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 year endedDecember 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") and the year endedDecember 31, 2020 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$15.2 billion of total card payment volume for the year endingDecember 31, 2020 , and our year-over-year card payment volume growth was approximately 42%.
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 ofThunder Bridge Acquisition, Ltd. , ("Thunder Bridge"), a special purpose acquisition company, onJuly 11, 2019 . On the closing of the Business Combination, 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.
39
--------------------------------------------------------------------------------
Acquisitions
OnFebruary 10, 2020 , we announced the acquisition of 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 audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. OnJuly 23, 2020 , we announced the acquisition of 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 audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. OnOctober 27, 2020 , we announced the acquisition of CPS for up to$93 million , which includes up to$15 million in performance-based earnouts. The acquisition closed onNovember 2, 2020 and was financed with cash on hand. See Note 5 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, 2020 , 2019 and
2018.
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 the 2018 amounts continue to be reported in
accordance with the Company's historical 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 did not restate its 2018 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 Predecessor Credit Agreement (as defined below), which was terminated in connection with the
40
--------------------------------------------------------------------------------
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 Successor Credit Agreement (as defined below), which was
entered into in connection with the Business Combination and amended in February
2020 and November 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 11, January 1,
Year ended 2019 through 2019 Year ended
December 31, December 31, through December
2020 2019 July 10, 31, 2018
($ in thousands) 2019
Revenue
Processing and service fees $155,036 $57,560 $47,043 $82,186
Interchange and network fees - - - 47,827
Total Revenue $155,036 $57,560 $47,043 $130,013
Operating expenses
Interchange and network fees $ - $ - $ - $47,827
Other costs of services 41,447 15,657 10,216 27,160
Selling, general and
administrative 87,302 45,758 51,201 29,097
Depreciation and amortization 60,807 23,757 6,223 10,421
Change in fair value of
contingent consideration (2,510) - - (1,103)
Total operating expenses $187,046 $85,172 $67,640 $113,402
Income (loss) from operations $(32,010) $(27,612) $(20,597) $16,611
Interest expenses (14,445) (5,922) (3,145) (6,073)
Change in fair value of tax
receivable liability (12,439) (1,638) - -
Other (expenses) income (3) (1,380) - (1)
Total other (expenses) income (26,887) (8,940) (3,145) (6,074)
Income (loss) before income tax
expense (58,897) (36,552) (23,742) 10,537
Income tax benefit 12,358 4,991 - -
Net income (loss) $(46,539) $(31,561) $(23,742) $10,537
Net income (loss) attributable to
non-controlling interest (11,770) (15,271) - -
Net income (loss) attributable to
the Company $(34,769) $(16,290) $(23,742) $10,537
Weighted-average shares of Class
A common stock outstanding -
basic and diluted 52,180,911 35,731,220
Loss per Class A share - basic
and diluted ($0.67 ) ($0.46 )
Year Ended
For purposes of this results of operations discussion, we have combined the results of the Predecessor for the period fromJanuary 1, 2019 toJuly 10, 2019 with the results of the Successor for the period fromJuly 11, 2019 toDecember 31, 2019 ("2019 combined period").
Revenue
Total revenue was$155.0 million for the year endedDecember 31, 2020 and$104.6 million for the 2019 combined period, an increase of$50.4 million or 48.2%. This increase was the result of newly signed customers, the growth of our existing customers, as well as the acquisitions of TriSource, APS, Ventanex, cPayPlus, and CPS. For the year endedDecember 31, 2020 , incremental revenues of approximately$40.4 million are attributable to TriSource, APS, Ventanex, cPayPlus and CPS. 41
--------------------------------------------------------------------------------
Other Costs of Services
Other costs of services were$41.4 million for the year endedDecember 31, 2020 and$25.9 million for the 2019 combined period, an increase of$15.6 million or 60.2%. For the year endedDecember 31, 2020 , incremental costs of services of approximately$14.5 million are attributable to TriSource, APS, Ventanex, cPayPlus and CPS.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were$87.3 million for the year endedDecember 31, 2020 and$97.0 million for the 2019 combined period, a decrease of$9.7 million or 10.0%. This decrease was primarily due to one-time expenses associated with the Business Combination in 2019, offset by increases in share-based compensation and other operating costs.
