified retrospective
method, the Company has not restated its comparative consolidated financial
statements for these effects.
Expenses
Interchange and network fees. Interchange and network fees consist primarily of
pass-through fees which generally increase in proportion to card payment volume
increases. These include interchange fees, dues and assessments, and other
pass-through costs. Beginning January 1, 2019 , as a result of the adoption of
ASC 606, interchange and network fees are not presented as operating expenses,
but as a reduction of revenue.
Other costs of services. Other costs of services primarily include commissions
to our software integration partners and other third-party processing costs,
such as front and back-end processing costs and sponsor bank fees.
Selling, general and administrative. Selling, general and administrative expenses include salaries, share-based compensation and other employment costs, professional service fees, rent and utilities, and other operating costs.
Depreciation and amortization. Depreciation expense consists of depreciation on
our investments in property, equipment and computer hardware. Depreciation
expense is recognized on a straight-line basis over the estimated useful life of
the asset. Amortization expense for software development costs and purchased
software is recognized on the straight-line method over a three-year estimated
useful life, over a ten-year estimated useful life for customer relationships
and channel relationships, and a two-year estimated useful life for
non-competition agreements.
Interest expense. Prior to the closing of the Business Combination, interest
expense consisted of interest in respect of our indebtedness under our Prior
Credit Agreement (as defined below), which was terminated in connection with the
closing of the Business Combination. In periods after the closing of the
Business Combination, interest expense consists of
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interest in respect of our indebtedness under the New Credit Agreement, which was entered into in connection with the Business Combination.
Other expenses. Other expenses primarily consist of write-off of debt issuance
costs relating to our Prior Credit Agreement (prior to the Business Combination)
and prepayment penalties relating to the Prior Credit Agreement, which was
terminated at the closing of the Business Combination, and the write-offs
related to certain fixed assets.
Results of Operations
From From
July 11, January 1,
2019 to 2019 Year Ended Year Ended
December 31, to July 10, December 31, December 31,
2019 2019 2018 2017
(in thousands) (Successor) (Predecessor)
Revenue
Processing and service fees $57,560 $47,043 $82,186 $57,063
Interchange and network fees - - 47,827 36,888
Total Revenue 57,560 47,043 130,013 93,951
Operating Expenses
Interchange and network fees $ - - 47,827 36,888
Other costs of services 15,657 10,216 27,160 20,713
Selling general and administrative 45,758 51,201 29,097 14,604
Depreciation and amortization 23,757 6,223 10,421 7,456
Change in fair value of contingent
consideration - - (1,103) (2,100)
Total operating expenses 85,172 67,640 113,402 77,562
Income (loss) from operations (27,611) (20,597) 16,611 16,389
Other income (expense)
Interest expense (5,922) (3,145) (6,073) (5,706)
Change in fair value of tax receivable
liability (1,638) - - -
Other income (expense) (1,380) 0 (1) (1,235)
Total other income (expenses) (8,940) (3,145) (6,074) (6,941)
Income (loss) before income tax expense (36,552) (23,743) 10,537 9,448
Income tax benefit (expense) 4,991 - - -
Net income (loss) $(31,561) $(23,743) $10,537 $9,448
Less: Net income (loss) attributable to
noncontrolling
interests $(15,271) - - -
Net income (loss) attributable to the
Company $(16,290) $(23,743) Earnings (loss) per Class A share: Basic and diluted$(0.46) Weighted-average shares outstanding: Basic and diluted 35,731,220
Year Ended
Revenue
Total revenue was$57.6 million for the Successor Period,$47.0 million fromJanuary 1, 2019 throughJuly 10, 2019 , and$130.0 million in the year endedDecember 31, 2018 . Total revenue for the combined year endedDecember 31, 2019 was$104.6 million , a decrease of$25.4 million or 19.5% from$130.0 million for the year endedDecember 31, 2018 . 43 -------------------------------------------------------------------------------- The primary reason for the decrease is the impact of adopting ASC 606 in 2019 and the result of recording processing revenue "net" of the fees collected on behalf of the payment networks and card issuers, as opposed to the "gross" presentation for certain of these fees in 2018. The decrease is offset by increases as a result of newly signed customers, the growth of our existing customers, as well as the acquisitions of TriSource and APS. For the year endedDecember 31, 2019 , incremental revenues of approximately$13.6 million are attributable to TriSource and APS.
Interchange and Network Fees
Interchange and network fees were$0.0 million for the Successor Period,$0.0 million fromJanuary 1, 2019 throughJuly 10, 2019 and$47.8 million in the year endedDecember 31, 2018 . The primary reason for the decrease is due to the impact of adopting ASC 606 in 2019 and the result of recording fees collected on behalf of the payment networks and card issuers "net" of the amounts paid to them, as opposed to the "gross" presentation for certain of these fees in 2018.
Other Costs of Services
Other costs of services were$15.7 million for the Successor Period,$10.2 million fromJanuary 1, 2019 throughJuly 10, 2019 and$27.2 million in the year endedDecember 31, 2018 . Other costs of services for the combined year endedDecember 31, 2019 was$25.9 million , a decrease of$1.3 million or 4.7% from$27.2 million for the year endedDecember 31, 2018 . The primary reason for the decrease is due to the impact of adopting ASC 606 in 2019 and the recording of certain processing and service fees "net" as opposed to the "gross" presentation in 2018. Other costs of services generally increase in proportion to card processing volume. For the year endedDecember 31, 2019 , incremental costs of services of approximately$6.1 million are attributable to TriSource and APS.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were$45.2 million for the Successor Period,$51.2 million fromJanuary 1, 2019 throughJuly 10, 2019 and$29.1 million in the year endedDecember 31, 2018 . Selling, general and administrative expenses for the combined year endedDecember 31, 2019 were$96.4 million , an increase of$67.3 million or 231.3% from$29.1 million for the year endedDecember 31, 2018 . This increase was primarily due to one-time expenses associated with the Business Combination, general business growth, increases in stock compensation expense, and increases in expenses relating to software and technological services, rent, telecommunication costs, advertising and marketing.
