UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission File Number 001-38531
Repay Holdings Corporation
(Exact name of Registrant as specified in its Charter)
Delaware
98-1496050
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
3 West Paces Ferry Road,
Suite 200
Atlanta, GA
30305
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (404) 504-7472
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, par value $0.0001 per share
RPAY
The NASDAQ Stock Market LLC
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 5, 2021, there are 90,586,250 shares of the registrant’s Class A Common Stock, par value $0.0001 per share, outstanding (which number includes 2,341,139 shares of unvested restricted stock that have voting rights) and 100 shares of the registrant’s Class V Common Stock, par value of $0.0001 per share, outstanding. As of August 5, 2021, the holders of such outstanding shares of Class V common stock also hold 7,933,893 units in a subsidiary of the registrant and such units are exchangeable into shares of the registrant’s Class A common stock on a one-for-one basis.
REPAY HOLDINGS CORPORATION
Quarterly Report on Form 10‑Q
For the quarter ended June 30, 2021
TABLE OF CONTENTS
Page
PART I – FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements
1
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
30
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
44
Item 4.
Controls and Procedures
45
PART II – OTHER INFORMATION
Legal Proceedings
46
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
47
Signatures
48
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our current views with respect to, among other things, anticipated benefits from the BillingTree and Kontrol acquisitions, the effects of the COVID-19 pandemic, expected demand on our product offering, including further implementation of electronic payment options and statements regarding our market and growth opportunities, and our business strategy and the plans and objectives of management for future operations. You generally can identify these statements by the use of words such as “outlook,” “potential,” “continue,” “may,” “seek,” “approximately,” “predict,” “believe,” “expect,” “plan,” “intend,” “estimate” or “anticipate” and similar expressions or the negative versions of these words or comparable words, as well as future or conditional verbs such as “will,” “should,” “would,” “likely” and “could.” These statements may be found under Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere, and are subject to certain risks and uncertainties that could cause actual results to differ materially from those included in the forward-looking statements. These risks and uncertainties include, but are not limited to: exposure to economic conditions and political risk affecting the consumer loan market, the receivables management industry and consumer and commercial spending; the impacts of the ongoing COVID-19 coronavirus pandemic and the actions taken to control or mitigate its spread; a delay or failure to integrate and/or realize the benefits of the BillingTree acquisition and our other recent acquisitions; changes in the payment processing market in which we compete, including with respect to its competitive landscape, technology evolution or regulatory changes; changes in the vertical markets that we target, including the regulatory environment applicable to our customers; risks relating to our relationships within the payment ecosystem; risk that we may not be able to execute our growth strategies, including identifying and executing acquisitions; risks relating to data security; changes in accounting policies applicable to us; the risk that we may not be able to maintain effective internal controls; and those risks described under Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020, as amended. The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we disclaim any obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In light of these risks and uncertainties, there is no assurance that the events or results suggested by the forward-looking statements will in fact occur, and you should not place undue reliance on these forward-looking statements.
PART I
FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
June 30, 2021 (Unaudited)
December 31, 2020
Assets
Cash and cash equivalents
$
120,400,640
91,129,888
Accounts receivable
31,397,634
21,310,724
Prepaid expenses and other
9,229,945
6,925,115
Total current assets
161,028,219
119,365,727
Property, plant and equipment, net
2,603,063
1,628,439
Restricted cash
20,138,233
15,374,846
Customer relationships, net of amortization
470,026,755
280,887,486
Software, net of amortization
80,252,218
64,434,985
Other intangible assets, net of amortization
31,026,250
23,904,667
Goodwill
751,193,501
458,970,255
Operating lease right-of-use assets, net of amortization
10,882,410
10,074,506
Deferred tax assets
118,019,437
135,337,229
Total noncurrent assets
1,484,141,867
990,612,413
Total assets
1,645,170,086
1,109,978,140
Liabilities
Accounts payable
17,999,606
11,879,638
Related party payable
18,100,515
15,811,597
Accrued expenses
21,168,870
19,216,258
Current maturities of long-term debt
—
6,760,650
Current operating lease liabilities
1,828,000
1,527,224
Current tax receivable agreement
10,440,762
10,240,310
Total current liabilities
69,537,753
65,435,677
Long-term debt, net of current maturities
427,950,300
249,952,746
Noncurrent operating lease liabilities
9,525,372
8,836,655
Tax receivable agreement, net of current portion
224,523,900
218,987,795
Other liabilities
2,658,313
10,583,196
Total noncurrent liabilities
664,657,885
488,360,392
Total liabilities
734,195,638
553,796,069
Commitment and contingencies (Note 12)
Stockholders' equity
Class A common stock, $0.0001 par value; 2,000,000,000 shares authorized and 88,222,430 issued and outstanding as of June 30, 2021; 2,000,000,000 shares authorized and 71,244,682 issued and outstanding as of December 31, 2020
8,822
7,125
Class V common stock, $0.0001 par value; 1,000 shares authorized and 100 shares issued and outstanding as of June 30, 2021 and December 31, 2020
Additional paid-in capital
1,073,163,704
691,675,072
Accumulated other comprehensive (loss) income
(6,436,763
)
Accumulated deficit
(203,994,711
(175,931,713
Total stockholders' equity
869,177,815
509,313,721
Equity attributable to non-controlling interests
41,796,633
46,868,350
Total liabilities and stockholders' equity and members' equity
See accompanying notes to consolidated financial statements.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30,
Six Months Ended June 30,
2021
2020
Revenue
48,411,871
36,500,525
95,932,367
75,963,062
Operating Expenses
Other costs of services
12,720,798
8,726,627
25,195,606
19,497,924
Selling, general and administrative
29,542,047
19,018,212
52,935,414
37,184,403
Depreciation and amortization
19,678,980
14,705,598
37,471,974
28,609,982
Change in fair value of contingent consideration
(1,200,000
740,000
1,448,786
Total operating expenses
60,741,825
43,190,437
117,051,780
86,032,309
(Loss) Income from operations
(12,329,954
(6,689,912
(21,119,413
(10,069,247
Other (expense) income
Interest expense
(816,621
(3,704,355
(1,999,978
(7,222,140
Loss on extinguishment of debt
(5,940,600
Change in fair value of warrant liabilities
(66,669,522
(73,567,617
Change in fair value of tax receivable liability
(4,355,183
(10,038,458
(3,312,450
(10,580,421
Other income
34,389
5,399
62,536
44,447
Other loss
(9,080,410
Total other (expense) income
(5,137,415
(80,406,936
(20,270,902
(91,325,731
(Loss) income before income tax expense
(17,467,369
(87,096,848
(41,390,315
(101,394,978
Income tax benefit
4,117,474
3,896,626
10,059,247
5,012,218
Net (loss) income
(13,349,895
(83,200,222
(31,331,068
(96,382,760
Less: Net (loss) income attributable to
non-controlling interests
(1,080,798
(3,903,059
(3,268,070
(6,755,458
Net (loss) income attributable to the Company
(12,269,097
(79,297,163
(28,062,998
(89,627,302
Loss per Class A share:
Basic and diluted
(0.15
(1.90
(0.36
(2.26
Weighted-average shares outstanding:
79,781,185
41,775,128
78,200,752
39,699,841
2
Consolidated Statements of Comprehensive Income
Net loss
Other comprehensive loss, before tax
Change in fair value of designated cash flow hedges
(13,933,220
(11,247,984
Total other comprehensive loss, before tax
Income tax related to items of other comprehensive income:
Tax benefit on change in fair value of designated cash flow hedges
236,527
1,551,370
Total income tax benefit on related to items of other comprehensive income
Total other comprehensive loss, net of tax
(13,696,693
(9,696,614
Total comprehensive loss
(96,896,915
(106,079,374
Less: Comprehensive loss attributable to non-controlling interests
(4,281,138
(11,345,199
Comprehensive loss attributable to the Company
(92,615,777
(94,734,175
3
Consolidated Statements of Changes in Equity
Class A Common
Stock
Class V Common
Additional
Paid-In
Accumulated
Accumulated Other Comprehensive
Total
Stockholders'
Non-controlling
Shares
Amount
Capital
Deficit
(Loss) Income
Equity
Interests
Balance at December 31, 2019
37,530,568
3,753
100
-
283,555,118
(70,335,151
313,397
213,537,117
206,162,035
Stock-based compensation
3,522,731
Warrant exercise
308,051
31
3,534,157
3,534,188
Reclassification to warrant liabilities
2,170,296
(10,330,139
(2,852,399
(5,643,102
(4,211,662
Balance at March 31, 2020
37,838,619
3,784
292,782,302
(80,665,290
(5,329,705
206,791,091
199,097,974
Issuance of new shares
9,200,000
920
173,991,388
173,992,308
Redemption of Post-Merger Repay Units
(63,321,690
(700,895
(64,022,585
(34,777,415
5,475,449
4,979,711
498
51,792,829
51,793,327
Valuation allowance on Ceiling Rule DTA
(8,300,787
74,150,310
(851,640
(572,958
Balance at June 30, 2020
52,018,330
5,202
526,569,801
(159,962,453
(6,882,240
359,730,310
159,844,542
4
(Unaudited) (Continued)
Balance at December 31, 2020
71,244,682
6,244,500
624
142,411,389
142,412,013
(313,652
Exchange of Post-Merger Repay Units
375,000
38
2,158,374
2,158,412
(2,158,412
Release of share awards vested under Equity Plan
220,664
22
(22
Treasury shares repurchased
(1,821,942
3,995
5,171,544
(20,945
(5,064
(15,793,901
(2,187,272