Depreciation and Amortization
Depreciation and amortization expenses were$60.8 million for the year endedDecember 31, 2020 and$30.0 million for the 2019 combined period, an increase of$30.8 million or 102.8%. 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, cPayPlus and CPS.
Change in Fair Value of Contingent Consideration
Change in the fair value of contingent consideration was$2.5 million for the year endedDecember 31, 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$14.4 million for the year endedDecember 31, 2020 and$9.1 million for the 2019 combined period, an increase of$5.4 million or 59.3%. This increase was due to a higher average outstanding principal balance under our Successor Credit Agreement as compared to the average outstanding principal balance under the Predecessor Credit Agreement.
Change in Fair Value of Tax Receivable Liability
We incurred a change in the fair value of the tax receivable liability of$12.4 million for the year endedDecember 31, 2020 compared to$1.6 million for the 2019 combined period, an increase of$10.8 million . This increase was due to larger 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, as well as, additional accretion expense associated with the increase in the TRA liability as a result of Post-Merger Repay Unit exchanges that occurred during the year.
Income Tax
The income tax benefit was$12.4 million for the year endedDecember 31, 2020 and$5.0 million for the period fromJuly 11, 2019 toDecember 31, 2019 , which reflects 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 additional expenses incurred by the Company, primarily driven by stock-based compensation deductions, the amortization of assets acquired in Business Combination and acquisitions of TriSource, APS, Ventanex, cPayPlus and CPS, as well as, amortization associated with the step-up in basis received as a result of Post-Merger Repay Unit exchanges. For results of operations for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 , see Part II, Item 7 of the Company's 2019 Form 10-K. 42
--------------------------------------------------------------------------------
Non-GAAP Financial Measures
This report includes certain non-GAAP financial measures that our 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 loss on extinguishment of debt, 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 loss on extinguishment of debt, 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, loss on disposition of property and equipment, 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 Successor Period fromJuly 11, 2019 toDecember 31, 2019 and the year endedDecember 31, 2020 (excluding certain shares that were 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, 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. The following tables set forth a reconciliation of our results of operations for the years endedDecember 31, 2020 , 2019, and 2018. Due to the Predecessor and Successor periods, for the convenience of readers, we have presented the year endedDecember 31, 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. 43 -------------------------------------------------------------------------------- REPAY HOLDINGS CORPORATION Reconciliation of GAAP Net Income to Non-GAAP Adjusted EBITDA Successor Successor Predecessor Predecessor Pro Forma July 11, January 1, Pro Forma Year Year 2019 2019 Year Ended Adjustments(o) Ended through through Combined Adjustments(o) Ended Year Ended December December December July 10, December December ($ in thousands) 31, 2020 31, 2020 31, 2019 2019 31, 2019 31, 2018 Revenue Processing and service fees$155,036 $ -$155,036 $57,560 $47,043 $104,603 $ -$104,603 $82,186 Interchange and network fees - - - - - - - - 47,827 Total Revenue$155,036 $ -$155,036 $57,560 $47,043 $104,603 $ -$104,603 $130,013 Operating expenses Interchange and network fees $ - $ - $ - $ - $ - $ - $ - $ -$47,827 Other costs of services 41,447 - 41,447 15,657 10,216 25,873 - 25,873 27,160 Selling, general and administrative 87,302 - 87,302 45,758 51,201 96,959 - 96,959 29,097 Depreciation and amortization 60,807 (32,634) 28,173