Change in Fair Value of Contingent Consideration
There was no change in the fair value of contingent consideration in the
Successor Period or the period from
Depreciation and Amortization Expenses
Depreciation and amortization expenses were$23.8 million for the Successor Period,$6.2 million fromJanuary 1, 2019 throughJuly 10, 2019 and$10.4 million in the year endedDecember 31, 2018 . Depreciation and amortization expenses for the combined year endedDecember 31, 2019 were$30.0 million , an increase of$19.6 million or 187.7% from$10.4 million for the year endedDecember 31, 2018 . The increase was primarily due to fair value adjustments to intangibles resulting from the Business Combination, as well as additional depreciation and amortization of fixed assets and intangibles from the acquisitions of TriSource and APS.
Interest Expense
Interest expense was$5.9 million for the Successor Period,$3.1 million fromJanuary 1, 2019 throughJuly 10, 2019 and$6.1 million in the year endedDecember 31, 2018 . Interest expense for the combined year endedDecember 31, 2019 was$9.1 million , an increase of$3.0 million or 49.3% from$6.1 million for the year endedDecember 31, 2018 . This increase was due to a higher average outstanding principal balance under our New Credit Agreement as compared to the average outstanding principal balance under the Prior Credit Agreement.
Change in Fair Value of Assets and Liabilities
Change in fair value of assets and liabilities were
Other Expenses
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Other expenses were $1.4 million for the Successor Period which primarily
consisted of write-off expenses of debt issuance costs relating to our Prior
Credit Agreement, which was settled on July 11, 2019 , in connection with the
Business Combination and New Credit Agreement. There were de minimis other
expenses from January 1, 2019 through July 10, 2019 and for the year ended
December 31, 2018 .
Income Tax
Prior to the Business Combination, the Company was not subject to corporate income taxation and, thus, did not have any corporate income tax expense in 2018 or 2017. Therefore, comparison of the year endedDecember 31, 2019 versus 2018 and the year endedDecember 31, 2018 versus 2017 are not meaningful. The income tax benefit recorded during 2019 of$5.0 million reflected the expected income tax benefit to be received on the net earnings for the Successor Period related to the Company's economic interest in Hawk Parent. This was a result of the operating loss incurred by the Company, primarily driven by the expenses incurred in conjunction with Business Combination and stock-based compensation deductions.
Year Ended
Revenue
Total revenue increased$36.1 million , or 38.4%, to$130.0 million for the year endedDecember 31, 2018 from$94.0 million for the year endedDecember 31, 2017 . For the year endedDecember 31, 2018 , incremental revenues of approximately$5.4 million and$17.3 million are attributable to the clients of PaidSuite andPaymaxx , respectively. For the year endedDecember 31, 2018 , revenue from discount fees and fixed transaction and service fees was approximately$128.0 million , which increased$35.1 million , or 37.8%, from$92.9 million for the year endedDecember 31, 2017 .
Processing and service fees increased
Interchange and Network Fees
Interchange and network fees increased$10.9 million , or 29.7%, to$47.8 million for the year endedDecember 31, 2018 from$36.9 million for the year endedDecember 31, 2017 , driven by increases in card payment volume associated with the PaidSuite andPaymaxx acquisitions, new clients, and same sales growth from existing clients. Interchange and network fees increased in general proportion to card payment volume increases.
Other Costs of Services
Other costs of services increased$6.4 million , or 31.1%, to$27.2 million for the year endedDecember 31, 2018 from$20.7 million for the year endedDecember 31, 2017 . Increased card payment volume resulted in greater third-party processing costs and an increase in commissions paid to our software integration partners.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased$14.5 million , or 99.2%, to$29.1 million for the year endedDecember 31, 2018 from$14.6 million for the year endedDecember 31, 2017 . This increase was primarily driven by an increase in compensation expenses due to an increase in headcount from acquisitions and general business growth. Increases in software and technological services, rent, telecommunication costs, advertising and marketing expenses accounted for the remainder of the increase. We expect selling, general and administrative expenses to increase going forward, as we further develop our personnel infrastructure and make other investments needed to support the continued development and distribution of our solutions.
Depreciation and Amortization
Depreciation and amortization increased$3.0 million , or 39.7%, to$10.4 million for the year endedDecember 31, 2018 from$7.5 million for the year endedDecember 31, 2017 , primarily due to greater amortization expense resulting from the PaidSuite andPaymaxx acquisitions
Change in Fair Value of Contingent Consideration
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There was $1.1 million of change in fair value of contingent consideration for
the year ended December 31, 2018 associated with the earnout payment in
connection with the 2016 Recapitalization. The change in fair value of
contingent consideration for the year ended December 31, 2017 was income of $2.1
million , associated with an earnout relating to an acquisition that occurred
prior to 2016.
Interest Expense
Interest expense increased $0.4 million , or 6.4%, to $6.1 million for the year
ended December 31, 2018 from $5.7 million for the year ended December 31, 2017 .
While our total debt during the year ended December 31, 2018 was higher than
that of the year ended December 31, 2017 , our Prior Credit Agreement, which was
obtained in September 2017 , allowed for significantly lower borrowing costs
relative to our previous debt facility, which was refinanced and replaced with
our Prior Credit Agreement.
Other Expense
Other expenses decreased to$1.1 thousand during the year endedDecember 31, 2018 , from$1.2 million for the year endedDecember 31, 2017 ,$0.7 million of which were related to the write-off of debt issuance costs relating to our Prior Credit Agreement and$0.5 million of which were prepayment penalties relating to our previous debt facility, which was refinanced and replaced with our Prior Credit Agreement. 46
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Non-GAAP Financial Measures
This communication includes certain non-GAAP financial measures that management uses to evaluate our operating business, measure our performance and make strategic decisions.