Accumulated other comprehensive income
6,436,763
1,207,738
Balance at March 31, 2021
78,084,846
7,809
839,589,351
(191,725,614
647,871,546
43,399,802
10,051,302
1,005
228,636,942
228,637,947
(387,947
25,267
135,128
135,130
(135,128
61,015
6
(6
(704,589
2,216
5,507,001
(1,512
(123
Balance at June 30, 2021
88,222,430
5
Consolidated Statements of Cash Flows
Cash flows from operating activities
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Stock based compensation
10,656,090
8,998,180
Amortization of debt issuance costs
1,197,917
663,294
5,940,600
Loss on sale of interest rate swaps
9,317,243
Fair value change in warrant liabilities
73,567,617
Fair value change in tax receivable agreement liability
3,312,450
10,580,421
Fair value change in other assets and liabilities
708,622
Deferred tax expense
(10,059,247
(5,012,717
Change in accounts receivable
(3,603,491
1,213,666
Change in related party receivable
563,084
Change in prepaid expenses and other
(702,976
178,443
Change in operating lease ROU assets
576,505
Change in accounts payable
3,567,717
486,986
Change in related party payable
340,132
(14,467,759
Change in accrued expenses and other
(2,945,543
(458,152
Change in operating lease liabilities
(394,915
Change in other liabilities
(7,924,883
168,852
Net cash provided by operating activities
16,867,291
9,417,759
Cash flows from investing activities
Purchases of property and equipment
(985,274
(539,008
Purchases of software
(9,738,165
(7,202,987
Acquisition of APS, net of cash and restricted cash acquired
(465,454
Acquisition of Ventanex, net of cash and restricted cash acquired
(35,521,024
Acquisition of CPS, net of cash and restricted cash acquired
1,510,778
Acquisition of BillingTree, net of cash and restricted cash acquired
(269,825,725
Acquisition of Kontrol, net of cash and restricted cash acquired
(7,471,194
Net cash used in investing activities
(286,509,580
(43,728,473
Cash flows from financing activities
Change in line of credit
(10,000,000
Issuance of long-term debt
440,000,000
60,425,983
Payments on long-term debt
(262,653,996
(2,965,162
Public issuance of Class A Common Stock
142,098,361
Repurchase of treasury shares
(2,520,320
Exercise of warrants
55,327,515
(98,800,000
Payment of loan costs
(13,247,617
(1,861,817
Net cash provided by financing activities
303,676,428
176,118,827
Increase in cash, cash equivalents and restricted cash
34,034,139
141,808,113
Cash, cash equivalents and restricted cash at beginning of period
106,504,734
37,901,117
Cash, cash equivalents and restricted cash at end of period
140,538,873
179,709,230
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest
802,060
6,433,715
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Valuation adjustment to contingent consideration for APS acquisition
6,580,549
Acquisition of Ventanex in exchange for contingent consideration
10,800,000
Acquisition of Kontrol in exchange for contingent consideration
500,000
Notes to the Unaudited Consolidated Financial Statements
1. Organizational Structure and Corporate Information
Repay Holdings Corporation was incorporated as a Delaware corporation on July 11, 2019 in connection with the closing of a transaction (the “Business Combination”) pursuant to which Thunder Bridge Acquisition Ltd., a special purpose acquisition company organized under the laws of the Cayman Islands (“Thunder Bridge”), (a) domesticated into a Delaware corporation and changed its name to “Repay Holdings Corporation” and (b) consummated the merger of a wholly owned subsidiary of Thunder Bridge with and into Hawk Parent Holdings, LLC, a Delaware limited liability company (“Hawk Parent”).
Throughout this section, unless otherwise noted or unless the context otherwise requires, the terms “we”, “us”, “Repay” and the “Company” and similar references refer (1) before the Business Combination, to Hawk Parent and its consolidated subsidiaries and (2) from and after the Business Combination, to Repay Holdings Corporation and its consolidated subsidiaries. Throughout this section, unless otherwise noted or unless the context otherwise requires, “Thunder Bridge” refers to Thunder Bridge Acquisition. Ltd. prior to the consummation of the Business Combination. Thunder Bridge issued public warrants and private placement warrants (collectively, the “Warrants”), which were outstanding and recorded on the Company’s consolidated financial statements at the time of the Business Combination. On July 27, 2020, the Company completed the redemption of all outstanding Warrants.
The Company is headquartered in Atlanta, Georgia. The Company’s legacy business was founded as M & A Ventures, LLC, a Georgia limited liability company doing business as REPAY: Realtime Electronic Payments (“REPAY LLC”), in 2006 by current executives John Morris and Shaler Alias. Hawk Parent was formed in 2016 in connection with the acquisition of a majority interest in the successor entity of REPAY LLC and its subsidiaries by certain investment funds sponsored by, or affiliated with, Corsair Capital LLC (“Corsair”).
On January 19, 2021, the Company completed the previously announced underwritten public offering (the “Equity Offering”) of 6,244,500 shares of its Class A common stock at a public offering price of $24.00 per share. 814,500 shares of such Class A common stock were sold in the Equity Offering in connection with the full exercise of the underwriters’ option to purchase additional shares of Class A common stock pursuant to the underwriting agreement.
On January 19, 2021, the Company also completed the previously announced offering of $440.0 million in aggregate principal amount of 0.00% Convertible Senior Notes due 2026 (the “2026 Notes”) in a private placement (the “Notes Offering”) to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. $40.0 million in aggregate principal amount of such 2026 Notes were sold in the Notes Offering in connection with the full exercise of the initial purchasers’ option to purchase such additional 2026 Notes pursuant to the purchase agreement. The Notes will mature on February 1, 2026, unless earlier converted, repurchased or redeemed.
On June 15, 2021, the Company acquired all of the equity interests of BT Intermediate, LLC (together with its subsidiaries, “BillingTree”) for approximately $506.6 million, consisting of approximately $278.3 million in cash from the Company’s balance sheet and approximately 10 million shares of newly issued Class A common stock, representing approximately 10% of the voting power of the Company’s outstanding shares of common stock.
On June 22, 2021, the Company acquired substantially all of the assets of Kontrol LLC (“Kontrol”) for up to $11.0 million, of which approximately $7.5 million was paid at closing. The acquisition was financed with cash on hand.
Restatement of previously issued financial statements
On April 12, 2021, the Securities and Exchange Commission (the “SEC”) issued a statement (the “Statement”) on the accounting and reporting considerations for warrants issued by special purpose acquisition companies (“SPACs”). The Statement referenced the guidance included in generally accepted accounting principles in the United States of America (“GAAP”) that entities must consider in determining whether to classify contracts that may be settled in its own stock, such as warrants, as equity or as an asset or liability. After considering the Statement, the Company re-evaluated its historical accounting for the Warrants and concluded it must amend the accounting treatment of the Warrants, which were recorded to the Company’s consolidated financial statements at the time of the Business Combination. At that time, the Warrants were presented within equity and did not impact any reporting periods prior to the Business Combination. The Company’s management concluded that the Warrants include provisions that, based on the Statement, preclude the Warrants from being classified as components of equity. Management, after consultation with the audit committee and
7
our independent registered accounting firm, concluded that our previously issued audited financial statements as of December 31, 2019, for the period from July 11, 2019 through December 31, 2019 and as of and for the year ended December 31, 2020 and the Company’s unaudited condensed consolidated financial statements for the quarterly periods within those periods (the “Relevant Periods”) should no longer be relied upon. The Company has filed an amendment to the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (as amended, the “2020 Form 10-K”) restating the financial statements for the Relevant Periods (including the three and six months ended June 30, 2020), as set forth in the Statement. The notes included herein should be read in conjunction with the restated financial reports included in the 2020 Form 10-K. This Quarterly Report on Form 10-Q reflects the restated financials for the three and six months ended June 30, 2020. The Warrants were no longer outstanding as of the end of 2020, and therefore, the change in accounting policy triggered by the restatement has no impact on the financial statements for the three and six months ended June 30, 2021 included in this Quarterly Report on Form 10-Q.
The Company has reflected in this Quarterly Report on Form 10-Q restated financials as of December 31, 2020 and June 30, 2020 and for the three and six months ended June 30, 2020 to restate the following non-cash items:
As of December 31, 2020
As of June 30, 2020 (Unaudited)
As Reported
Adjustments
As Restated
Warrant liabilities
38,062,930
363,159,756
401,222,686
422,492,654
460,555,584
604,391,167
87,283,905
474,608,423
51,961,378
(88,647,808
(87,283,905
(69,938,145
(90,024,308
397,793,240
(38,062,930
For the three months ended June 30, 2020
For the six months ended June 30, 2020
Unaudited Consolidated Statements of Operations
(13,737,414
(17,758,114
(20,427,326
(27,827,361
(16,530,700
(22,815,143
(12,627,641
(16,059,685
(0.30
(0.40
Unaudited Consolidated Statements of Cash Flows
Adjustments to reconcile net income (loss) to net cash provided by operating activities
32,232,902
105,800,519
The restatement had no impact on the Company’s liquidity or cash position.