23,757 6,223 29,980 (15,412) 14,568 10,421 Change in fair value of contingent consideration (2,510)
- (2,510) - - - - - (1,103)
Total operating expenses $187,046 $(32,634) $154,412 $85,172 $67,640 $152,812 $(15,412) $137,400 $113,402
Income (loss) from
operations $(32,010) $32,634 $624 $(27,612) $(20,597) $(48,209) $15,412 $(32,797) $16,611
Other expenses
Interest expenses (14,445) - (14,445) (5,922) (3,145) (9,067) - (9,067) (6,073)
Change in fair value of
tax receivable liability (12,439) - (12,439) (1,638) - (1,638) - (1,638) -
Other (expenses) income (3) - (3) (1,380) - (1,380) - (1,380) (1)
Total other (expenses) income (26,887) - (26,887) (8,940) (3,145) (12,085) - (12,085)
(6,074)
Income (loss) before income tax expense (58,897) 32,634 (26,263) (36,552) (23,742) (60,294) 15,412 (44,882)
10,537
Income tax benefit 12,358 - 12,358 4,991 - 4,991 - 4,991 - Net income (loss)$(46,539) $32,634 $(13,905) $(31,561) $(23,742) $(55,303) $15,412 $(39,891) $10,537 Add: Interest expense 14,445 9,067 6,073 Depreciation and amortization(a) 28,173 14,568 10,421 Income tax (benefit) (12,358) (4,991) - EBITDA$16,355 $(21,247) $27,031 Loss on extinguishment of debt (b) - 1,380 1 Non-cash change in fair value of contingent consideration(c) (2,510) - (1,103) Non-cash change in fair value of assets and liabilities(d) 12,439 1,638 - Share-based compensation expense(e) 19,446 22,922 797 Transaction expenses(f) 10,924 40,126 4,751 Management Fees(g) - 211 400 Legacy commission related charges(h) 8,614 2,557 4,168 Employee recruiting costs(i) 214 51 256 Loss on disposition of property and equipment - - 17 Other taxes(j) 426 226 216 Restructuring and other strategic initiative costs(k) 1,103 352 272 Other non-recurring charges(l) 1,154 215 (27) Adjusted EBITDA$68,165 $48,432 $36,779 44
--------------------------------------------------------------------------------
REPAY HOLDINGS CORPORATION
Reconciliation of GAAP Net Income to Non-GAAP Adjusted Net Income
Successor Successor Predecessor Predecessor
July 11, January 1,
Year Pro Forma 2019 2019 Pro Forma
Ended Adjustments(o) Year Ended through through Combined Adjustments(o) Year Ended Year Ended
December December December July 10, December December
($ in thousands) 31, 2020 31, 2020 31, 2019 2019 31, 2019 31, 2018
Revenue
Processing and service fees $155,036 $ - $155,036 $57,560 $47,043 $104,603 $ - $104,603 $82,186
Interchange and network fees - - - - - - - - 47,827
Total Revenue $155,036 $ - $155,036 $57,560 $47,043 $104,603 $ - $104,603 $130,013
Operating expenses
Interchange and network fees $ - $ - $ - $ - $ - $ - $ - $ - $47,827
Other costs of services 41,447 - 41,447 15,657 10,216 25,873 - 25,873 27,160 Selling, general and administrative 87,302 - 87,302 45,758 51,201 96,959 - 96,959 29,097
Depreciation and amortization 60,807 (32,634) 28,173
23,757 6,223 29,980 (15,412) 14,568 10,421 Change in fair value of contingent consideration (2,510) - (2,510) - - - - - (1,103) Total operating expenses$187,046 $(32,634) $154,412 $85,172 $67,640 $152,812 $(15,412) $137,400 $113,402 Income (loss) from operations$(32,010) $32,634 $624 $(27,612) $(20,597) $(48,209) $15,412 $(32,797) $16,611 Other expenses Interest expenses (14,445) - (14,445) (5,922) (3,145) (9,067) - (9,067) (6,073) Change in fair value of tax receivable liability (12,439) - (12,439) (1,638) - (1,638) - (1,638) - Other (expenses) income (3) - (3) (1,380) - (1,380) - (1,380) (1) Total other (expenses) income (26,887) - (26,887) (8,940) (3,145) (12,085) - (12,085)
(6,074)
