For purposes of this section, "Repay", the "Company", "we", or "our" refer to
(i) Hawk Parent Holdings, LLC and its subsidiaries ("Predecessor") for the
periods from January 1, 2019 through July 10, 2019 and July 1, 2019 through July
10, 2019 and (ii) Repay Holdings Corporation and its subsidiaries (the
"Successor ") for the period from July 11, 2019 through September 30, 2019 and
the three and nine month periods ended September 30, 2020 (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.
Cautionary Note Regarding Forward-Looking Statements
Statements under "Management's Discussion and Analysis of Financial Condition
and Results of Operations" regarding our financial position, business strategy
and the plans and objectives of management for future operations, are
forward-looking statements. Actual results could differ materially from those
contemplated by the forward-looking statements as a result of certain factors,
including those set forth under Part I, Item 1A "Risk Factors" in our Annual
Report on Form 10-K and under Part II, Item 1A "Risk Factors" in this Form 10-Q.
Overview
We are a leading payments technology company. We provide integrated payment
processing solutions to industry-oriented vertical markets in which businesses
have specific and bespoke transaction processing needs. We refer to these
markets as "vertical markets" or "verticals."
We are a payments innovator, differentiated by our proprietary, integrated
payment technology platform and our ability to reduce the complexity of the
electronic payments for businesses. We intend to continue to strategically
target verticals where we believe our ability to tailor payment solutions to our
customers' needs 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 $3.8 billion and $11.2 billion
of total card payment volume in the three and nine months ended September 30,
2020, respectively, and our card payment volume growth over the same periods in
2019 was approximately 44% and 55%, respectively.
The impacts of the COVID-19 pandemic and related economic conditions on the
Company's results are highly uncertain. The scope, duration and magnitude of the
direct and indirect effects of the COVID-19 pandemic are evolving rapidly and in
ways that are difficult to fully anticipate. At this time, we cannot reasonably
estimate the full impact of the pandemic on the Company, given the uncertainty
over the duration and severity of the economic crisis. In addition, because
COVID-19 did not begin to affect the Company's financial results until late in
the first quarter of 2020, its impact on the Company's results in the first nine
months of 2020 may not be indicative of its impact on the Company's results for
the remainder of 2020.
Business Combination
The Company was formed upon closing of the merger (the "Business Combination")
of Hawk Parent Holdings LLC (together with Repay Holdings, LLC and its other
subsidiaries, "Hawk Parent") with a subsidiary of Thunder Bridge Acquisition,
Ltd, ("Thunder Bridge"), a special purpose acquisition company, on July 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, the Company 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.
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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 successfully integrate recent acquisitions and complete
future acquisitions;
? our ability to offer new and competitive payment technology solutions to our
customers; and
? general economic conditions and consumer finance trends.
Recent Acquisitions
On February 10, 2020, we announced the acquisition of CDT Technologies, LTD
d/b/a Ventanex ("Ventanex") for up to $50.0 million, which includes a $14.0
million performance-based earnout. The closing of the acquisition was financed
with a combination of cash on hand and new borrowings under our existing credit
facility. See Note 5 to the unaudited interim consolidated financial statements
included elsewhere in this Quarterly Report on Form 10-Q.
On July 23, 2020, we announced the acquisition of cPayPlus, LLC ("cPayPlus") for
up to $16.0 million, which includes a $8.0 million performance-based earnout.
The closing of the acquisition was financed with cash on hand. See Note 5 to the
unaudited interim consolidated financial statements included elsewhere in this
Quarterly Report on Form 10-Q.
On October 27, 2020, we announced the acquisition of CPS Payment Services
("CPS") for up to $93 million, which includes up to $15 million in
performance-based earnouts. The acquisition closed on November 2, 2020 and was
financed with cash on hand.
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 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. During the three and nine months ended September 30, 2020 and 2019,
we believe our chargeback rate was less than 1% of our card payment volume.
Expenses
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 over a five-year estimated useful life for
non-compete agreements.
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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 interest in respect of our
indebtedness under the New Credit Agreement, which was entered into in
connection with the Business Combination and amended in February 2020.
Change in fair value of tax receivable liability. This amount represents the
change in fair value of the tax receivable agreement liability. The TRA
liability is carried at fair value; so, any change to the valuation of this
liability is recognized through this line in other expense. The change in fair
value can result from the redemption or exchange of Post-Merger Repay Units for
Class A common stock of Repay Holdings Corporation, or through accretion of the
discounted fair value of the expected future cash payments.