Adjusted EBITDA is a non-GAAP financial measure that represents net income prior to interest expense, tax expense, depreciation and amortization, as adjusted to add back certain non-cash and non-recurring charges, such as loss on extinguishment of debt, non-cash change in fair value of contingent consideration, share-based compensation charges, transaction expenses, management fees, legacy commission related charges, employee recruiting costs, loss on disposition of property and equipment, other taxes, strategic initiative related costs and other non-recurring charges. Adjusted Net Income is a non-GAAP financial measure that represents net income prior to amortization of acquisition-related intangibles, as adjusted to add back certain non-cash and non-recurring charges, such as loss on extinguishment of debt, non-cash change in fair value of contingent consideration, transaction expenses, share-based compensation expense, management fees, legacy commission related charges, employee recruiting costs, loss on disposition of property and equipment, strategic initiative related costs and other non-recurring charges. Adjusted Net Income is adjusted to exclude amortization of all acquisition-related intangibles as such amounts are inconsistent in amount and frequency and are significantly impacted by the timing and/or size of acquisitions. Management believes that the adjustment of acquisition-related intangible amortization supplements GAAP financial measures because it allows for greater comparability of operating performance. Although we exclude amortization from acquisition-related intangibles from our non-GAAP expenses, management believes that it is important for investors to understand that such intangibles were recorded as part of purchase accounting and contribute to revenue generation. Adjusted Net Income per share is a non-GAAP financial measure that represents Adjusted Net Income divided by the weighted average number of shares of Class A common stock outstanding (on as-converted basis) for the three months endedDecember 31, 2019 , and for the Successor period fromJuly 11, 2019 toDecember 31, 2019 (excluding certain shares that were subject to forfeiture). Organic gross profit growth is a non-GAAP financial measure that represents the year-on-year gross profit growth that excludes gross profit attributed to acquisitions made in 2019. We believe that Adjusted EBITDA, Adjusted Net Income, Adjusted Net Income per share and organic gross profit growth provide useful information to investors and others in understanding and evaluating its operating results in the same manner as management. However, Adjusted EBITDA, Adjusted Net Income, Adjusted Net Income per share and organic gross profit growth are not financial measures calculated in accordance with GAAP and should not be considered as a substitute for net income, operating profit, or any other operating performance measure calculated in accordance with GAAP. Using these non-GAAP financial measures to analyze our business has material limitations because the calculations are based on the subjective determination of management regarding the nature and classification of events and circumstances that investors may find significant. In addition, although other companies in our industry may report measures titled Adjusted EBITDA, Adjusted Net Income, Adjusted Net Income per share, organic gross profit growth or similar measures, such non-GAAP financial measures may be calculated differently from how we calculate our non-GAAP financial measures, which reduces their overall usefulness as comparative measures. Because of these limitations, you should consider Adjusted EBITDA, Adjusted Net Income, Adjusted Net Income per share and organic gross profit growth alongside other financial performance measures, including net income and our other financial results presented in accordance with GAAP. You should be aware of additional limitations with respect to Adjusted Net Income per share because the GAAP presentation of net loss per share is only reflected for the Successor period.
The following tables set forth our results of operations for the Successor
Period, Predecessor Periods, and year ended
Due to the Predecessor and Successor periods, for the convenience of readers, we have presented the year endedDecember 31, 2019 on a combined basis (reflecting simple arithmetic combination of the GAAP Predecessor and Successor Periods without further adjustment) in order to present a meaningful comparison against the corresponding period in the years endedDecember 31, 2018 and 2017. 47 --------------------------------------------------------------------------------
REPAY HOLDINGS CORPORATION
Reconciliation of GAAP Net Income to Non-GAAP Adjusted EBITDA
From From
July 11, January 1, Pro Forma
2019 to 2019 year ended Year Ended Year Ended
December 31, to July 10, December December 31, December 31,
2019 2019 Combined 2019 Adjustments(o) 31, 2019 2018 2017
(in thousands) (Successor) (Predecessor) (Predecessor)
Revenue
Processing and service fees$57,560 $47,043 $104,603 $ -$104,603 $82,186 $57,063 Interchange and network fees - - - - - 47,827 36,888 Total Revenue 57,560 47,043 104,603 - 104,603 130,013 93,951 Operating Expenses Interchange and network fees $ - - - - - 47,827 36,888 Other costs of services 15,657 10,216 25,873 - 25,873 27,160 20,713 Selling general and administrative 45,758 51,201 96,960 - 96,960 29,097 14,604 Depreciation and amortization 23,757 6,223 29,980 (15,412) 14,568 10,421 7,456 Change in fair value of contingent consideration - - - - - (1,103) (2,100) Total operating expenses 85,172 67,640
152,812 (15,412) 137,401 113,402 77,562