8
2. Basis of Presentation and Summary of Significant Accounting Policies
Unaudited Interim Consolidated Financial Statements
These unaudited consolidated interim financial statements should be read in conjunction with the Company's audited consolidated financial statements and accompanying notes for the periods ended December 31, 2020 and 2019, which are included in the 2020 Form 10-K.
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with GAAP and with instructions to Form 10-Q and Rule 10-01 of SEC Regulation S-X as they apply to interim financial information. Accordingly, the interim consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements, although the Company believes that the disclosures made are adequate to make the information not misleading.
The interim consolidated financial statements are unaudited, but in the Company’s opinion include all adjustments of a normal recurring nature or a description of the nature and amount of any adjustments other than normal recurring adjustments, operations and cash flows as of and for the periods presented. The interim financial results are not necessarily indicative of results that may be expected for any other interim period or the fiscal year.
Principles of Consolidation
The consolidated financial statements include the accounts of Repay Holdings Corporation, the majority-owned Hawk Parent Holdings LLC and its wholly owned subsidiaries: Hawk Intermediate Holdings, LLC, Hawk Buyer Holdings, LLC, Repay Holdings, LLC, M&A Ventures, LLC, Repay Management Holdco Inc., Repay Management Services LLC, Sigma Acquisition, LLC, Wildcat Acquisition, LLC (“PaidSuite”), Marlin Acquirer, LLC (“Paymaxx”), REPAY International LLC, REPAY Canada Solutions ULC, TriSource Solutions, LLC (“TriSource”), Mesa Acquirer, LLC, CDT Technologies LTD, Viking GP Holdings, LLC, cPayPlus, LLC, CPS Payment Services, LLC, Media Payments, LLC, Custom Payment Systems, LLC, BT Intermediate, LLC, Electronic Payment Providers, LLC, Blue Cow Software, LLC, Hoot Payment Solutions, LLC, Internet Payment Exchange, LLC, Stratus Payment Solutions, LLC, Clear Payment Solutions, LLC and Harbor Acquisition LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.
Basis of Financial Statement Presentation
The accompanying interim consolidated financial statements of the Company were prepared in accordance with GAAP. The Company uses the accrual basis of accounting whereby revenues are recognized when earned, usually upon the date services are rendered, and expenses are recognized at the date services are rendered or goods are received.
9
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported Consolidated Statements of Operations during the reporting period. Actual results could differ materially from those estimates.
Recently Adopted Accounting Pronouncements
Accounting for Income Taxes
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 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 after December 15, 2020, with early adoption permitted. Most amendments within ASU 2019-12 are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis.
The Company adopted ASU 2019-12 as of January 1, 2021, using a modified retrospective transition approach. The adoption of this ASU does not have a material impact on the Company’s consolidated financial statements or related disclosures.
Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity, which made targeted improvements to an issuer’s accounting for convertible instruments under Accounting Standards Codification (“ASC”) Topic No. 470 Debt, and the derivative scope exception for contracts in an entity’s own equity under ASC Topic No. 815 Derivatives and Hedging. Specifically, ASU 2020-06 reduces the number of accounting models that exist under GAAP as well as the number of settlement conditions which will likely result in more convertible instruments being accounted for as a single unit of account, a reduction in the amount of interest expense recognized for convertible debt, and more embedded derivatives meeting the derivative scope exception. In addition, ASU 2020-06 amends ASC Topic No. 260 Earnings Per Share, which will result in more dilutive earnings per share results.
ASU 2020-06 is effective for public companies beginning January 1, 2022, including interim periods within the fiscal years after the adoption date. Early adoption is also permitted beginning January 1, 2021, including interim periods within those fiscal years.
The Company early adopted ASU 2020-06 as of January 1, 2021. The Company issued the 2026 Notes in January 2021, which resulted in recognition of $440.0 million in noncurrent long-term debt of and $11.4 million in debt issuance cost. In determining the impact of the 2026 Notes on the Company’s diluted earnings per share calculations, the Company will apply the if-converted method. For additional information and required disclosures related to 2026 Notes, see Note 10. Borrowings.
3. Revenue
For the Company’s accounting policies for recognizing revenue and contract costs, see Note 2. Basis of Presentation and Summary of Significant Accounting Policies and Note 3. Revenue to the Company’s Notes to Consolidated Financial Statements in Part II, Item 8 of the 2020 Form 10-K.
Software Revenue
As a result of the acquisition of BillingTree, the Company has acquired a software revenue stream. Software revenue has been presented within revenue on the Consolidated Statements of Operations.
10
Software revenue consists of term license fees related to software products, and software maintenance and support (“PCS”). Customers typically enter into software contracts for contractual terms of three to twelve months period. The term license and PCS are each distinct performance obligations. The total consideration in the contract is allocated based on management’s assessment of the relative standalone selling price for each performance obligation.
Revenue is recognized when the related performance obligations are satisfied. Revenue from the term license is recognized at a point in time, upon delivery to the client. Revenue from PCS is recognized over the term of the contract. When the Company receives an up-front deposit, the revenue is deferred until such a time that the term license or PCS is provided to the customer. Deferred revenue is expected to be recognized as revenue within one year and is classified within a current liability.
As BillingTree was acquired during the three months ended June 30, 2021, there was no deferred revenue balance at the beginning of the period; however, the balance of deferred revenue as of June 30, 2021 incorporates the deferred revenue acquired in the BillingTree acquisition. See Note 5. Business Combinations for more detail regarding the BillingTree acquisition.
Disaggregation of revenue
The table below presents a disaggregation of revenue by direct and indirect relationships for the periods indicated:
Direct relationships
47,286,567
35,873,834
94,042,003
74,589,458
Indirect relationships
1,125,304
626,691
1,890,364
1,373,604
Total Revenue
4. Earnings Per Share
During the three and six months ended June 30, 2021 and 2020, basic and diluted net loss per common share are the same since the inclusion of the assumed exchange of all limited liability company interests of Hawk Parent (“Post-Merger Repay Units”), unvested restricted share awards and convertible debt conversion would have been anti-dilutive.
The following table summarizes net loss attributable to the Company and the weighted average basic and basic and diluted shares outstanding:
Loss before income tax expense
Less: Net loss attributable to non-controlling interests
Net loss attributable to the Company
Weighted average shares of Class A common stock outstanding - basic and diluted
Loss per share of Class A common stock outstanding - basic and diluted
11
For the three and six months ended June 30, 2021 and 2020, the following common stock equivalent shares were excluded from the computation of the diluted loss per share, since their inclusion would have been anti-dilutive:
Post-Merger Repay Units exchangeable for Class A common stock
7,933,893
24,305,623
Dilutive warrants exercisable for Class A common stock
1,758,145
Unvested restricted share awards of Class A common stock
2,860,945
2,899,272
2026 Notes convertible for Class A common stock
13,095,238
Share equivalents excluded from earnings (loss) per share
23,890,076
28,963,040
Shares of the Company’s Class V common stock do not participate in the earnings or losses of the Company and, therefore, are not participating securities. As such, separate presentation of basic and diluted earnings per share of Class V common stock under the two-class method has not been presented.
5. Business Combinations
Ventanex
On February 10, 2020, the Company acquired all of the ownership interests of CDT Technologies, LTD d/b/a Ventanex (“Ventanex”). Under the terms of the securities purchase agreement between Repay Holdings, LLC and the direct and indirect owners of CDT Technologies, LTD (“Ventanex Purchase Agreement”), the aggregate consideration paid at closing by the Company was approximately $36 million in cash. In addition to the closing consideration, the Ventanex Purchase Agreement contains a performance-based earnout (the “Ventanex Earnout Payment”), which was based on future results of the acquired business and could result in an additional payment to the former owners of Ventanex of up to $14 million. The Ventanex acquisition was financed with a combination of cash on hand and committed borrowing capacity under the Company’s existing credit facility. The Ventanex Purchase Agreement contains customary representations, warranties and covenants by Repay and the former owners of Ventanex, as well as a customary post-closing adjustment provision relating to working capital and similar items.
The following summarizes the purchase consideration paid to the selling members of Ventanex:
Cash consideration
35,939,129
Contingent consideration (1)
4,800,000
Total purchase price
40,739,129
(1)
12
Reflects the fair value of the Ventanex Earnout Payment, the contingent consideration to be paid to the selling members of Ventanex, pursuant to the Ventanex Purchase Agreement as of February 10, 2020. The selling partners of Ventanex will have the contingent earn-out right to receive a payment of up to $14.0 million dependent upon the Gross Profit, as defined in the Ventanex Purchase Agreement, for the years ended December 31, 2020 and 2021. In February 2021, the Company paid the sellers of Ventanex $0.9 million, pursuant to the terms of the Ventanex Purchase Agreement. As of June 30, 2021, the Ventanex earnout was $3.8 million, which resulted in a ($0.8) million and ($1.0) million adjustment included in the change in fair value of contingent consideration in the Consolidated Statements of Operations for the three and six months ended June 30, 2021, respectively.