Results of Operations
Successor Predecessor
July 1, January 1,
July 11, 2019 2019 2019
Three Months Nine Months through through through
ended September ended September September 30, July 10, July 10,
(in $ thousands) 30, 2020 30, 2020 2019 2019 2019
Revenue $ 37,635$ 113,598$ 23,926$ 2,334$ 47,043
Operating expenses
Other costs of services $ 10,492$ 29,990 $ 6,368 $ 468$ 10,216
Selling, general and
administrative 28,581 65,765 21,003 34,069 51,201
Depreciation and
amortization 15,421 44,031 10,703 333 6,223
Change in fair value of
contingent consideration (3,750 ) (3,010 ) - - -
Total operating expenses $ 50,744$ 136,776$ 38,074$ 34,870$ 67,640
Income (loss) from
operations $ (13,109 )$ (23,178 )$ (14,148 )$ (32,536 )$ (20,597 )
Other expenses
Interest expenses (3,624 ) (10,847 ) (2,686 ) (227 ) (3,145 )
Change in fair value of tax
receivable liability (1,475 ) (12,056 ) (451 ) - -
Other income 25 70 (1,316 ) - -
Total other (expenses)
income (5,074 ) (22,833 ) (4,453 ) (227 ) (3,145 )
Income (loss) before income
tax expense (18,183 ) (46,011 ) (18,601 ) (32,763 ) (23,742 )
Income tax benefit 3,383 8,395 2,719 - -
Net income (loss) $ (14,800 )$ (37,616 )$ (15,882 )$ (32,763 )$ (23,742 )
Net income (loss)
attributable to
non-controlling interest (5,298 ) (12,053 ) (7,399 ) - -
Net income (loss)
attributable to the Company $ (9,502 )$ (25,563 )$ (8,483 )$ (32,763 )$ (23,742 )
Weighted-average shares of
Class A common stock
outstanding - basic and
diluted 57,913,089 45,806,225 34,326,127
Loss per Class A share -
basic and diluted $ (0.16 ) $ (0.56 ) $ (0.25 )
Three Months Ended September 30, 2020 Compared to Three Months Ended September
30, 2019
For purposes of this results of operations discussion, we have combined the
results of the Predecessor for the period from July 1, 2019 to July 10, 2019
with the results of the Successor for the period from July 11, 2019 to September
30, 2019 ("2019 three-month combined period").
Revenue
Total revenue was $37.6 million for the three months ended September 30, 2020
and $26.3 million for the 2019 three-month combined period, an increase of $11.4
million or 43.3%. This increase was the result of newly signed customers, the
growth of our existing customers, as well as the acquisitions of TriSource, APS,
Ventanex, and cPayPlus. For the three months ended September 30, 2020,
incremental revenues of approximately $10.2 million are attributable to
TriSource, APS, Ventanex, and cPayPlus.
Other Costs of Services
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Other costs of services were $10.5 million for the three months ended September
30, 2020 and $6.8 million for 2019 three-month combined period, an increase of
$3.7 million or 53.5%. For the three months ended September 30, 2020,
incremental costs of services of approximately $3.5 million are attributable to
TriSource, APS, Ventanex, and cPayPlus.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $28.6 million for the three
months ended September 30, 2020 and $55.1 million for the 2019 three-month
combined period, a decrease of $26.5 million or 48.1%. This decrease was
primarily due to one-time expenses associated with the Business Combination.
Depreciation and Amortization Expenses
Depreciation and amortization expenses were $15.4 million for the three months
ended September 30, 2020 and $11.0 million for the 2019 three-month combined
period, an increase of $4.4 million or 39.7%. 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, APS, Ventanex and cPayPlus.
Change in the Fair Value of Contingent Consideration
Change in the fair value of contingent consideration was $3.8 million for the
three months ended September 30, 2020, which consisted of fair value adjustments
related to the contingent consideration for the acquisitions of TriSource, APS,
and Ventanex.
Interest Expense
Interest expense was $3.6 million for the three months ended September 30, 2020
and $2.9 million for the 2019 three-month combined period, an increase of $0.7
million or 24.4%. 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 Tax Receivable Liability
We incurred a loss, related to accretion expense and fair value adjustment of
the tax receivable liability of $1.5 million for the three months ended
September 30, 2020 compared to $0.5 million for the 2019 three-month combined
period, an increase of $1.0 million or 227.1%. This increase was due to higher
fair value adjustments related to the tax receivable liability, primarily as a
result of changes to the discount rate used to determine the fair value of the
liability.