Income (loss) from operations (27,611) (20,597) (48,209) 15,412 (32,797) 16,611 16,389 Other income (expense) Interest expense (5,922) (3,145) (9,067) - (9,067) (6,073) (5,706) Change in fair value of tax receivable liability (1,638) - (1,638) - (1,638) - - Other income (expense) (1,380) 0 (1,380) - (1,380) (1) (1,235) Total other income (expenses) (8,940) (3,145) (12,085) - (12,085) (6,074) (6,941) Income (loss) before income tax expense (36,552) (23,743) (60,294) 15,412 (44,882) 10,537 9,448 Income tax benefit (expense) 4,991 - 4,991 - 4,991 - - Net income (loss)$(31,561) $(23,743) $(55,303) $15,412 $(39,891) $10,537 $9,448 Add: Interest expense 9,067 6,073 5,706 Depreciation and amortization (a) 14,568 10,421 7,456 Income tax (benefit) (4,991) - - EBITDA$(21,247) 27,031 22,611 Loss on extinguishment of debt (b) 1,380 1 1,235 Non-cash change in fair value of contingent consideration (c) - (1,103) (2,100) Non-cash change in fair value of assets and liabilities (d) 1,638 - - Share-based compensation expense (e) 22,922 797 622 Transaction expenses (f) 40,126 4,751 1,351 Management Fees (g) 211 400 400 Legacy commission related charges (h) 2,557 4,168 782 Employee recruiting costs (i) 51 256 278 Loss on disposition of property and equipment - 17 8 Other taxes (j) 226 216 98 Strategic initiative costs (k) 352 272 164 Other non-recurring charges (l) 215 (27) (24) Adjusted EBITDA
$48,432 $36,779 $25,426 48
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REPAY HOLDINGS CORPORATION
Reconciliation of GAAP Net Income to Non-GAAP Adjusted Net Income
From From
July 11, January 1, Pro Forma
2019 to 2019 year ended Year Ended Year Ended
December 31, to July 10, December December 31, December 31,
2019 2019 Combined 2019 Adjustments(o) 31, 2019 2018 2017
(in thousands) (Successor) (Predecessor) (Predecessor)
Revenue
Processing and service fees$57,560 $47,043 $104,603 $ -$104,603 $82,186 $57,063 Interchange and network fees - - - - - 47,827 36,888 Total Revenue 57,560 47,043 104,603 - 104,603 130,013 93,951 Operating Expenses Interchange and network fees $ - - - - - 47,827 36,888 Other costs of services 15,657 10,216 25,873 - 25,873 27,160 20,713 Selling general and administrative 45,758 51,201 96,960 - 96,960 29,097 14,604 Depreciation and amortization 23,757 6,223 29,980 (15,412) 14,568 10,421 7,456 Change in fair value of contingent consideration - - - - - (1,103) (2,100) Total operating expenses 85,172 67,640 152,812 (15,412) 137,401 113,402 77,562 Income (loss) from operations (27,611) (20,597) (48,209) 15,412 (32,797) 16,611 16,389 Other income (expense) Interest expense (5,922) (3,145) (9,067) - (9,067) (6,073) (5,706) Change in fair value of tax receivable liability (1,638) - (1,638) - (1,638) - - Other income (expense) (1,380) 0 (1,380) - (1,380) (1) (1,235) Total other income (expenses) (8,940) (3,145) (12,085) - (12,085) (6,074) (6,941) Income (loss) before income tax expense (36,552) (23,743) (60,294) 15,412 (44,882) 10,537 9,448 Income tax benefit (expense) 4,991 - 4,991 - 4,991 - - Net income (loss)$(31,561) $(23,743) $(55,303) $15,412 $(39,891) $10,537 $9,448 Add: Amortization of Acquisition-Related Intangibles(m) 9,917 7,919 6,605 Loss on extinguishment of debt (b) 1,380 1 1,235 Non-cash change in fair value of contingent consideration(c) - (1,103) (2,100) Non-cash change in fair value of assets and liabilities(d) 1,638 - - Share-based compensation expense(e) 22,922 797 622 Transaction expenses(f) 40,126 4,751 1,351 Management Fees(g) 211 400 400 Legacy commission related charges(h) 2,557 4,168 782 Employee recruiting costs(i) 51 256 278 Loss on disposition of property and equipment - 17 8 Strategic initiative costs(k) 352 272 164 Other non-recurring charges(l) 215 (27) (24) Adjusted Net Income$39,479 $27,987 $18,770 Shares of Class A common stock outstanding (on an as-converted basis)(n) 59,721,429 Adjusted Net income per share$0.66
(a) See footnote (m) for details on our amortization and depreciation expenses.
(b) Reflects write-offs of debt issuance costs relating to Hawk Parent's
term loans and prepayment penalties relating to its previous debt
facilities.
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(c) Reflects the changes in management's estimates of future cash
consideration to be paid in connection with prior acquisitions from the
amount estimated as of the most recent balance sheet date.
(d) Reflects the changes in management's estimates of the fair value of the
liability relating to the Tax Receivable Agreement
(e) Represents compensation expense associated with Hawk Parent's equity
compensation plans, totaling
vesting due to a change of control triggered by the Business
Combination, and $22,013,287 as a result of new grants made in the
Successor period.
(f) Primarily consists of (i) during the Successor Period , professional
service fees and other costs in connection with the Business
Combination, the acquisitions of TriSource and APS, and (ii) during the
year ended
in connection with the Business Combination, and additional transaction
related expenses in connection with the acquisitions of
and PaidMD, LLC (together, "PaidSuite") and Paymaxx Pro, LLC
("Paymaxx"), which transactions closed in 2017.
(g) Reflects management fees paid to
the management agreement, which terminated upon the completion of the
Business Combination.
(h) Represents payments made to certain employees in connection withsignificant restructuring of their commission structures. These payments
represented commission structure changes which are not in the ordinary
course of business.
(i) Represents payments made to third-party recruiters in connection with a
significant expansion of our personnel, which Repay expects will become
more moderate in subsequent periods.
(j) Reflects franchise taxes and other non-income based taxes.
(k) Consulting fees relating to Repay's processing services and otheroperational improvements that were not in the ordinary course as well as
one-time fees relating to special projects for new market expansion that
are not anticipated to continue in the ordinary course of business are
reflected in the twelve months ended
respectively. Additionally, one-time expenses related to the creation of
a new entity in connection with equity arrangements for the members of
Hawk Parent in connection with the Business Combination are reflected in
the twelve months ended December 31, 2019 .
(l) For the twelve months ended December 31, 2018 reflects reversal of
adjustments over the prior and current periods made for legalexpenses
incurred related to a dispute with a former customer, for which we were
reimbursed in the current period as a result of its settlement. For the
three months ended December 31, 2018 and the twelve months ended
December 31, 2019 , reflects expenses incurred related to other one-time
legal and compliance matters.