Income (loss) before income tax expense (58,897) 32,634 (26,263) (36,552) (23,742) (60,294) 15,412 (44,882) 10,537 Income tax benefit 12,358 - 12,358 4,991 - 4,991 - 4,991 - Net income (loss)$(46,539) $32,634 $(13,905) $(31,561) $(23,742) $(55,303) $15,412 $(39,891) $10,537 Add: Amortization of Acquisition-Related Intangibles(m) 19,492 9,917 7,919 Loss on extinguishment of debt (b) - 1,380 1 Non-cash change in fair value of contingent consideration(c) (2,510) - (1,103) Non-cash change in fair value of assets and liabilities(d) 12,439 1,638 - Share-based compensation expense(e) 19,446 22,922 797 Transaction expenses(f) 10,924 40,126 4,751 Management Fees(g) - 211 400 Legacy commission related charges(h) 8,614 2,557 4,168 Employee recruiting costs(i) 214 51 256 Loss on disposition of property and equipment - - 17 Restructuring and other strategic initiative costs(k) 1,103 352 272 Other non-recurring charges(l) 1,154 215 (27) Pro forma taxes at effective rate(p) (13,226) - - Adjusted Net Income$43,745 $39,478 $27,988 Shares of Class A common stock outstanding (on an as-converted basis)(n) 73,373,106 59,721,429 Adjusted Net income per share$0.60 $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.
(c) Reflects the changes in management's estimates of future cashconsideration to be paid in connection with prior acquisitions from the
amount estimated as of the most recent balance sheet date.
45
--------------------------------------------------------------------------------
(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 equity compensation
plans, totaling
July 11, 2019 toDecember 31, 2019 , and$796,967 for the year endedDecember 31, 2018 .
(f) Primarily consists of (i) during the year ended
professional service fees and other costs incurred in connection with
the acquisition of CPS, and additional transaction expenses incurred in
connection with the Business Combination and the acquisitions of
TriSource Solutions, APS Payments, Ventanex and cPayPlus, which closed
in prior periods, as well as professional service expenses related to
the June and
from
other costs in connection with the Business Combination, the
acquisitions of TriSource and APS Payments, and (iii) during the period
from
2018, professional service fees and other costs in connection with the
Business Combination.
(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
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 year ended December 31, 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 year ended December 31, 2019 , reflectsexpenses
incurred related to other one-time legal and compliance matters, as
well as a one-time credit issued to a customer which was not in the
ordinary course of business. For the year ended December 31, 2018
reflects reversal of adjustments over the prior and currentperiods
made for legal expenses incurred related to a dispute with a former
customer, for which we were reimbursed in the current period as a
result of its settlement.
(m) For the year ended December 31, 2020 reflects (i) amortization of the
customer relationships intangibles acquired through Hawk Parent's
acquisitions of PaidSuite and
2017 and the recapitalization transaction in 2016, through which Hawk
Parent was formed in connection with the acquisition of a majority
interest in
by, or affiliated with, Corsair, (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
Payments, Ventanex, and cPayPlus. For the year ended
reflects amortization of customer relationships intangibles acquired
through Hawk Parent's acquisitions and the 2016 Recapitalization
transaction and the acquisition of TriSource. 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. For the year ended
reflects amortization of customer relationships intangibles acquired
through Hawk Parent's acquisitions of PaidSuite and
year ended
See additional information below for an analysis of our amortization
expenses:
Year ended December 31,
($ in thousands) 2020 2019 2018
Acquisition-related intangibles $19,492 $9,917 $7,919
Software 7,467 3,895 2,052
Reseller buyouts 58 58 58
Amortization $27,017 $13,870 $10,029
Depreciation 1,156 698 392
Total Depreciation and amortization (1)
46
--------------------------------------------------------------------------------(1) 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 (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 expenses, management believes that it is important
for investors to understand that such intangibles wererecorded as
part of purchase 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
additional intangibles.