Income Tax
The income tax benefit was $3.4 million for the three months ended September 30,
2020 and $2.7 million for the period from July 11, 2019 to September 30, 2019,
which reflected the expected income tax benefit to be received on the net
earnings 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
stock-based compensation deductions as well as the amortization of assets
acquired in Business Combination and acquisitions of TriSource, APS, Ventanex,
and cPayPlus.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30,
2019
For purposes of this results of operations discussion, we have combined the
results of the Predecessor for the period from January 1, 2019 to July 10, 2019
with the results of the Successor for the period from July 11, 2019 to September
30, 2019 ("2019 nine-month combined period").
Revenue
Total revenue was $113.6 million for the nine months ended September 30, 2020
and $71.0 million for the 2019 nine-month combined period, an increase of $42.6
million or 60.1%. This increase was the result of newly signed customers, the
growth of our existing customers, as well as the acquisitions of TriSource, APS,
Ventanex, and cPayPlus.
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For the nine months ended September 30, 2020, incremental revenues of
approximately $33.7 million are attributable to TriSource, APS, Ventanex, and
cPayPlus.
Other Costs of Services
Other costs of services were $30.0 million for the nine months ended September
30, 2020 and $16.6 million for the 2019 nine-month combined period, an increase
of $13.4 million or 80.8%. For the nine months ended September 30, 2020,
incremental costs of services of approximately $12.7 million are attributable to
TriSource, APS, Ventanex, and cPayPlus.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $65.8 million for the nine
months ended September 30, 2020 and $72.2 million for the 2019 nine-month
combined period, a decrease of $6.4 million or 8.9%. This decrease was primarily
due to one-time expenses associated with the Business Combination, offset by
increases in share-based compensation and other operating costs.
Depreciation and Amortization Expenses
Depreciation and amortization expenses were $44.0 million for the nine months
ended September 30, 2020 and $16.9 million for the 2019 nine-month combined
period, an increase of $27.1 million or 160.1%. 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, APS, Ventanex, and cPayPlus.
Change in the Fair Value of Contingent Consideration
Change in the fair value of contingent consideration was $3.0 million for the
nine months ended September 30, 2020, which consisted of fair value adjustments
related to the contingent consideration for the acquisitions of TriSource, APS,
and Ventanex.
Interest Expense
Interest expense was $10.8 million for the nine months ended September 30, 2020
and $5.8 million for the 2019 nine-month combined period, an increase of $5.0
million or 86.0%. 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 Tax Receivable Liability
We incurred a loss, related to accretion expense and fair value adjustment of
the tax receivable liability of $12.1 million for the nine months ended
September 30, 2020 compared to only $0.5 million of accretion expense for the
2019 nine-month combined period, an increase of $11.6 million. This increase was
due to higher fair value adjustments related to the tax receivable liability,
primarily as a result of changes to the discount rate used to determine the fair
value of the liability.
Income Tax
The income tax benefit was $8.4 million for the nine months ended September 30,
2020 and $2.7 million for the period from July 11, 2019 to September 30, 2019,
which reflected the expected income tax benefit to be received on the net
earnings 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
stock-based compensation deductions as well as the amortization of assets
acquired in Business Combination and acquisitions of TriSource, APS, Ventanex
and cPayPlus.
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Non-GAAP Financial Measures
This report 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 non-cash change in
fair value of contingent consideration, non-cash change in fair value of assets
and liabilities, share-based compensation charges, transaction expenses,
management fees, legacy commission related charges, employee recruiting costs,
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 non-cash change in fair
value of contingent consideration, non-cash change in fair value of assets and
liabilities, share-based compensation expense, transaction expenses, management
fees, legacy commission related charges, employee recruiting costs, strategic
initiative related costs and other non-recurring charges, net of tax effect
associated with these adjustments. 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 and nine months
ended September 30, 2020 (excluding shares subject to forfeiture).
We believe that Adjusted EBITDA, Adjusted Net Income, and Adjusted Net Income
per share 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, and Adjusted Net Income per share 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, and
Adjusted Net Income per share, 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, and Adjusted Net Income per share 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 three and nine months ended
September 30, 2020.
The following tables set forth a reconciliation of our results of operations for
the three and nine months ended September 30, 2020 and 2019. Due to the
Predecessor and Successor periods, for the convenience of readers, we have
presented the three and nine months ended September 30, 2019 on both a
Predecessor and Successor basis and a combined basis (reflecting simple
arithmetic combination of the GAAP Predecessor and Successor periods with
adjustments) in order to present a meaningful comparison against the
corresponding periods.