(m) For the year ended
relationships intangibles acquired through Hawk Parent's acquisitions of
PaidSuite and Paymaxx during the year ended December 31, 2017 and the
recapitalization transaction in 2016, through which Hawk Parent was
formed in connection with the acquisition of a majority interest in
Repay Holdings, LLC by certain investment funds sponsored by, or
affiliated with, Corsair. For the year ended December 31, 2019 reflects
amortization of the customer relationships intangibles describedpreviously, as well as customer relationships, non-compete agreement,
software, and channel relationship intangibles acquired through the
Business Combination, and customer relationships, non-competition
agreement, and software intangibles acquired through
LLC's acquisitions of TriSource and APS. This adjustment excludes the
amortization of other intangible assets which were acquired in theregular course of business, such as capitalized internally developed
software and purchased software. See additional information below for an
analysis of our amortization expenses:
Twelve months ended December 31 ,
(in $ thousands) 2019 2018 2017
Acquisition-related intangibles $9,917 $7,919 $6,605
Software 3,895 2,052 687
Reseller buyouts 58 58 0
Amortization $13,870 $10,029 $7,292
Depreciation 698 392 164
Total Depreciation and amortization1 $14,568 $10,421 $7,456
(1) Adjusted Net Income is adjusted to exclude amortization of all
acquisition-related intangibles as such amounts areinconsistent in
amount and frequency and are significantly impacted by the timing
and/or size of acquisitions (see corresponding adjustments in the
reconciliation of net income to Adjusted Net Income presented above).
Management believes that the adjustment of acquisition-related
intangible amortization supplements GAAP financial measures because
it allows for greater comparability of operating performance.
Although we exclude amortization from acquisition-relatedintangibles
from our non-GAAP
50
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expenses, management believes that it is important for investors to
understand that such intangibles were recorded as part ofpurchase
accounting and may contribute to revenue generation. Amortization of
intangibles that relate to past acquisitions will recur in future
periods until such intangibles have been fully amortized. Any future
acquisitions may result in the amortization of additionalintangibles.
(n) Represents the weighted average number of shares of Class A common stock
outstanding (on as-converted basis) for the three months ended December
31, 2019 , and for the Successor period from July 11, 2019 to December31, 2019 (excluding certain shares that were subject to forfeiture).
(o) Adjustment for incremental depreciation and amortization recorded due to
fair-value adjustments under ASC 805 in the Successor Period.
Adjusted EBITDA for the combined year ended December 31, 2019 and for the year
ended December 31, 2018 was $48.4 million and $36.8 million , respectively,
representing 31.7% year-over-year increase. Adjusted Net Income for the combined
year ended December 31, 2019 and the year ended December 31, 2018 was $39.5
million and $28.0 million , respectively, representing a 41.0% year-over-year
increase. Our net income (loss) attributable to the Company for the combined
year ended December 31, 2019 and for the year ended December 31, 2018 was
($40.0) million and $10.5 million , respectively, representing a 381.0%
year-over-year decrease.
Adjusted EBITDA for the year ended December 31, 2018 and 2017 was $36.8 million
and $25.4 million , respectively, representing a 44.7% year-over-year increase.
Adjusted Net Income for the year ended December 31, 2018 and 2017 was $28.0
million and $18.8 million , respectively, representing a 49.1% year-over-year
increase. Our net income for the year ended December 31, 2018 and 2017 was $10.5
million and $9.4 million , respectively, representing an 11.5% year-over-year
increase.
These increases in Adjusted EBITDA and Adjusted Net Income, in the combined year
ended December 31, 2019 , are the result of the growing card payment volume and
revenue figures described above, new customers, and same store sales growth from
existing customers as well as the acquisitions of TriSource and APS. The
decrease in Net Income, in the combined year ended 2019, is primarily the result
of one-time expenses incurred in connection with the Business Combination as
well as stock compensation expense.
These increases in Adjusted EBITDA and Adjusted Net Income, in the year ended
December 31, 2018 , are the result of the growing card payment volume and revenue
figures described above, new customers, and same store sales growth from
existing customers.
Seasonality
We have experienced in the past, and may continue to experience, seasonal fluctuations in our volumes and revenues as a result of consumer spending patterns. Volumes and revenues during the first quarter of the calendar year tend to increase in comparison to the remaining three quarters of the calendar year on a same store basis. This increase is due to consumers' receipt of tax refunds and the increases in repayment activity levels that follow. Operating expenses show less seasonal fluctuation, with the result that net income is subject to the similar seasonal factors as our volumes and revenues.
Liquidity and Capital Resources
We have historically financed our operations and working capital through net cash from operating activities. As ofDecember 31, 2019 , we had$24.6 million of cash and cash equivalents and available borrowing capacity of$10.0 million under the New Credit Agreement. This balance does not include restricted cash, which reflects cash accounts holding reserves for potential losses and customer settlement funds of$13.3 million atDecember 31, 2019 . Our primary cash needs are to fund working capital requirements, invest in technology development, fund acquisitions and related contingent consideration, make scheduled principal payments and interest payments on our outstanding indebtedness and pay tax distributions to members of Hawk Parent. We expect that our cash flow from operations, current cash and cash equivalents and available borrowing capacity under the New Credit Agreement will be sufficient to fund our operations and planned capital expenditures and to service our debt obligations for the next twelve months. We are a holding company with no operations and depend on our subsidiaries for cash to fund all of our consolidated operations, including future dividend payments, if any. We depend on the payment of distributions by our current subsidiaries, including Hawk Parent, which distributions may be restricted by law or contractual agreements, including agreements governing their indebtedness. For a discussion of those considerations and restrictions, refer to Part II, Item 1A "Risk Factors - Risks Related to Our Class A Common Stock." 51
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Cash Flows
The following table present a summary of cash flows from operating, investing and financing activities for the periods indicated:
July 11, January 1,
2019 to 2019 to Period Ended Period Ended
December 31, July 10, December 31, December 31,
2019 2019 2018 2017
(In thousands) (Successor) (Predecessor)
Net cash provided by
operating activities $12,936 $8,350 $24,177 $21,143
Net cash used in investing
activities (335,084) (4,046) (5,798) (3,437)
Net cash provided (used) by
financing activities 360,049 (9,355) (8,208) (8,993)
Cash Flow from Operating Activities
Net cash provided by operating activities was
Net cash provided by operating activities was
Net cash provided by operating activities was
Net cash provided by operating activities was
Cash provided by operating activities for the Successor Period fromJuly 11, 2019 toDecember 31, 2019 and the Predecessor periods fromJanuary 1 to July 10, 2019 and the year endedDecember 31, 2018 reflects net income as adjusted for non-cash operating items including depreciation and amortization, share-based compensation, and changes in working capital accounts.