The Company recorded an allocation of the purchase price to Ventanex’s tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values as of the February 10, 2020 closing date. The purchase price allocation is as follows:
50,663
1,376,539
Prepaid expenses and other current assets
180,514
1,607,716
137,833
428,313
Identifiable intangible assets
26,890,000
Total identifiable assets acquired
29,063,862
(152,035
(373,159
Net identifiable assets acquired
28,538,668
12,200,461
The values allocated to identifiable intangible assets and their estimated useful lives are as follows:
Fair Value
Useful life
(in millions)
(in years)
Non-compete agreements
0.1
Trade names
0.4
Indefinite
Developed technology
4.1
Merchant relationships
22.3
26.9
Goodwill of $12.2 million represents the excess of the gross consideration transferred over the fair value of the underlying net tangible and identifiable intangible assets acquired, of which $8.3 million on a gross basis is expected to be deductible for tax purposes. Qualitative factors that contribute to the recognition of goodwill include certain intangible assets that are not recognized as separate identifiable intangible assets apart from goodwill. Intangible assets not recognized apart from goodwill consist primarily of the strong market position and the assembled workforce of Ventanex.
cPayPlus
On July 23, 2020, the Company acquired all of the ownership interests of cPayPlus. Under the terms of the securities purchase agreement between Repay Holdings, LLC and the direct and indirect owners of cPayPlus (“cPayPlus Purchase Agreement”), the aggregate consideration paid at closing by the Company was approximately $8.0 million in cash. In addition to the closing consideration, the cPayPlus Purchase Agreement contains a performance-based earnout (the “cPayPlus Earnout Payment”), which was based on future results of the acquired business and could result in an additional payment to the former owners of cPayPlus of up to $8.0 million in the third quarter of 2021. The cPayPlus acquisition was financed with cash on hand. The cPayPlus Purchase Agreement contains customary representations, warranties and covenants by Repay and the former owners of cPayPlus, as well as a customary post-closing adjustment provision relating to working capital and similar items.
The following summarizes the purchase consideration paid to the selling members of cPayPlus:
7,956,963
6,500,000
14,456,963
13
Reflects the fair value of the cPayPlus Earnout Payment, the contingent consideration to be paid to the selling members of cPayPlus, pursuant to the cPayPlus Purchase Agreement as of July 23, 2020. The selling partners of cPayPlus will have the contingent earn-out right to receive a payment of up to $8.0 million dependent upon the Gross Profit, as defined in the cPayPlus Purchase Agreement, in the third quarter of 2021. As of June 30, 2021, the cPayPlus earnout was $8.0 million, which resulted in a $0.2 million and $1.5 million adjustment included in the change in fair value of contingent consideration in the Consolidated Statements of Operations for the three and six months ended June 30, 2021, respectively.
The Company recorded an allocation of the purchase price to cPayPlus’s tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values as of the July 23, 2020 closing date. The purchase price allocation is as follows:
262,331
164,789
37,660
464,780
20,976
7,720,000
8,205,756
(99,046
(363,393
7,743,317
6,713,646
6.7
0.8
7.7
14
Goodwill of $6.7 million represents the excess of the gross consideration transferred over the fair value of the underlying net tangible and identifiable intangible assets acquired, of which $0.2 million on a gross basis is expected to be deductible for tax purposes. Qualitative factors that contribute to the recognition of goodwill include certain intangible assets that are not recognized as separate identifiable intangible assets apart from goodwill. Intangible assets not recognized apart from goodwill consist primarily of the strong market position and the assembled workforce of cPayPlus.
CPS
On November 2, 2020, the Company acquired all of the ownership interests of CPS Payment Services, LLC, Media Payments, LLC (“MPI”), and Custom Payment Systems, LLC (collectively, “CPS”). Under the terms of the securities purchase agreement between Repay Holdings, LLC and the direct and indirect owners of CPS (“CPS Purchase Agreement”), the aggregate consideration paid at closing by the Company was approximately $78.0 million in cash. In addition to the closing consideration, the CPS Purchase Agreement contains a performance-based earnout (the “CPS Earnout Payment”), which was based on future results of the acquired business and could result in an additional payment to the former owners of CPS of up to $15.0 million in two separate earnouts. The CPS acquisition was financed with cash on hand. The CPS Purchase Agreement contains customary representations, warranties and covenants by Repay and the former owners of CPS, as well as a customary post-closing adjustment provision relating to working capital and similar items.
The following summarizes the preliminary purchase consideration paid to the selling members of CPS:
83,886,556
4,500,000
88,386,556
Reflects the fair value of the CPS Earnout Payment, the contingent consideration to be paid to the selling members of CPS, pursuant to the CPS Purchase Agreement as of November 2, 2020. The selling partners of CPS will have the contingent earnout right to receive a payment of up to $15.0 million in two separate earnouts, dependent upon the Gross Profit, as defined in the CPS Purchase Agreement. As of June 30, 2021, the CPS earnout was $4.5 million, which resulted in a ($0.6) million and $0.0 million adjustment included in the change in fair value of contingent consideration in the Consolidated Statements of Operations for the three and six months ended June 30, 2021, respectively.
The Company recorded a preliminary allocation of the purchase price to CPS’ and MPI’s tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values as of the November 2, 2020 closing date. The preliminary purchase price allocation is as follows:
MPI
1,667,066
2,097,921
2,810,158
5,556,958
2,615,615
934,751
7,092,839
8,589,630
19,391
2,995
407
35,318
30,830,000
7,110,000
37,942,637
15,737,943
(2,004,371
(4,495,599
(2,143,680
33,794,586
11,242,344
40,747,939
2,601,687
74,542,525
13,844,031
15
The preliminary values allocated to identifiable intangible assets and their estimated useful lives are as follows:
0.5
7.2
0.7
23.0
6.3
30.8
Goodwill of $43.3 million represents the excess of the gross consideration transferred over the fair value of the underlying net tangible and identifiable intangible assets acquired, of which $38.8 million on a gross basis is expected to be deductible for tax purposes. Qualitative factors that contribute to the recognition of goodwill include certain intangible assets that are not recognized as separate identifiable intangible assets apart from goodwill. Intangible assets not recognized apart from goodwill consist primarily of the strong market position and the assembled workforce of CPS.
BillingTree
On June 15, 2021, the Company acquired BillingTree. Under the terms of the agreement and plan of merger between BT Intermediate, LLC, the Company, two newly formed subsidiaries of the Company and the owner of BT Intermediate, LLC (“BillingTree Merger Agreement”), the aggregate consideration paid at closing by the Company was approximately $506.6 million, consisting of approximately $278.3 million in cash and approximately 10 million shares of newly issued Class A common stock. The BillingTree Merger Agreement contains customary representations, warranties and covenants by Repay and the former owner of BillingTree, as well as a customary post-closing adjustment provision relating to working capital and similar items.
The following summarizes the preliminary purchase consideration paid to the seller of BillingTree:
278,344,249
Unit consideration
228,250,000
506,594,249
The Company recorded a preliminary allocation of the purchase price to BillingTree’s tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values as of the June 15, 2021 closing date. The preliminary purchase price allocation is as follows:
8,243,570
6,483,419
1,601,854
16,328,843
541,244
274,954
Other assets
1,384,409
232,320,000
250,849,450
(2,552,251
(6,282,563
Deferred tax liability
(28,123,217
213,891,419
292,702,830
16
0.3
7.8
26.2
198.0
232.3
Goodwill of $292.7 million represents the excess of the gross consideration transferred over the fair value of the underlying net tangible and identifiable intangible assets acquired, of which $47.7 million on a gross basis is expected to be deductible for tax purposes. Qualitative factors that contribute to the recognition of goodwill include certain intangible assets that are not recognized as separate identifiable intangible assets apart from goodwill. Intangible assets not recognized apart from goodwill consist primarily of the strong market position and the assembled workforce of BillingTree.
BillingTree contributed $2.4 million to revenue and $(0.3) million in net income to the Company’s unaudited interim Consolidated Statements of Operations, from June 15, 2021 through June 30, 2021.
Kontrol
On June 22, 2021, the Company acquired substantially all of the assets of Kontrol LLC (“Kontrol”). Under the terms of the asset purchase agreement between a newly formed subsidiary of Repay Holdings, LLC and the owner of Kontrol (“Kontrol Purchase Agreement”), the aggregate consideration paid at closing by the Company was up to $11.0 million in cash, of which $7.5 million was paid at closing. The Kontrol Purchase Agreement contains customary representations, warranties and covenants by Repay and the former owner of Kontrol, as well as a customary post-closing adjustment provision relating to working capital and similar items.
The following summarizes the preliminary purchase consideration paid to the owner of Kontrol:
7,471,194
Contingent consideration
7,971,194
The Company recorded a preliminary allocation of the purchase price to Kontrol’s tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values as of the June 22, 2021 closing date. The preliminary purchase price allocation is as follows:
6,940,000
1,031,194
0.0
6.9
17
Goodwill of $1.0 million represents the excess of the gross consideration transferred over the fair value of the underlying net tangible and identifiable intangible assets acquired, of which $0.5 million on a gross basis is expected to be deductible for tax purposes. Qualitative factors that contribute to the recognition of goodwill include certain intangible assets that are not recognized as separate identifiable intangible assets apart from goodwill. Intangible assets not recognized apart from goodwill consist primarily of the strong market position and the assembled workforce of Kontrol.
Kontrol contributed $0.1 million to revenue and $0.0 million in net income to the Company’s unaudited interim Consolidated Statements of Operations, from June 22, 2021 through June 30, 2021.
Transaction Expenses
The Company incurred transaction expenses of $2.7 million and $3.7 million for the three and six months ended June 30, 2021, respectively, related to the Ventanex, cPayPlus, CPS, BillingTree, and Kontrol acquisitions. The Company incurred transaction expenses of $1.0 million and $1.0 million for the three and six months ended June 30, 2020, respectively, related to the Ventanex acquisition.