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REPAY HOLDINGS CORPORATION
Reconciliation of GAAP Net Income to Non-GAAP Adjusted EBITDA
For the three months ended September 30, 2020 and 2019
Successor Successor Predecessor
Three Pro Forma July 11, Pro Forma
Months Three Months 2019 July 1, 2019 Three Months
Ended Adjustments(o) Ended through through July 10, Combined Adjustments(o) Ended
September September 30, September 2019 September 30,
(in $ thousands) 30, 2020 2020 30, 2019 2019
Revenue $ 37,635$ 37,635$ 23,926 $ 2,334 $ 26,260$ 26,260
Operating expenses
Other costs of services $ 10,492$ 10,492$ 6,368 $ 468 $ 6,836$ 6,836
Selling, general and
administrative 28,581 28,581 21,003 34,069 55,072 55,072
Depreciation and amortization 15,421 (8,159 ) 7,262 10,703 333 11,036 (7,253 ) 3,783
Change in fair value of
contingent consideration (3,750 ) (3,750 ) - - - -
Total operating expenses $ 50,744$ 42,585$ 38,074 $ 34,870 $ 72,944$ 65,691
Income (loss) from operations $ (13,109 )$ (4,950 )$ (14,148 ) $ (32,536 ) $ (46,684 )$ (39,431 )
Other expenses
Interest expenses (3,624 ) (3,624 ) (2,686 ) (227 ) (2,913 ) (2,913 )
Change in fair value of tax
receivable liability (1,475 ) (1,475 ) (451 ) - (451 ) (451 )
Other income 25 25 (1,316 ) - (1,316 ) (1,316 )
Total other (expenses) income (5,074 ) (5,074 ) (4,453 ) (227 ) (4,681 ) (4,680 )
Income (loss) before income
tax expense (18,183 ) (10,024 ) (18,601 ) (32,763 ) (51,364 ) (44,111 )
Income tax benefit 3,383 3,383 2,719 - 2,719 2,719
Net income (loss) $ (14,800 )$ (6,641 )$ (15,882 ) $ (32,763 ) $ (48,645 )$ (41,392 )
Add:
Interest expense 3,624 2,913
Depreciation and
amortization(a) 7,262 3,783
Income tax (benefit) (3,383 ) (2,719 )
EBITDA $ 862 $ (37,415 )
Loss on extinguishment of debt
(b) - 1,316
Non-cash change in fair value
of contingent consideration(c) (3,750 ) -
Non-cash change in fair value
of assets and liabilities(d) 1,475 451
Share-based compensation
expense(e) 5,768 10,409
Transaction expenses(f) 3,332 35,017
Management Fees(g) - 11
Legacy commission related
charges(h) 7,221 1,877
Employee recruiting costs(i) 67 18
Other taxes(j) 171 32
Restructuring and other
strategic initiative costs(k) 389 80
Other non-recurring charges(l) 60 114
Adjusted EBITDA $ 15,595$ 11,910
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REPAY HOLDINGS CORPORATION
Reconciliation of GAAP Net Income to Non-GAAP Adjusted EBITDA
For the nine months ended September 30, 2020 and 2019
Successor Successor Predecessor
Nine Pro Forma July 11, Pro Forma
Months Nine Months 2019 January 1, 2019 Nine Months
Ended Adjustments(o) Ended through through July 10, Combined Adjustments(o) Ended
September September 30, September 2019 September 30,
(in $ thousands) 30, 2020 2020 30, 2019 2019
Revenue $ 113,598$ 113,598$ 23,926 $ 47,043 $ 70,969$ 70,969
Operating expenses
Other costs of services $ 29,990$ 29,990$ 6,368 $ 10,216 $ 16,584$ 16,584
Selling, general and
administrative 65,765 65,765 21,003 51,201 72,204 72,204
Depreciation and amortization 44,031 (24,476 ) 19,555 10,703 6,223 16,926 (7,253 ) 9,673
Change in fair value of
contingent consideration (3,010 ) (3,010 ) - - - -
Total operating expenses $ 136,776$ 112,300$ 38,074 $ 67,640 $ 105,714$ 98,461
Income (loss) from operations $ (23,178 )$ 1,298$ (14,148 ) $ (20,597 ) $ (34,745 )$ (27,492 )
Other expenses 0
Interest expenses (10,847 ) (10,847 ) (2,686 ) (3,145 ) (5,831 ) (5,831 )
Change in fair value of tax
receivable liability (12,056 ) (12,056 ) (451 ) - (451 ) (451 )
Other income 70 70 (1,316 ) - (1,316 ) (1,316 )