Cash Flow from Investing Activities
Net cash used in investing activities was
Net cash used in investing activities was
Net cash used in investing activities was
Net cash used in investing activities was
Cash Flow from Financing Activities
52
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Net cash provided by financing activities was $360.0 million in the Successor
Period due to borrowings under our New Credit Agreement of $220.0 million ,
offset by debt issuance costs of $6.1 million . The Company received proceeds
from the Business Combination of $148.9 million and a private placement offering
of $135.0 million , offset by payments of $93.3 million to settle our Prior
Credit Agreement and $38.7 million to repurchase outstanding Thunder Bridge
warrants.
Net cash used in financing activities was $9.4 million from January 1, 2019
through July 11, 2019 due to $2.5 million of principal payments related to our
Prior Credit Agreement and tax distributions of $6.9 million to Hawk Parent's
members.
Net cash used in financing activities was
Indebtedness
Prior Credit Agreement
Hawk Parent was previously party to the Revolving Credit and Term Loan Agreement, dated as ofSeptember 28, 2017 , and amended as ofDecember 15, 2017 (the "Prior Credit Agreement"), withSunTrust Bank , as administrative agent and lender, and the other lenders party thereto. In connection with the completion of the Business Combination, all outstanding loans were repaid and the Prior Credit Agreement was terminated.
New Credit Agreement
In connection with the Business Combination, onJuly 11, 2019 ,TB Acquisition Merger Sub LLC , Hawk Parent and certain subsidiaries of Hawk Parent, as guarantors, entered into a Revolving Credit and Term Loan Agreement (the "New Credit Agreement") with certain financial institutions, as lenders, andTruist Bank (formerlySunTrust Bank ), as the administrative agent. As ofDecember 31, 2019 , the New Credit Agreement provided for a senior secured term loan facility of$170.0 million , a delayed draw term loan of$40.0 million , and a revolving credit facility of$20.0 million . As ofDecember 31, 2019 , the Company had$10.0 million drawn against the revolving credit facility. We paid$30,764 in fees related to unused commitments fromJuly 11, 2019 throughDecember 31, 2019 . The New Credit Agreement was upsized inFebruary 2020 . See Note 18 to the financial statements in Item 8 of this Annual Report on Form 10-K for more information. As ofDecember 31, 2019 , we had term loan borrowings of$203.4 million , net of deferred issuance costs, and$10.0 million in revolver borrowings outstanding under the New Credit Agreement and were in compliance with its restrictive financial covenants.
Contractual Obligations
The following table summarizes our contractual obligations and commitments as of
Payments Due by Period
Total Less 1 to 3 Years 3 to 5 Years More
than 1 than 5
(in thousands) Year Years
Processing minimums (a) $862 $202 $360 $300 $-
Facility leases 2,066 944 1,018 104 -
Credit Facility and related 269,218 17,440 43,568 208,210 -
interest (b)
Contingent consideration 14,250 14,250 - - -
(c)
Total $286,396 $32,837 $44,945 $208,614 $-
(a) Certain of the agreements with third-party processors require us to submit
a minimum monthly number of transactions for processing. If we submit a number
of transactions that is lower than the minimum, we are required to pay to the
processor the fees it would have received if we had submitted the required
minimum number of transactions.
(b) We estimated interest payments through the maturity of the Credit Facility
by applying the interest rate of 5.50% in effect on our borrowings as of
(c) Represents contingent consideration associated with the acquisitions of TriSource and APS.
53
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Potential payments under the Tax Receivable Agreement are not reflected in this
table. See the sections entitled "- Tax Receivable Agreement" below and
"Shareholder Proposal 2: The Business Combination Proposal - Related Agreements
- Tax Receivable Agreement."
Tax Receivable Agreement
Upon the completion of the Business Combination, we entered into that certain
Tax Receivable Agreement (the "TRA") with holders (other than the Company) of
limited liability company interests of Hawk Parent (the "Post-Merger Repay
Units"). As a result of the TRA, we established a liability in our consolidated
financial statements. Such liability, which will increase upon the exchanges of
Post-Merger Repay Units for Class A common stock, generally represents 100% of
the estimated future tax benefits, if any, relating to the increase in tax basis
that will result from exchanges of the Post-Merger Repay Units for shares of
Class A common stock pursuant to the Exchange Agreement and certain other tax
attributes of the Company and tax benefits of entering into the TRA, including
tax benefits attributable to payments under the TRA.
Under the terms of the TRA, we may elect to terminate the TRA early but will be
required to make an immediate payment equal to the present value of the
anticipated future cash tax savings. As a result, the associated liability
reported on our consolidated financial statements may be increased. We expect
that the payment obligations of the Company required under the TRA will be
substantial. The actual increase in tax basis, as well as the amount and timing
of any payments under the TRA, will vary depending upon a number of factors,
including the timing of redemptions or exchanges by the holders of Post-Merger
Repay Units, the price of our Class A common stock at the time of the redemption
or exchange, whether such redemptions or exchanges are taxable, the amount and
timing of the taxable income we generate in the future, the tax rate then
applicable and the portion of our payments under the TRA constituting imputed
interest. We expect to fund the payment of the amounts due under the TRA out of
the cash savings that we actually realize in respect of the attributes to which
TRA relates. However, the payments required to be made could be in excess of the
actual tax benefits that we realize and there can be no assurance that we will
be able to finance our obligations under the TRA.