Pro Forma Financial Information (Unaudited)
The supplemental condensed consolidated results of the Company on an unaudited pro forma basis give effect to the Ventanex, cPayPlus, CPS, BillingTree and Kontrol acquisitions as if the transactions had occurred on January 1, 2020. The unaudited pro forma information reflects adjustments for the issuance of the Company’s common stock, debt incurred in connection with the transactions, the impact of the fair value of intangible assets acquired and related amortization and other adjustments the Company believes are reasonable for the pro forma presentation. In addition, the pro forma earnings exclude acquisition-related costs.
Pro Forma Three Months Ended June 30,
Pro Forma Six Months Ended June 30,
61,191,338
53,165,376
124,699,561
111,516,262
(7,331,232
(83,795,121
(28,023,722
(96,175,597
Net loss attributable to non-controlling interests
(538,196
(4,199,266
(2,969,849
(6,835,622
(6,793,036
(79,595,855
(25,053,873
(89,339,975
Loss per Class A share - basic and diluted
(0.09
(1.91
(0.32
(2.25
18
6. Fair Value
The following table summarizes, by level within the fair value hierarchy, the carrying amounts and estimated fair values of the Company’s assets and liabilities measured at fair value on a recurring or nonrecurring basis or disclosed, but not carried, at fair value in the Consolidated Balance Sheets as of the dates presented. There were no transfers into, out of, or between levels within the fair value hierarchy during any of the periods presented. Refer to Note 5, Note 10 and Note 11 for additional information on these liabilities.
June 30, 2021
Level 1
Level 2
Level 3
Assets:
Liabilities:
17,800,000
Borrowings
Tax receivable agreement
234,964,662
252,764,662
680,714,962
15,800,000
256,713,396
229,228,105
Interest rate swap
9,312,332
266,025,728
245,028,105
511,053,833
Cash and cash equivalents are classified within Level 1 of the fair value hierarchy, under ASC 820, Fair Value Measurements (“ASC 820”), as the primary component of the price is obtained from quoted market prices in an active market. The carrying amounts of the Company’s cash and cash equivalents approximate their fair values due to the short maturities and highly liquid nature of these accounts.
Restricted Cash
Restricted cash is classified within Level 1 of the fair value hierarchy, under ASC 820, Fair Value Measurements (“ASC 820”), as the primary component is cash that is used as collateral for debts. The carrying amounts of the Company’s restricted cash approximate their fair values due to the highly liquid nature.
19
Contingent Consideration
Contingent consideration relates to potential payments that the Company may be required to make associated with acquisitions. The contingent consideration is recorded at fair value based on estimates of discounted future cash flows associated with the acquired businesses within Related party payable in the Consolidated Balance Sheets. To the extent that the valuation of these liabilities is based on inputs that are less observable or not observable in the market, the determination of fair value requires more judgment. Accordingly, the fair value of contingent consideration is classified within Level 3 of the fair value hierarchy, under ASC 820. The change in fair value is re-measured at each reporting period with the change in fair value being recognized in accordance with ASC 805, Business Combinations (“ASC 805”).
The Company used a discount rate to determine the present value, based on a risk-free rate adjusted for a credit spread, of the contingent consideration in the simulation approach. A range of 3.3% to 3.4% and weighted average of 3.4% was applied to the simulated contingent consideration payments, in order to determine the fair value. A significant increase or decrease in the discount rate could have resulted in a lower or higher balance, respectively, as of the measurement date.
The following table provides a rollforward of the contingent consideration related to previous business acquisitions. Refer to Note 5 for more details.
Balance at beginning of period
14,250,000
Measurement period adjustment
Purchases
1,500,000
Payments
(948,786
(14,320,549
Accretion expense
Valuation adjustment
Balance at end of period
18,050,000
The carrying value of the Company’s 2026 Notes and term loan is net of unamortized debt discount and debt issuance costs. The fair value of the Company’s borrowings was determined using a discounted cash flow model based on observable market factors, such as changes in credit spreads for comparable benchmark companies and credit factors specific to us. The fair value of Company’s borrowings is classified within Level 2 of the fair value hierarchy, as the inputs to the discounted cash flow model are generally observable and do not contain a high level of subjectivity. See Note 10 for further discussion on borrowings.
Tax Receivable Agreement
Upon the completion of the Business Combination, the Company entered into the Tax Receivable Agreement (the “TRA”) with holders of Post-Merger Repay Units. As a result of the TRA, the Company established a liability in its consolidated financial statements. The TRA is recorded at fair value based on estimates of discounted future cash flows associated with the estimated payments to the Post-Merger Repay Unit holders. These inputs are not observable in the market; thus, the TRA is classified within Level 3 of the fair value hierarchy, under ASC 820. The change in fair value is re-measured at each reporting period with the change in fair value being recognized in accordance with ASC 805.
The Company used a discount rate, also referred to as the early termination rate, to determine the present value, based on a risk-free rate plus a spread, pursuant to the TRA. A rate of 1.25% was applied to the forecasted TRA payments at June 30, 2021, in order to determine the fair value. A significant increase or decrease in the discount rate could have resulted in a lower or higher balance, respectively, as of the measurement date. The TRA balance increased as a result of exchanges of Post-Merger Repay Units for Class A common stock pursuant to the Exchange Agreement entered into upon completion of the Business Combination (the “Exchange Agreement”). In addition, the TRA balance
20
was adjusted by $3.3 million through accretion expense and a valuation adjustment, related to a decrease in the discount rate, which was 1.34% as of December 31, 2020.
The following table provides a rollforward of the TRA related to the Business Combination and subsequent acquisition and exchanges of Post-Merger Repay Units. See Note 15 for further discussion on the TRA.
67,176,226
2,424,107
29,822,986
1,522,939
1,096,084
1,789,511
9,484,337
107,579,633
In October 2019, the Company entered into a $140.0 million notional, fifty-seven month interest rate swap agreement, and in February 2020, the Company entered into a $30.0 million notional, sixty month interest rate swap agreement, then a revised notional amount of $65.0 million beginning on September 30, 2020. These interest rate swap agreements are to hedge changes in its cash flows attributable to interest rate risk on a combined $205.0 million of Company’s variable-rate term loan to a fixed-rate basis, thus reducing the impact of interest rate changes on future interest expense.
These swaps involve the receipt of variable-rate amounts in exchange for fixed interest rate payments over the lives of the agreements without an exchange of the underlying notional amounts and were designated for accounting purposes as cash flow hedges. The interest rate swaps are carried at fair value on a recurring basis within Other assets in the Consolidated Balance Sheets and are classified within Level 2 of the fair value hierarchy, as the inputs to the derivative pricing model are generally observable and do not contain a high level of subjectivity. The fair value was determined based on the present value of the estimated future net cash flows using implied rates in the applicable yield curve as of the valuation date.
As of June 30, 2021, both interest rate swaps were settled.
7. Property and Equipment
Property and equipment consisted of the following:
June 30,
December 31,
Furniture, fixtures, and office equipment
2,084,797
1,112,702
Computers
2,242,161
1,733,672
Leasehold improvements
390,748
340,333
4,717,706
3,186,707
Less: Accumulated depreciation and amortization
2,114,643
1,558,268
Depreciation expense for property and equipment was $0.3 million and $0.6 million for the three and six months ended June 30, 2021, respectively. Depreciation expense for property and equipment was $0.3 million and $0.5 million for the three and six months ended June 30, 2020, respectively.
21
8. Intangible Assets
The Company holds definite and indefinite-lived intangible assets. As of June 30, 2021, the indefinite-lived intangible assets consist of trade names of $30.1 million, and this balance consists of seven trade names, arising from the acquisitions of Hawk Parent, TriSource, APS Payments (“APS”), Ventanex, cPayPlus, CPS, BillingTree and Kontrol. As of December 31, 2020, the indefinite-lived intangible assets consist of trade names of $22.2 million, and this balance consists of six trade names, arising from the acquisitions of Hawk Parent, TriSource, APS, Ventanex, cPayPlus, and CPS.
Definite-lived intangible assets consisted of the following:
Gross Carrying Value
Accumulated Amortization
Net Carrying Value
Weighted Average Useful Life (Years)
Customer relationships
513,350,000
54,803,810
458,546,190
4.89
Channel relationships
12,550,000
1,069,435
11,480,565
9.15
Software costs
139,015,287
58,763,069
1.01
4,590,000
3,633,750
956,250
0.95
Balance as of June 30, 2021
669,505,287
118,270,064
551,235,223
4.14
308,450,000
39,920,578
268,529,422
8.64
191,936
12,358,064
9.65
104,715,101
40,280,116
1.85
4,270,000
2,595,333
1,674,667
1.52
Balance as of December 31, 2020
429,985,101
82,987,963
346,997,138
6.95
The Company’s amortization expense for intangible assets was $19.1 million and $36.6 million for the three and six months ended June 30, 2021, respectively. The Company’s amortization expense for intangible assets was $14.4 million and $28.1 million for the three and six months ended June 30, 2020, respectively.