Total other (expenses) income (22,833 ) (22,833 ) (4,453 ) (3,145 ) (7,598 ) (7,598 )
Income (loss) before income
tax expense (46,011 ) (21,535 ) (18,601 ) (23,742 ) (42,343 ) (35,090 )
Income tax benefit 8,395 8,395 2,719 - 2,719 2,719
Net income (loss) $ (37,616 )$ (13,140 )$ (15,882 ) $ (23,742 ) $ (39,624 )
$ (32,371 )
Add:
Interest expense 10,847 5,831
Depreciation and
amortization(a) 19,555 9,673
Income tax (benefit) (8,395 ) (2,719 )
EBITDA $ 8,867$ (19,586 )
Loss on extinguishment of debt
(b) - 1,316
Non-cash change in fair value
of contingent consideration(c) (3,010 ) -
Non-cash change in fair value
of assets and liabilities(d) 12,056 451
Share-based compensation
expense(e) 14,766 10,660
Transaction expenses(f) 7,777 37,513
Management Fees(g) - 211
Legacy commission related
charges(h) 7,221 2,427
Employee recruiting costs(i) 123 33
Other taxes(j) 396 259
Restructuring and other
strategic initiative costs(k) 579 296
Other non-recurring charges(l) 392 114
Adjusted EBITDA $ 49,167$ 33,694
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REPAY HOLDINGS CORPORATION
Reconciliation of GAAP Net Income to Non-GAAP Adjusted Net Income
For the three months ended September 30, 2020 and 2019
Successor Successor Predecessor
Three July 11, Pro Forma
Months Pro Forma 2019 Three Months
Ended Adjustments(o)
Three Months through July 1, 2019 Combined Adjustments(o) Ended September
September Ended September September through July 10, 30, 2019
(in $ thousands) 30, 2020 30, 2020 30, 2019 2019
Revenue $ 37,635$ 37,635$ 23,926 $ 2,334 $ 26,260$ 26,260
Operating expenses
Other costs of services $ 10,492$ 10,492$ 6,368 $ 468 $ 6,836 $ 6,836
Selling, general and
administrative 28,581 28,581 21,003 34,069 55,072 55,072
Depreciation and amortization 15,421 (8,159 ) 7,262 10,703 333 11,036 (7,253 ) 3,783
Change in fair value of
contingent consideration (3,750 ) (3,750 ) - - - -
Total operating expenses $ 50,744$ 42,585$ 38,074 $ 34,870 $ 72,944$ 65,691
Income (loss) from operations $ (13,109 )$ (4,950 )$ (14,148 ) $ (32,536 ) $ (46,684 )$ (39,431 )
Other expenses
Interest expenses (3,624 ) (3,624 ) (2,686 ) (227 ) (2,913 ) (2,913 )
Change in fair value of tax
receivable liability (1,475 ) (1,475 ) (451 ) - (451 ) (451 )
Other income 25 25 (1,316 ) - (1,316 ) (1,316 )
Total other (expenses) income (5,074 ) (5,074 ) (4,453 ) (227 ) (4,681 ) (4,680 )
Income (loss) before income tax
expense (18,183 ) (10,024 ) (18,601 ) (32,763 ) (51,364 ) (44,111 )
Income tax benefit 3,383 3,383 2,719 - 2,719 2,719
Net income (loss) $ (14,800 )$ (6,641 )$ (15,882 ) $ (32,763 ) $ (48,645 )$ (41,392 )
Add:
Amortization of
Acquisition-Related
Intangibles(m) 4,804 2,525
Loss on extinguishment of debt
(b) - 1,316
Non-cash change in fair value of
contingent consideration(c) (3,750 ) -
Non-cash change in fair value of
assets and liabilities(d) 1,475 451
Share-based compensation
expense(e) 5,768 10,409
Transaction expenses(f) 3,332 35,017
Management Fees(g) - 11
Legacy commission related
charges(h) 7,221 1,877
Employee recruiting costs(i) 67 18
Restructuring and other
strategic initiative costs(k) 389 80
Other non-recurring charges(l) 60 114
Pro forma taxes at effective
rate(p) (3,218 ) -
Adjusted Net Income $ 9,507 $ 10,426
Shares of Class A common stock
outstanding (on an as-converted
basis)(n) 78,885,221 57,531,359
Adjusted Net income per share $ 0.12 $ 0.18
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REPAY HOLDINGS CORPORATION
Reconciliation of GAAP Net Income to Non-GAAP Adjusted Net Income
For the nine months ended September 30, 2020 and 2019
Successor Successor Predecessor
Nine July 11, Pro Forma