Critical Accounting Policies and Recently Issued Accounting Standards
Revenue Recognition
We provide integrated payment processing solutions to niche markets that have
specific transaction processing needs; for example, personal loans, automotive
loans, and receivables management. We contract with our customers through
contractual agreements that set forth the general terms and conditions of the
service relationship, including rights of obligations of each party, line item
pricing, payment terms and contract duration. Most of our revenues are derived
from volume-based payment processing fees ("discount fees") and other related
fixed per transaction fees. Discount fees represent a percentage of the dollar
amount of each credit or debit transaction processed and include fees relating
to processing and services that we provide. As our customers process increased
volumes of payments, our revenues increase as a result of the fees we charge for
processing these payments.
Our performance obligations in our contracts with customers is the promise to
stand-ready to provide front-end authorization and back-end settlement payment
processing services ("processing services") for an unknown or unspecified
quantity of transactions and the consideration received is contingent upon the
customer's use (e.g., number of transactions submitted and processed) of the
related processing services. Accordingly, the total transaction price is
variable. These services are stand-ready obligations, as the timing and quantity
of transactions to be processed is not determinable. Under a stand-ready
obligation, our performance obligation is satisfied over time throughout the
contract term rather than at a point in time. Because the service of standing
ready to perform processing services is substantially the same each day and has
the same pattern of transfer to the customer, we have determined that our
stand-ready performance obligation comprises a series of distinct days of
service. Discount fees and other fixed per transaction fees are recognized each
day using a time-elapsed output method based on the volume or transaction count
at the time the merchants' transactions are processed.
Revenues are also derived from transaction or service fees (e.g. chargebacks,
gateway) as well as other miscellaneous service fees. These services are
considered immaterial in the overall context of our contractual arrangements
and, as such, do not represent distinct performance obligations. Instead, the
fees associated with these services are bundled with the processing services
performance obligation identified.
The transaction price for such processing services are determined, based on the
judgment of our management, considering factors such as margin objectives,
pricing practices and controls, customer segment pricing strategies, the product
life cycle and the observable price of the service charged to similarly situated
customers.
54
-------------------------------------------------------------------------------- We follow the requirements of Topic 606-10-55-36 through -40, Revenue from Contracts with Customers, Principal Agent Considerations, in determining the gross versus net revenue recognition for performance obligation(s) in the contract with a customer. Revenue recorded with the Company acting in the capacity of a principal is reported at on a gross basis equal to the full amount of consideration to which we expect in exchange for the good or service transferred. Revenue recorded with the Company acting in the capacity of an agent is reported on a net basis, exclusive of any consideration provided to the principal party in the transaction. The principal versus agent evaluation is matter of judgment that depends on the facts and circumstances of the arrangement and is dependent on whether we control the good or service before it is transferred to the customer or whether we are acting as an agent of a third party. This evaluation is performed separately for each performance obligation identified.
Interchange and network fees
Within our contracts with customers, we incur interchange and network pass-through charges from the third-party card issuers and payment networks, respectively, related to the provision of payment authorization and routing services. We have determined that we are acting as an agent with respect to these payment authorization and routing services, based the fact that we have no discretion over which card-issuing bank or payment network will be used to process a transaction and is unable to direct the activity of the merchant to another card-issuing bank or payment network. As such, we view the card-issuing bank and the payment network as the principal for these performance obligations, as these parties are primarily responsible for fulfilling these promises to the merchant. Therefore, revenue allocated to the payment authorization performance obligation is presented net of interchange and card network fees paid to the card issuing banks and card networks, respectively, for the three months and year endedDecember 31, 2019 , in connection with the adoption of ASC 606.
Indirect relationships
As a result of our past acquisitions, we have legacy relationships with
Independent Sales Organizations ("ISO"), whereby we act as the merchant acquirer
for the ISO. The ISO maintains a direct relationship with the sponsor bank and
the transaction processor, rather than the Company. Consequently, we recognize
revenue for these relationships net of the residual amount remitted to the ISO,
based on the fact that the ISO is primarily responsible for providing the
transaction processing services to the merchant. We are not focused on this
sales model, and we expect this relationship will represent an increasingly
smaller portion of the business over time.
Goodwill represents the excess of purchase price over tangible and intangible assets acquired less liabilities assumed arising from business combinations.Goodwill is generally allocated to reporting units based upon relative fair value (taking into consideration other factors such as synergies) when an acquired business is integrated into multiple reporting units. Repay's reporting units are at the operating segment level or one level below the operating segment level for which discrete financial information is prepared and regularly reviewed by management. When a business within a reporting unit is disposed of, goodwill is allocated to the disposed business using the relative fair value method. Relative fair value is estimated using a discounted cash flow analysis.
We test goodwill annually for impairment, as well as upon an indicator of
impairment, at the reporting unit level. As of the most recent impairment
analysis date, the fair value of each reporting unit exceeded its carrying
value. We did not record any goodwill impairment charges for the years ended
Intangibles
Intangible assets include acquired merchant relationships, residual buyouts,
trademarks, tradenames, website development costs and non-compete agreements.
Merchant relationships represent the fair value of customer relationships we
purchased. Residual buyouts represent the right to not have to pay a residual to
an independent sales agent related to certain future transactions of the agent's
referred merchants.
We amortize definite lived identifiable intangible assets using a method that
reflects the pattern in which the economic benefits of the intangible asset are
expected to be consumed or otherwise utilized. The estimated useful lives of our
customer-related intangible assets approximate the expected distribution of cash
flows, whether straight-line or accelerated, generated from each asset. The
useful lives of contract-based intangible assets are equal to the terms of the
agreement.
55
-------------------------------------------------------------------------------- Management evaluates the remaining useful lives and carrying values of long lived assets, including definite lived intangible assets, at least annually or when events and circumstances warrant such a review, to determine whether significant events or changes in circumstances indicate that a change in the useful life or impairment in value may have occurred. There were no impairment charges during the years endedDecember 31, 2019 and 2018.