(n) Represents the weighted average number of shares of Class A common stock
outstanding (on as-converted basis) for the year ended December 31,
2020 , and the period from July 11, 2019 to December 31, 2019 (in each
case, 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 year ended December 31, 2020 and the combined year ended
December 31, 2019 was $68.2 million and $48.4 million , respectively,
representing a 40.7% year-over-year increase. Adjusted Net Income for the year
ended December 31, 2020 and the combined year ended December 31, 2019 was $43.7
million and $39.5 million , respectively, representing a 10.8% year-over-year
increase. Our net loss attributable to the Company for the year ended December
31, 2020 and the combined year ended December 31, 2019 was $34.8 million and
$40.0 million , respectively, representing a 13.1% year-over-year decrease.
These increases in Adjusted EBITDA and Adjusted Net Income, for the year ended
December 31, 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,
cPayPlus and CPS. The increase in net income (loss) attributable to the Company
for the year ended December 31, 2020 , is primarily the result of one-time
expenses incurred in connection with the Business Combination.
For discussion on Adjusted EBITDA, Adjusted Net income, and net income (loss)
attributable to the Company for the year ended December 31, 2019 compared to the
year ended December 31, 2018 , see Part II, Item 7 of the Company's 2019 Form
10-K.
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. We also finance our operations through proceeds from the issuance of our Class A common stock inJune 2020 and ourJanuary 2021 convertible notes offering. As ofDecember 31, 2020 , we had$92.6 million of cash and cash equivalents and available borrowing capacity of$75.6 million under the Successor Credit Agreement. This balance does not include restricted cash, which reflects cash accounts holding reserves for potential losses and customer settlement funds of$13.9 million as ofDecember 31, 2020 . InFebruary 2021 , we used a portion of the proceeds from theJanuary 2021 convertible notes offering to prepay in full the entire principal amount of the term loans then outstanding under the Successor Credit Agreement and also terminated in full all delayed draw term loan commitments then outstanding. At that time, we also amended and restated the Successor Credit Agreement and entered into the Amended Credit Agreement, which establishes a$125.0 million senior secured revolving credit facility in favor of Hawk Parent. Our primary cash needs are to fund working capital requirements, invest in technology development, fund acquisitions and related contingent consideration, make scheduled principal payments and interest payments on our outstanding indebtedness and pay tax distributions to members of Hawk Parent. We expect that our cash flow from 47
-------------------------------------------------------------------------------- operations, current cash and cash equivalents and available borrowing capacity under the Amended Credit Agreement will be sufficient to fund our operations and planned capital expenditures and to service our debt obligations for the next twelve months. We are a holding company with no operations and depend on our subsidiaries for cash to fund all of our consolidated operations, including future dividend payments, if any. We depend on the payment of distributions by our current subsidiaries, including Hawk Parent, which distributions may be restricted by law or contractual agreements, including agreements governing their indebtedness. For a discussion of those considerations and restrictions, refer to Part II, Item 1A "Risk Factors - Risks Related to Our Class A Common Stock."
Cash Flows
The following table present a summary of cash flows from operating, investing and financing activities for the periods indicated:
Successor Predecessor
July 11, January
Year 2019 1, 2019 Year
Ended through through Ended
December December July 10, December
($ in thousands) 31, 2020 31, 2019 2019 31, 2018
Net cash provided by operating
activities $28,487 $12,936 $8,350 $24,177
Net cash used in investing activities (145,980) (335,084) (4,046) (5,798)
Net cash provided by (used in) financing
activities 186,097 360,049 (9,355) (8,208)
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 year endedDecember 31, 2020 , the period fromJuly 11, 2019 toDecember 31, 2019 , the period fromJanuary 1, 2019 toJuly 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$4.0 million fromJanuary 1, 2019 toJuly 10, 2019 due to capitalization of software development activities and fixed asset additions.