Months Pro Forma 2019 Nine Months
Ended Adjustments(o) Nine Months through January 1, 2019 Combined Adjustments(o) Ended September
September Ended September September through July 10, 30, 2019
(in $ thousands) 30, 2020 30, 2020 30, 2019 2019
Revenue $ 113,598$ 113,598$ 23,926 $ 47,043 $ 70,969$ 70,969
Operating expenses
Other costs of services $ 29,990$ 29,990$ 6,368 $ 10,216 $ 16,584$ 16,584
Selling, general and
administrative 65,765 65,765 21,003 51,201 72,204 72,204
Depreciation and amortization 44,031 (24,476 ) 19,555 10,703 6,223 16,926 (7,253 ) 9,673
Change in fair value of
contingent consideration (3,010 ) (3,010 ) - - - -
Total operating expenses $ 136,776$ 112,300$ 38,074 $ 67,640 $ 105,714$ 98,461
Income (loss) from operations $ (23,178 ) $ 1,298 $ (14,148 ) $ (20,597 ) $ (34,745 )$ (27,492 )
Other expenses 0
Interest expenses (10,847 ) (10,847 ) (2,686 ) (3,145 ) (5,831 ) (5,831 )
Change in fair value of tax
receivable liability (12,056 ) (12,056 ) (451 ) - (451 ) (451 )
Other income 70 70 (1,316 ) - (1,316 ) (1,316 )
Total other (expenses) income (22,833 ) (22,833 ) (4,453 ) (3,145 ) (7,598 ) (7,598 )
Income (loss) before income tax
expense (46,011 ) (21,535 ) (18,601 ) (23,742 ) (42,343 ) (35,090 )
Income tax benefit 8,395 8,395 2,719 - 2,719 2,719
Net income (loss) $ (37,616 ) $
(13,140 ) $ (15,882 ) $ (23,742 ) $ (39,624 )
$ (32,371 )
Add:
Amortization of
Acquisition-Related
Intangibles(m) 13,463 6,485
Loss on extinguishment of debt
(b) - 1,316
Non-cash change in fair value of
contingent consideration(c) (3,010 ) -
Non-cash change in fair value of
assets and liabilities(d) 12,056 451
Share-based compensation
expense(e) 14,766 10,660
Transaction expenses(f) 7,777 37,513
Management Fees(g) - 211
Legacy commission related
charges(h) 7,221 2,427
Employee recruiting costs(i) 123 33
Restructuring and other
strategic initiative costs(k) 579 296
Other non-recurring charges(l) 392 114
Pro forma taxes at effective
rate(p) (9,160 ) -
Adjusted Net Income $ 31,067$ 27,135
Shares of Class A common stock
outstanding (on an as-converted
basis)(n) 71,307,517 57,531,359
Adjusted Net income per share $ 0.44 $ 0.47
(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.
(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.
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(e) Represents compensation expense associated with equity compensation plans,
totaling $5,768,220 and $14,766,400 in the three and nine months ended
September 30, 2020, respectively, $658,195 and $908,978 in the Predecessor
periods from July 1, 2019 to July 10, 2019 and January 1, 2019 to July 10,
2019, respectively, and $9,750,821 as a result of new grants made in the
Successor period from July 11, 2019 to September 30, 2019.
(f) Primarily consists of (i) during the three and nine months ended September
30, 2020, professional service fees and other costs incurred in connection
with the acquisition of cPayPlus, and additional transaction expenses
incurred in connection with the Business Combination and the acquisitions
of TriSource Solutions, APS Payments, and Ventanex, which closed in prior
periods, as well as professional service expenses related to the Follow-on
Offerings and (ii) during the three and nine months ended September 30,
2019, professional service fees and other costs in connection with the
Business Combination and the acquisitions of TriSource Solutions, and APS
Payments.
(g) Reflects management fees paid to Corsair Investments, L.P. pursuant to the
management agreement, which terminated upon the completion of the Business
Combination.