Income Taxes
Under ASC 740, "Income Taxes," deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to net operating losses, tax credits, and temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, which will result in taxable or deductible amounts in the future. Our income tax expense/benefit, deferred tax assets and tax receivable liability reflect management's best assessment of estimated current and future taxes. Significant judgments and estimates are required in determining the consolidated income tax expense/benefits, deferred tax assets and tax receivable agreement liability. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including projected future taxable income and results of recent operations. Estimating future taxable income is inherently uncertain, requires judgment and is consistent with estimates we are using to manage our business. If we determine in the future that we will not be able to fully utilize all or part of the deferred tax assets, we would record a valuation allowance through earnings in the period the determination was made.
Equity Units Awarded
We measure restricted shares awarded to management based on the fair value of the awards on the date of the grant and recognizes compensation expense for those awards over the requisite service period. The restricted share awards vest over varying periods with all of the restricted share awards being fully vested in 2023.
Recently Adopted Accounting Pronouncements
Revenue Recognition
InMay 2014 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 201409, Revenue from Contracts with Customers ("Topic 606" or "ASC 606"), a comprehensive new revenue recognition standard that superseded nearly all legacy revenue recognition guidance underU.S. GAAP. The standard's core principle is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The guidance may be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initial application recognized at the date of initial application ("modified retrospective method") for fiscal years beginning afterDecember 15, 2017 . InAugust 2015 , the FASB issued ASU 201514 which defers the effective date of ASU 201409 one year for private or emerging growth companies, making it effective for the Company in annual reporting periods beginning afterDecember 15, 2018 , and interim periods beginning afterDecember 15, 2019 . We adopted Topic 606 onJanuary 1, 2019 , using the modified retrospective method and applying the standard to all contracts not completed on the date of adoption. Results for the reporting period beginningJanuary 1, 2019 are presented under ASC 606, while prior period amounts continue to be reported in accordance with our historic accounting practices under previous guidance. The primary impact to our consolidated financial statements as a result of the adoption of ASC 606 is a change in total net revenue attributable to the presentation of interchange, network and other fees on a net basis, driven by changes in principal and agent considerations, as compared to previously being presented on a gross basis. Under the modified retrospective method, we have not restated our comparative consolidated financial statements for these effects.
Refer to Note 3, Revenue, to the financial statements in Item 8 of this Annual Report on Form 10-K for more detail on the impact of our adoption of ASC 606.
Business Combinations
InJanuary 2017 , FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business ("ASU 2017-01"). The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. The standard is effective for annual periods beginning afterDecember 15, 2017 , including interim periods 56
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within those fiscal years. We have adopted with update, effective
Intangibles -
InJanuary 2017 , the FASB issued ASU No. 2017-04, Intangibles -Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU simplifies the measurement of goodwill impairment by eliminating the requirement that an entity compute the implied fair value of goodwill based on the fair values of its assets and liabilities to measure impairment. Instead, goodwill impairment will be measured as the difference between the fair value of the reporting unit and the carrying value of the reporting unit. The ASU also clarifies the treatment of the income tax effect of tax-deductible goodwill when measuring goodwill impairment loss. ASU 2017-04 will be effective for the Company beginning onNovember 1, 2022 . The amendment must be applied prospectively with early adoption permitted. We elected to early adopt the amendment for the year endedDecember 31, 2017 , which did not have a material impact on the consolidated financial statements.
Statement of Cash Flows
We adopted ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash onJanuary 1, 2019 , using the retrospective method. The most notable change relates to the treatment of balances we consider to be "restricted cash." The amendments in this Update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Fair Value Measurement InAugust 2018 , the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements in Topic 820. After the adoption of ASU 2018-13, an entity will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; the valuation processes for Level 3 fair value measurements; and, for nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period. However, in lieu of a rollforward for Level 3 fair value measurements, a nonpublic entity will be required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities. ASU 2018-13 is effective for our fiscal year beginning afterDecember 15, 2019 . The amendments on changes in unrealized gains and losses should be applied prospectively for only the most recent period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented on their effective date. Early adoption is permitted, and an entity also is permitted to early adopt any removed or modified disclosures on issuance of ASU 2018-13, and delay adoption of the additional disclosures until their effective date. After adopting ASU 2018-13, there was no material effect on our consolidated financial statements.
Recently Issued Accounting Pronouncements not yet Adopted
Leases
InFebruary 2016 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016 02, Leases (Subtopic 842). The purpose of this ASU is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this ASU require that lessees recognize the rights and obligations resulting from leases as assets and liabilities on their balance sheets, initially measured at the present value of the lease payments over the term of the lease, including payments to be made in optional periods to extend the lease and payments to purchase the underlying assets if the lessee is reasonably certain of exercising those options. The main difference between previous GAAP and Topic 842 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The effective date of this ASU for emerging growth companies is for fiscal years beginning afterDecember 15, 2020 , and interim periods within fiscal years beginning afterDecember 15, 2021 . Management is currently assessing the impact this ASU will have on its consolidated financial statements. 57 --------------------------------------------------------------------------------
Credit Losses
InJune 2016 , the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments which significantly changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining life, instead of when incurred. The changes (as amended) are effective for public business entities for fiscal years beginning afterDecember 15, 2019 , and interim periods within those fiscal years, with early adoption permitted for fiscal years beginning afterDecember 15, 2019 , including interim periods within those fiscal years. We are considered an emerging growth company and have elected to use the extended transition period provided for such companies. As a result, we will not be required to adopt ASU No. 2016-13 untilJanuary 1, 2023 . We are currently evaluating the impact of the adoption of this principle on our consolidated financial statements. Accounting for Income Taxes InDecember 2019 , the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU No. 2019-12"). ASU No. 2019-12 simplifies the accounting for income taxes, eliminates certain exceptions within Income Taxes (Topic 740), and clarifies certain aspects of the current guidance to promote consistency among reporting entities, and is effective for fiscal years, and for interim periods within those fiscal years, beginning afterDecember 15, 2020 , with early adoption permitted. Most amendments within ASU No. 2019-12 are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. We are currently in the process of evaluating the effects of ASU No. 2019-12 on our consolidated financial statements, including potential early adoption.
Off-Balance Sheet Arrangements
We did not have any material off-balance sheet arrangements as of
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