Net cash used in investing activities was
Cash Flow from Financing Activities
Net cash provided by financing activities was$186.1 million for the year endedDecember 31, 2020 , due to proceeds from the issuance of new shares in theJune 2020 offering of Class A common stock, new borrowings related to the acquisition of Ventanex under the Successor Credit Agreement, as well as funds received related to the exercise of warrants, offset by repayment of the outstanding revolver balance related to the Successor Credit Agreement in connection with its 48
--------------------------------------------------------------------------------
amendment and the acquisition of Ventanex, and repayments of the term loan principal balance under the Successor Credit Agreement.
Net cash provided by financing activities was$360.0 million fromJuly 11, 2019 toDecember 31, 2019 , due to borrowings under our Successor 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 Predecessor Credit Agreement and$38.7 million to repurchase outstanding Thunder Bridge warrants.
Net cash used in financing activities was
Indebtedness Predecessor Credit Agreement Hawk Parent was previously party to the Revolving Credit and Term Loan Agreement, dated as ofSeptember 28, 2017 , and amended atDecember 15, 2017 (the "Predecessor 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 Predecessor Credit Agreement was terminated.
Successor 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 "Successor Credit Agreement") with certain financial institutions, as lenders, andTruist Bank (formerlySunTrust Bank ), as the administrative agent. As ofDecember 31, 2020 , the Successor 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 ofDecember 31, 2020 , we had$0.0 million drawn against the revolving credit facility. We paid$231,168 , and$30,764 in fees related to unused commitments for the year endedDecember 31, 2020 and the period fromJuly 11, 2019 toDecember 31, 2019 , respectively See Note 10 to the financial statements in Item 8 of this Annual Report on Form 10-K for more information. As ofDecember 31, 2020 , we had term loan borrowings of$248.3 million , net of deferred issuance costs, under the Successor Credit Agreement, and we were in compliance with its restrictive financial covenants.
Amended Credit Agreement
InFebruary 2021 , we also amended and restated the Successor Credit Agreement and entered into the Amended Credit Agreement, which establishes a$125.0 million senior secured revolving credit facility in favor of Hawk Parent. We currently expect that we will remain in compliance with the restrictive financial covenants of the Amended Credit Agreement, prospectively.
Contractual Obligations
The following table summarizes our contractual obligations and commitments as ofDecember 31, 2020 related to processing minimums, operating leases, borrowings, and contingent consideration: Payments Due by Period Total Less than 1 to 3 Years 3 to 5 Years More than ($ in thousands) 1 Year 5 Years Processing minimums (a)$1,842 $1,374 $468 $ - $ - Operating leases 11,994 1,970 3,852 3,378 2,794 Credit facility and related 302,716 17,435 53,084 232,197 - interest (b) Contingent consideration (c) 15,800 15,800 - - - Total$332,352 $36,579 $57,404 $235,575 $2,794 49
--------------------------------------------------------------------------------
(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 revolving
credit facility by applying the interest rate of 4.00% in effect on our
borrowings as of December 31, 2020 , plus an unused fee rate of 0.50%.
(c) Represents contingent consideration associated with the acquisitions of
Ventanex, cPayPlus, and CPS.
Potential payments under the Tax Receivable Agreement are not reflected in this table. See the section entitled "- Tax Receivable Agreement" below.
Tax Receivable Agreement
Upon the completion of the Business Combination, we entered into that certain Tax Receivable Agreement (the "Tax Receivable Agreement" or "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
For information related to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 2. Basis of Presentation and Summary of Significant Accounting Policies, to our Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.
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 obligation 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.
50
--------------------------------------------------------------------------------
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.
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 years endedDecember 31, 2020 and 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
51
--------------------------------------------------------------------------------
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.
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 ended December 31, 2020 and 2019.
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 current outstanding restricted share awards being fully vested in 2024.
Recently Issued Accounting Pronouncements not yet Adopted
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.
Off-Balance Sheet Arrangements
We did not have any material off-balance sheet arrangements as ofDecember 31, 2020 (Successor), as ofDecember 31, 2019 (Successor), or for the period fromJanuary 1, 2019 toJuly 10, 2019 (Predecessor).
© Edgar Online, source