(h) Represents payments made to certain employees in connection with
significant 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 we expect will become more
moderate in subsequent periods.
(j) Reflects franchise taxes and other non-income based taxes.
(k) Reflects consulting fees related to our processing services and other
operational improvements, including restructuring and integration
activities related to our acquired businesses, that were not in the
ordinary course during the three and nine months ended September 30, 2020
and 2019, and 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 in the nine months
ended September 30, 2019.
(l) For the three and nine months ended September 30, 2020, reflects expenses
incurred related to one-time accounting system and compensation plan
implementation related to becoming a public company, as well as
extraordinary refunds to customers and other payments related to COVID-19.
For the nine months ended September 30, 2019, reflects expenses incurred
related to other one-time legal and compliance matters. Additionally, for
the three months ended September 30, 2019 reflects a one-time credit
issued to a customer which was not in the ordinary course of business.
(m) For the three and nine months ended September 30, 2020 reflects (i)
amortization of the customer 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 Capital LLC., (ii) customer
relationships, non-compete agreement, software, and channel relationship
intangibles acquired through the Business Combination, and (iii) customer
relationships, non-compete agreement, and software intangibles acquired
through Repay Holdings, LLC's acquisitions of TriSource Solutions, APS
Payments, Ventanex, and cPayPlus. For the three and nine months ended
September 30, 2019, reflects amortization of customer relationships
intangibles acquired through Hawk Parent's acquisitions and the
recapitalization transaction in 2016 and the acquisition of TriSource
Solutions described previously. This adjustment excludes the amortization
of other intangible assets which were acquired in the regular course of
business, such as capitalized internally developed software and purchased
software. See additional information below for an analysis of our
amortization expenses:
Three months ended September 30, Nine months ended September 30,
(in $ thousands) 2020 2019 2020 2019
Acquisition-related intangibles $ 4,804 $
2,525 $ 13,463 $ 6,485
Software 2,070 1,064 5,176 2,698
Reseller buyouts 15 15 44 44
Amortization $ 6,889 $ 3,604 $ 18,683 $ 9,227
Depreciation 373 179 872 446
Total Depreciation and amortization1 $ 7,262 $
3,783 $ 19,555 $ 9,673
1) Adjusted Net Income is adjusted to exclude amortization of all
acquisition-related intangibles as such amounts
42
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are inconsistent 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-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. 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 additional intangibles.
(n) Represents the weighted average number of shares of Class A common stock
outstanding (on as-converted basis) for the three and nine months ended
September 30, 2020, as well as the Successor period from July 11, 2019 to
September 30, 2019 (excluding 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.
(p) Represents pro forma income tax adjustment effect associated with items
adjusted above. As Hawk Parent, as the accounting Predecessor, was not
subject to income taxes, the tax effect above was calculated on the
adjustments related to the Successor period only.
Adjusted EBITDA for the three months ended September 30, 2020 and 2019 was $15.6
million and $11.9 million, respectively, representing a 30.9% year-over-year
increase. Adjusted EBITDA for the nine months ended September 30, 2020 and 2019
was $49.2 million and $33.7 million, respectively, representing a 45.9%
year-over-year increase.
Adjusted Net Income for the three months ended September 30, 2020 and 2019 was
$9.5 million and $10.4 million, respectively, representing an 8.8%
year-over-year decrease. Adjusted Net Income for the nine months ended September
30, 2020 and 2019 was $31.1 million and $27.1 million respectively, representing
a 14.5% year-over-year increase.
Our net income (loss) attributable to the Company for the three months ended
September 30, 2020 and 2019 was $(9.5) million and $(41.2) million,
respectively, representing a 77.0% year-over-year increase. Our net income
(loss) attributable to the Company for the nine months ended September 30, 2020
and 2019 was $(25.6) million and $(32.2) million respectively, representing a
20.7% year-over-year increase.
These increases in Adjusted EBITDA and Adjusted Net Income, for the nine months
ended September 30, 2020 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, APS, Ventanex, and
cPayPlus. The decrease in Adjusted Net Income for the three months ended
September 30, 2020 is largely a result of the tax effect of the adjustments to
the Net income (loss) incurred. The increase in net income (loss) attributable
to the Company for the three and nine months ended September 30, 2020, is
primarily the result of one-time expenses incurred in connection with the
Business Combination.