The estimated amortization expense for the next five years and thereafter in the aggregate is as follows:
Year Ending December 31,
Estimated
Future
Amortization
Expense
30,143,812
2022
52,062,854
2023
37,121,611
2024
32,147,468
2025
32,245,856
2026
32,242,778
Thereafter
335,270,843
The Company has only one operating segment and, based on the criteria outlined in ASC 350, Intangibles – Goodwill and Other (“ASC 350”), only one reporting unit that needs to be tested for intangible assets impairment. Accordingly, intangible assets were reviewed for impairment at the consolidated entity level. Based on the qualitative factors described in ASC 350, the Company concluded that intangible assets were not impaired as of June 30, 2021.
9. Goodwill
The following table presents changes to goodwill for the six months ended June 30, 2021.
Acquisitions
293,734,024
Dispositions
Impairment Loss
(1,510,778
The Company has only one operating segment and, based on the criteria outlined in ASC 350, Intangibles – Goodwill and Other (“ASC 350”), only one reporting unit that needs to be tested for goodwill impairment. Accordingly, goodwill was reviewed for impairment at the consolidated entity level. Based on the qualitative factors described in ASC 350, the Company concluded that goodwill was not impaired as of June 30, 2021.
10. Borrowings
Successor Credit Agreement
The Company entered into a Revolving Credit and Term Loan Agreement (as the “Successor Credit Agreement”) on July 11, 2019, with Truist Bank (formerly SunTrust Bank) and the other lenders party thereto, which provided a revolving credit facility (the “Revolving Credit Facility”), a term loan A (the “Term Loan”), and a delayed draw term loan at a variable interest rate (the “Delayed Draw Term Loan”). The Successor Credit Agreement provided for an aggregate revolving commitment of $20.0 million at a variable interest rate.
On February 10, 2020, as part of the financing for the acquisition of Ventanex, the Company entered into an agreement with Truist Bank and other members of its existing bank group to amend and upsize the Successor Credit Agreement from $230.0 million to $346.0 million. The Successor Credit Agreement is collateralized by substantially all of the Company’s assets, and includes restrictive qualitative and quantitative covenants, as defined in the Successor Credit Agreement.
On January 20, 2021, the Company used a portion of the proceeds from the 2026 Notes to prepay in full the entire amount of the outstanding Term Loans under the Successor Credit Agreement. The Company also terminated in full all outstanding Delayed Draw Term Loan commitments under such credit facilities.
Amended Credit Agreement
On February 3, 2021, the Company announced the closing of a new undrawn $125 million senior secured revolving credit facility through Truist Bank. The Amended Credit Agreement replaces the Company’s Successor Credit Agreement, which included an undrawn $30 million Revolving Credit Facility. The Company was in compliance with its restrictive covenants under the Amended Credit Agreement at June 30, 2021.
As of June 30, 2021, the Company had $0.0 million drawn against the Revolving Credit Facility. The Company paid $119,792 and $217,014 in fees related to unused commitments for the three and six months ended June 30, 2021, respectively. The Company paid $92,240 and $134,601 in fees related to unused commitments for the three and six months ended June 30, 2020, respectively. The Company’s interest expense on the line of credit totaled $0 for both the three and six months ended June 30, 2021. The Company’s interest expense on the line of credit totaled $4,356 and $66,364 for the three and six months ended June 30, 2020, respectively.
Convertible Senior Debt
On January 19, 2021, the Company issued $440.0 million in aggregate principal amount of 0.00% Convertible Senior Notes due 2026 in a private placement. The conversion rate of any 2026 Notes will initially be 29.7619 shares of Class A common stock per $1,000 principal amount of 2026 Notes (equivalent to an initial conversion price of approximately $33.60 per share of Class A common stock). Upon conversion of the 2026 Notes, the Company may
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choose to pay or deliver cash, shares of the Company’s Class A common stock, or a combination of cash and shares of the Company’s Class A common stock. The 2026 Notes will mature on February 1, 2026, unless earlier converted, repurchased or redeemed. Subject to Nasdaq requirements, the Company controls the conversion rights prior to November 3, 2025, unless a fundamental change or an event of default occurs.
During the six months ended June 30, 2021, the conversion contingencies of the 2026 Notes were not met, and the conversion terms of the 2026 Notes were not significantly changed. The shares issuable upon conversion of the 2026 Notes were excluded from the computation of the diluted loss per share, since their inclusion would have been anti-dilutive.
At June 30, 2021 and December 31, 2020, total borrowings under the Successor Credit Agreement, Amended Credit Agreement, and 2026 Notes consisted of the following, respectively:
Non-current indebtedness:
Term Loan
262,653,996
Revolving Credit Facility
Total borrowings under credit facility and convertible senior debt (1)
Less: Current maturities of long-term debt (2)
Less: Long-term loan debt issuance cost (3)
12,049,700
Total non-current borrowings
The Term Loan, Delayed Draw Term Loan and Revolving Credit Facility beared interest, at variable rates, which were 3.65% at December 31, 2020.
(2)
Pursuant to the terms of the Amended Credit Agreement, the Company was required to make quarterly principal payments equal to 0.625% of the initial principal amount of the Term Loan and Delayed Draw Term Loan (collectively the “Term Loans”).
(3)
The Company incurred $0.7 million and $1.2 million of interest expense for the amortization of deferred debt issuance costs for the three and six months ended June 30, 2021, respectively. The Company incurred $1.4 million of interest expense for the amortization of deferred debt issuance costs for the year ended December 31, 2020.
The Company incurred interest expense on the Term Loans of $3.2 million and $6.4 million for the three and six months ended June 30, 2020, respectively.
Following is a summary of principal maturities of long‑term debt for each of the next five years ending December 31 and in the aggregate:
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11. Derivative Instruments
The Company does not hold or use derivative instruments for trading purposes.
Derivative Instruments Designated as Hedges
Interest rate fluctuations expose the Company’s variable-rate term loan to changes in interest expense and cash flows. As part of its risk management strategy, the Company may use interest rate derivatives, such as interest rate swaps, to manage its exposure to interest rate movements.
In October 2019, the Company entered into a $140.0 million notional, five-year interest rate swap agreement, with Regions Bank, to hedge changes in cash flows attributable to interest rate risk on $140.0 million of its variable-rate term loan. This agreement involves the receipt of variable-rate amounts in exchange for fixed interest rate payments over the life of the agreement without an exchange of the underlying notional amount. This interest rate swap was designated for accounting purposes as a cash flow hedge. As such, changes in the interest rate swap’s fair value are deferred in accumulated other comprehensive income (loss) in the Consolidated Balance Sheets and are subsequently reclassified into interest expense in each period that a hedged interest payment is made on the Company’s variable-rate term loan. Pre-tax gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense was $0.1 million and $0.2 million for the three and six months ended June 30, 2020, respectively.
On February 21, 2020, the Company entered into a swap transaction with Regions Bank. On a quarterly basis, commencing on March 31, 2020 up to and including the termination date of February 10, 2025, the Company made fixed payments on a beginning notional amount of $30.0 million, then a revised notional amount of $65.0 million beginning on September 30, 2020. On a quarterly basis, commencing on February 21, 2020 up to and including the termination date of February 10, 2025, the counterparty made floating rate payments based on the 3-month LIBOR on the beginning notional amount of $30.0 million, then a revised notional amount of $65.0 million beginning on September 30, 2020.
Both interest rate swaps were settled as of June 30, 2021, with realized loss of $9.3 million recorded in Other loss in the Consolidated Statements of Operations during the six months ended June 30, 2021.
12. Commitments and Contingencies
The Company has commitments under operating leases for real estate leased from third parties under non-cancelable operating leases. A right-of-use (“ROU”) asset and lease liability is recorded on the Consolidated Balance Sheet for all leases except those with an original lease term of twelve months or less. The Company’s leases typically have lease terms between three years and ten years, with the longest lease term having an expiration date in 2029. Most of these leases include one or more renewal options for six years or less, and certain leases also include lessee termination options. At lease commencement, the Company assesses whether it is reasonably certain to exercise a renewal option, or reasonably certain not to exercise a termination option, by considering various economic factors. Options that are reasonably certain of being exercised are factored into the determination of the lease term, and related payments are included in the calculation of the ROU asset and lease liability.
The components of lease cost are presented in the following table:
Three Months Ended June 30, 2021
Six Months Ended June 30, 2021
Components of total lease costs:
Operating lease cost
555,384
1,096,023
Short-term lease cost
15,841
27,241
Variable lease cost
Total lease cost
571,225
1,123,264
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Amounts reported in the Consolidated Balance Sheets were as follows:
Operating leases:
ROU assets
Lease liability, current
Lease liability, long-term
Total lease liabilities
11,353,372
10,363,879
Weighted-average remaining lease term (in years)
5.7
6.2
Weighted-average discount rate (annual)
4.3
%
4.6
Other information related to leases are as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
472,705
931,353
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases
The following table presents a maturity analysis of the Company’s operating leases liabilities as of June 30, 2021:
1,164,049
2,261,605
2,311,391
2,124,176
1,936,698
3,095,550
Total undiscounted lease payments
12,893,469
Less: Imputed interest
1,540,097
13. Related Party Transactions
Related party payables consisted of the following:
Ventanex accrued earnout liability
3,800,000
cPayPlus accrued earnout liability
8,000,000
CPS accrued earnout liability
BillingTree accrued earnout liability (1)
1,000,000
Kontrol accrued earnout liability
Other payables to related parties
300,515
11,597
The accrued earnout liability is related to an acquisition by Clear Payment Solutions, LLC, a subsidiary of BT Intermediate, LLC, prior to the acquisition of BillingTree by the Company.
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The Company incurred transaction costs on behalf of related parties of $1.7 million and $2.9 million for the three and six months ended June 30, 2021, respectively. The Company incurred transaction costs on behalf of related parties of $0.7 million and $1.2 million for the three and six months ended June 30, 2020, respectively. These costs consist of retention bonuses and other compensation to employees, associated with the costs resulting from the integration of new businesses.
14. Share Based Compensation
Omnibus Incentive Plan
At the 2019 Annual Shareholders Meeting of Thunder Bridge, the shareholders considered and approved the 2019 Omnibus Incentive Plan (the “Incentive Plan”) which resulted in the reservation of 7,326,728 shares of Class A common stock for issuance thereunder. The Incentive Plan became effective immediately upon the closing of the Business Combination.
Under this plan, the Company currently has three types of share-based compensation awards outstanding: performance stock units (“PSUs”), restricted stock awards (“RSAs”) and restricted stock units (“RSUs”). Activities for the six months ended June 30, 2021 are as follows:
Class A Common Stock
Weighted Average Grant Date Fair Value
Unvested at December 31, 2020
2,523,431
15.71
Granted
748,428
22.83
Forfeited (1)(2)
129,235
15.33
Vested
281,679
14.74
Unvested at June 30, 2021
17.68
The forfeited shares include employee terminations during the six months ended June 30, 2021; further, these forfeited shares are added back to the amount of shares available for grant under the Incentive Plan.
Upon vesting, award-holders elected to sell shares to the Company in order to satisfy the associated tax obligations. The awards are not deemed outstanding; further, these forfeited shares are added back to the amount of shares available for grant under the Incentive Plan.
Unrecognized compensation expense related to unvested PSUs, RSAs and RSUs was $29.9 million at June 30, 2021, which is expected to be recognized as expense over the weighted-average period of 2.74 years. Unrecognized compensation expense related to unvested PSUs, RSAs and RSUs was $29.1 million at June 30, 2020, which is expected to be recognized as expense over the weighted-average period of 3.02 years. The Company incurred $5.5 million and $10.7 million of share-based compensation expense for the three and six months ended June 30, 2021, respectively. The Company incurred $5.5 million and $9.0 million of share-based compensation expense for the three and six months ended June 30, 2020, respectively.
15. Taxation
Repay Holdings Corporation is taxed as a corporation and is subject to paying corporate federal, state and local taxes on the income allocated to it from Hawk Parent, based upon Repay Holding Corporation’s economic interest held in Hawk Parent, as well as any stand-alone income or loss it generates. Hawk Parent is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, Hawk Parent is not subject to U.S. federal and certain state and local income taxes. Hawk Parent’s members, including Repay Holdings Corporation, are liable for federal, state and local income taxes based on their allocable share of Hawk Parent’s pass-through taxable income.
The Company’s effective tax rate was 23.6% and 24.3%, for the three and six months ended June 30, 2021, respectively. The Company recorded an income tax benefit of $4.1 million, and $10.1 million for the three and six months ended June 30, 2021, respectively. The effective tax rates for the three and six months ended June 30, 2021
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include a stock-based compensation adjustments excess tax benefit related to restricted stock awards vesting, which is required to be recorded discretely in the interim period in which it occurs. The Company’s effective tax rate was 4.5% and 4.9%, as restated for the three and six months ended June 30, 2020, respectively. The Company recorded an income tax benefit of $3.9 million and $5.0 million for the three and six months ended June 30, 2020, respectively. The effective tax rate is dependent on many factors, including the estimated amount of income subject to income tax. As such, the effective tax rate can vary from period to period.
The Company recognized $4.1 million and $10.1 million for the three and six months ended June 30, 2021, respectively, of deferred tax assets related to the income tax benefit derived from the net operating loss over the same periods. The Company recognized $3.9 million and $5.0 million for the three and six months ended June 30, 2020, respectively, of deferred tax assets related to the income tax benefit derived from the net operating loss over the same periods. The Company did not recognize any changes to the valuation allowance as of June 30, 2021, and the facts and circumstances remain unchanged.
Deferred tax liability, net of $23.8 million, and a deferred tax asset, net of $118.0 million, for the three and six months ended June 30, 2021, respectively, relates primarily to the basis difference in the Company’s investment in Hawk Parent. The basis difference arose primarily as a result of the subsequent purchase of Post-Merger Repay Units by the Company pursuant to the 2020 Unit Purchase Agreements with CC Payment Holdings, LLC, an entity controlled by Corsair, and the subsequent exchanges of Post-Merger Repay Units for shares of the Company’s Class A common stock in accordance with the Exchange Agreement. In addition, as a result of the merger with BillingTree on June 15, 2021, an estimated opening deferred tax liability net of $28.1 million was recorded. The merger was recognized as a Qualified Stock Purchase within the meaning of Internal Revenue Code (the “Code”) Section 338(d)(3). As such, no step up in the tax asset basis was permitted creating an estimated net deferred tax liability related to the tax asset basis difference in the investment in Hawk Parent on the opening balance sheet date.
As a result of the Post-Merger Repay Unit exchanges during the six months ended June 30, 2021, the Company recognized an additional deferred tax asset (“DTA”) and offsetting deferred tax liability (“DTL”) in the amounts of $123 and $5,187 for the three and six months ended June 30, 2021, respectively, to account for the portion of the Company’s outside basis in the partnership interest that it will not recover through tax deductions, a ceiling rule limitation arising under the Code sec. 704(c). As the ceiling rule causes taxable income allocations to be in excess of 704(b) book allocations the DTL will unwind, leaving only the DTA, which may only be recovered through the sale of the partnership interest in Hawk Parent. The Company has concluded, based on the weight of all positive and negative evidence, that all of the DTA associated with the ceiling rule limitation is not likely to be realized. As such, a 100% valuation allowance was recognized.
No uncertain tax positions existed as of June 30, 2021.
Tax Receivable Agreement Liability
Pursuant to the Company’s election under Section 754 of the Code, the Company expects to obtain an increase in its share of the tax basis in the net assets of Hawk Parent when Post-Merger Repay Units are redeemed or exchanged for Class A common stock of Repay Holdings Corporation. The Company intends to treat any redemptions and exchanges of Post-Merger Repay Units as direct purchases for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that the Company would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
On July 11, 2019, the Company entered into a TRA that provides for the payment by the Company of 100% of the amount of any tax benefits realized, or in some cases are deemed to realize, as a result of (i) increases in its share of the tax basis in the net assets of Hawk Parent resulting from any redemptions or exchanges of Post-Merger Repay Units and from its acquisition of the equity of the selling Hawk Parent members, (ii) tax basis increases attributable to payments made under the TRA, and (iii) deductions attributable to imputed interest pursuant to the TRA (the “TRA Payments”). The TRA Payments are not conditioned upon any continued ownership interest in Hawk Parent or the Company. The rights of each party under the TRA other than the Company are assignable. The timing and amount of
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aggregate payments due under the TRA may vary based on a number of factors, including the timing and amount of taxable income generated by the Company each year, as well as the tax rate then applicable, among other factors.
As of June 30, 2021, the Company had a liability of $235.0 million related to its projected obligations under the TRA, which is captioned as tax receivable agreement liability in the Company’s Unaudited Consolidated Balance Sheet. The increase of $5.7 million in the TRA liability for the six months ended June 30, 2021, was primarily a result of the change in the Early Termination Rate, as defined in the TRA, and selling members of Hawk Parent exchanging 400,267 Post-Merger Repay Units for shares of the Company’s Class A common stock during the six months ended June 30, 2021 in accordance with the Exchange Agreement. This resulted in an increase to the Company’s share of the tax basis in the net assets of Hawk Parent.
16. Subsequent events
Management has evaluated subsequent events and their potential effects on these unaudited consolidated financial statements through August 9, 2021, which is the date the unaudited consolidated financial statements were available to be issued. Based upon the review, management did not identify any subsequent events that would have required adjustment or disclosure in the financial statements.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For purposes of this section, "Repay", the “Company", "we", or "our" refer to Repay Holdings Corporation and its subsidiaries, 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, as amended.
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 $4.6 billion and $9.2 million of total card payment volume for the three and six months ended June 30, 2021, respectively, and our card payment volume growth over the same periods in 2020 was approximately 28% and 24%, respectively.
The ultimate impacts of the COVID-19 pandemic and related economic conditions on the Company’s results remain uncertain. The scope, duration and magnitude of the direct and indirect effects of the COVID-19 pandemic continue to evolve 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, the impact of COVID-19 on the Company’s results in 2020 and in the first half of 2021 may not be necessarily indicative of its impact on the Company’s results in the remainder of 2021.
As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, as amended, we restated our previously issued consolidated financial statements for periods following the Business Combination through December 31, 2020 to make accounting corrections related to warrant accounting. This Quarterly Report on Form 10-Q reflects the restated consolidated financial statements as of December 31, 2020 and for the three and six months ended June 30, 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.”
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 June 15, 2021, we completed the acquisition of BillingTree for approximately $506.6 million, consisting of approximately $278.3 million in cash from our balance sheet and approximately 10 million shares of newly issued Class A common stock, representing approximately 10% of the voting power of our outstanding shares of common stock.
On June 22, 2021, we completed the acquisition of Kontrol LLC (“Kontrol”) for up to $11.0 million, of which approximately $7.5 million was paid at closing. The acquisition 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 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 six months ended June 30, 2021 and 2020, we believe our chargeback rate was less than 1% of our card payment volume. In addition, our software revenue consists of term license fees related to software products and software maintenance and support.