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, per each customer store, during the first
quarter of the calendar year tend to increase in comparison to the remaining
three quarters of the calendar year. 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 of September 30, 2020, we had $182.3 million
of cash and cash equivalents and available borrowing capacity of $75.6 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 $10.4 million at September 30, 2020. Our primary cash needs
are to fund working capital requirements, invest in technology development, fund
acquisitions and related
43
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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"
in our Annual Report on Form 10-K.
Cash Flows
The following table present a summary of cash flows from operating, investing
and financing activities for the periods indicated:
Successor Successor Predecessor
Nine Months July 11, 2019 January 1, 2019
Ended through through July 10,
September September 30, 2019
(in $ thousands) 30, 2020
2019
Net cash provided by operating activities $ 6,711$ 4,937 $ 8,350
Net cash used in investing activities (55,176 ) (303,507 ) (4,046 )
Net cash provided by (used in) financing activities 203,242
355,619 (9,355 )
Cash Flow from Operating Activities
Net cash provided by operating activities was $6.7 million for the nine months
ended September 30, 2020.
Net cash provided by operating activities was $4.9 million from July 11, 2019 to
September 30, 2019.
Net cash provided by operating activities was $8.4 million from January 1, 2019
through July 10, 2019.
Cash provided by operating activities for the nine months ended September 30,
2020, the period from July 11, 2019 to September 30, 2019, and the period from
January 1, 2019 to July 10, 2019, 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 $55.2 million for the nine months
ended September 30, 2020, due to the acquisition of Ventanex and cPayPlus, as
well as capitalization of software development activities.
Net cash used in investing activities was $303.5 million from July 11, 2019 to
September 30, 2019, due to the Business Combination whereby Hawk Parent was
acquired, the acquisition of TriSource, and capitalization of software
development activities.
Net cash used in investing activities was $4.0 million from January 1, 2019
through July 10, 2019, due to capitalization of software development activities.
Cash Flow from Financing Activities
Net cash provided by financing activities was $203.2 million for the nine months
ended September 30, 2020, due to proceeds from the issuance of new shares in the
Follow-On Offerings, new borrowings related to the acquisition of Ventanex under
the New Credit Agreement, as well as funds received related to the exercise of
warrants, offset by
44
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repayment of the outstanding revolver balance related to the New Credit
Agreement in connection with its amendment and the acquisition of Ventanex, and
repayments of the term loan principal balance under the New Credit Agreement.
Net cash provided by financing activities was $355.6 million from July 11, 2019
to September 30, 2019, due to borrowing under our New Credit Agreement of $210.0
million, offset by debt issuance costs of $6.1 million. We 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.
Indebtedness
In connection with the Business Combination, on July 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 (as amended,
the "New Credit Agreement") with certain financial institutions, as lenders, and
Truist Bank (formerly SunTrust Bank), as the administrative agent.
On February 10, 2020, we announced the acquisition of Ventanex. The closing of
the acquisition was financed partially from new borrowings under our existing
credit facility. As part of the financing for the transaction, we entered into
an agreement with Truist Bank and other members of its existing bank group to
amend and upsize the New Credit Agreement.
As of September 30, 2020, the New Credit Agreement provides for a senior secured
term loan facility of $255.0 million, a delayed draw term loan of $60.0 million,
and a revolving credit facility of $30.0 million. As of September 30, 2020, we
had $0.0 million drawn against the revolving credit facility. We paid $96,567,
$231,168, and $19,444 in fees related to unused commitments for the three and
nine months ended September 30, 2020 and the period from July 11, 2019 to
September 30, 2019, respectively.
As of September 30, 2020, we had term loan borrowings of $258.1 million, net of
deferred issuance costs, under the New Credit Agreement, and we were in
compliance with its restrictive financial covenants. Additionally, we currently
expect that we will remain in compliance with the restrictive financial
covenants of the New Credit Agreement, prospectively.
Tax Receivable Agreement
Upon the completion of the Business Combination, we entered into the Tax
Receivable Agreement (the "TRA") with holders 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 redemptions or exchanges of Post-Merger
Repay Units for the Class A common stock of the Company, generally represents
100% of the estimated future tax benefit, if any, relating to the increase in
tax basis that will result from redemptions or 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 the Class A common stock of the Company 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
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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 Pronouncements
See Management's Discussion and Analysis of Financial Condition and Results of
Operations in our Annual Report on Form 10-K for the fiscal year ended December
31, 2019 for a complete discussion of critical accounting policies.
Off-Balance Sheet Arrangements
We did not have any material off-balance sheet arrangements as of September 30,
2020 or December 31, 2019.
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