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, between eight to ten years estimated useful life for customer relationships and channel relationships, and between two to five years estimated useful life for non-compete agreements.
Interest expense. Interest expense consists of interest in respect of our indebtedness under the Successor Credit Agreement, which was entered into in connection with the Business Combination and amended in February 2020, and the Amended Credit Agreement, which replaced the Successor Credit Agreement in February 2021.
Change in fair value of warrant liabilities. This amount represents the change in fair value of the warrant liabilities. The warrant liabilities are 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 results from the change of underlying publicly listed trading price of our Class A common stock at each measurement date.
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
Three Months ended June 30,
Six Months ended June 30,
(in $ thousands)
48,412
36,501
95,932
75,963
Operating expenses
12,721
8,727
25,196
19,498
29,542
19,018
52,935
37,184
19,679
14,706
37,472
28,610
(1,200
740
1,449
60,742
43,191
117,052
86,032
Income (loss) from operations
(12,330
(6,690
(21,120
(10,069
(817
(3,704
(2,000
(7,222
(5,941
(66,670
(73,568
(4,355
(10,038
(3,312
(10,580
34
63
(9,080
Total other (expenses) income
(5,138
(80,407
(20,270
(91,326
Income (loss) before income tax expense
(17,468
(87,097
(41,390
(101,395
4,117
3,897
10,059
5,012
Net income (loss)
(13,351
(83,200
(31,331
(96,383
Net income (loss) attributable to non-controlling interest
(1,081
(3,903
(3,268
(6,755
Net income (loss) attributable to the Company
(12,270
(79,297
(28,063
(89,628
Weighted-average shares of Class A common stock outstanding - basic and diluted
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
Total revenue was $48.4 million for the three months ended June 30, 2021 and $36.5 million for the three months ended June 30, 2020, an increase of $11.9 million or 32.6%. This increase was the result of newly signed customers, the growth of our existing customers, as well as the acquisitions of cPayPlus, CPS, BillingTree and Kontrol. For the three months ended June 30, 2021, incremental revenues of approximately $6.0 million are attributable to cPayPlus, CPS, BillingTree and Kontrol.
Other Costs of Services
Other costs of services were $12.7 million for the three months ended June 30, 2021 and $8.7 million for the three months ended June 30, 2020, an increase of $4.0 million or 45.8%. For the three months ended June 30, 2021, incremental costs of services of approximately $1.6 million are attributable to cPayPlus, CPS, BillingTree and Kontrol.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $29.5 million for the three months ended June 30, 2021 and $19.0 million for the three months ended June 30, 2020, an increase of $10.5 million or 55.3%. This increase was primarily due to general business growth and increases in expenses relating to software and technological services.
Depreciation and Amortization Expenses
Depreciation and amortization expenses were $19.7 million for the three months ended June 30, 2021 and $14.7 million for the three months ended June 30, 2020, an increase of $5.0 million or 33.8%. The increase was primarily due
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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 cPayPlus, CPS, BillingTree and Kontrol.
Change in the Fair Value of Contingent Consideration
Change in the fair value of contingent consideration was $(1.2) million for the three months ended June 30, 2021, which consisted of fair value adjustments related to the contingent consideration for the acquisitions of Ventanex, cPayPlus and CPS.
Interest Expense
Interest expense was $0.1 million for the three months ended June 30, 2021 and $3.7 million for the three months ended June 30, 2020, a decrease of $2.9 million or 77.9%. This decrease was due to a lower average outstanding principal balance under our Amended Credit Agreement as compared to the average outstanding principal balance under the Successor Credit Agreement.
Change in Fair Value of Warrant Liabilities
We incurred a change in the fair value of warrant liabilities of $66.7 million for the three months ended June 30, 2020, which was due to the mark-to-market valuation adjustments related to the increase in the publicly listed trading price of our stock. In July 2020, we completed the redemption of all of our outstanding warrants.
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 $4.4 million for the three months ended June 30, 2021 compared to $10.0 million for the three months ended June 30, 2020, a decrease of $5.7 million or 56.6%. This decrease was due to lower 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 $4.1 million for the three months ended June 30, 2021 and the income tax benefit was $3.9 million for the three months ended June 30, 2020, 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 and the amortization of assets acquired in the Business Combination and prior acquisitions.
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
Total revenue was $95.9 million for the six months ended June 30, 2021 and $76.0 million for the six months ended June 30, 2020, an increase of $20.0 million or 26.3%. This increase was the result of newly signed customers, the growth of our existing customers, as well as the acquisitions of cPayPlus, CPS, BillingTree and Kontrol. For the six months ended June 30, 2021, incremental revenues of approximately $9.0 million are attributable to cPayPlus, CPS, BillingTree and Kontrol.
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Other costs of services were $25.2 million for the six months ended June 30, 2021 and $19.5 million for the six months ended June 30, 2020, an increase of $5.7 million or 29.2%. For the six months ended June 30, 2021, incremental costs of services of approximately $2.7 million are attributable to cPayPlus, CPS, BillingTree and Kontrol.
Selling, general and administrative expenses were $52.9 million for the six months ended June 30, 2021 and $37.2 million for the six months ended June 30, 2020, an increase of $15.8 million or 42.4%. This increase was primarily due to general business growth and increases in expenses relating to software and technological services.
Depreciation and amortization expenses were $37.5 million for the six months ended June 30, 2021 and $28.6 million for the six months ended June 30, 2020, an increase of $8.9 million or 31.0%. 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 cPayPlus, CPS, BillingTree and Kontrol.
Change in the fair value of contingent consideration was $1.4 million for the six months ended June 30, 2021, which consisted of fair value adjustments related to the contingent consideration for the acquisitions of Ventanex, cPayPlus and CPS.
Interest expense was $2.0 million for the six months ended June 30, 2021 and $7.2 million for the six months ended June 30, 2020, a decrease of $5.2 million or 72.3%. This decrease was due to a lower average outstanding principal balance under our Amended Credit Agreement as compared to the average outstanding principal balance under the Successor Credit Agreement.
Loss on Extinguishment of Debt
We incurred a loss of $5.9 million on extinguishment of debt for the six months ended June 30, 2021, due to the termination in full of all outstanding Delayed Draw Term Loan commitments under the Successor Credit Agreement.
We incurred a change in the fair value of warrant liabilities of $73.6 million for the six months ended June 30, 2020, which was due to the mark-to-market valuation adjustments related to the increase in the publicly listed trading price of our stock. In July 2020, we completed the redemption of all of our outstanding warrants.
We incurred a loss, related to accretion expense and fair value adjustment of the tax receivable liability of $3.3 million for the six months ended June 30, 2021 compared to $10.6 million for the six months ended June 30, 2020, a decrease of $7.3 million or 68.7%. This decrease was due to lower 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.
Other Loss
We incurred a loss of $9.1 million on the settlement of interest rate swaps for the six months ended June 30, 2021.
The income tax benefit was $10.1 million for the six months ended June 30, 2021 and the income tax benefit was $5.0 million for the six months ended June 30, 2020, 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, the amortization of assets acquired in the Business Combination and prior acquisitions, the write-off of deferred debt issuance costs and the loss recognized as part of the settlement of interest rate swaps.
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 loss on extinguishment of debt, loss on termination of interest rate hedge, non-cash change in fair value of warrant liabilities, 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, employee recruiting costs, other taxes, restructuring and other strategic initiative costs and other non-recurring charges.
Adjusted Net Income is a non-GAAP financial measure that represents net income prior to amortization of acquisition-related intangibles, as adjusted to add back certain non-cash and non-recurring charges, such as loss on extinguishment of debt, loss on termination of interest rate hedge, non-cash change in fair value of warrant liabilities, 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, employee recruiting costs, restructuring and other strategic initiative costs, other non-recurring charges, non-cash interest expense and 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 an as-converted basis) for the three and six months ended June 30, 2021 and 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, 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 three and six months ended June 30, 2021 and 2020.
35
Reconciliation of GAAP Net Income to Non-GAAP Adjusted EBITDA
For the three months ended June 30, 2021 and 2020
2020(k)
Add:
817
3,704
Depreciation and amortization(a)
Income tax (benefit)
(4,117
(3,897
EBITDA
3,028
(68,687
Non-cash change in fair value of warrant liabilities(b)
66,670
Non-cash change in fair value of contingent consideration(c)
Non-cash change in fair value of assets and liabilities(d)
4,355
10,038
Share-based compensation expense(e)
5,505
5,475
Transaction expenses(f)
6,978
1,575
Employee recruiting costs(g)
56
Other taxes(h)
420
39
Restructuring and other strategic initiative costs(i)
945
112
Other non-recurring charges(j)
334
202
Adjusted EBITDA
20,403
16,221
36
For the six months ended June 30, 2021 and 2020
2,000
7,222
(10,059
(5,012
(1,918
(65,563
Loss on extinguishment of debt (l)
5,941
Loss on termination of interest rate hedge(m)
9,080
73,568
3,312
10,580
10,656
8,998
9,318
4,444
174
559
226
1,573
190
720
332
40,864
33,571
37
Reconciliation of GAAP Net Income to Non-GAAP Adjusted Net Income
Amortization of Acquisition-Related Intangibles(n)
17,270
13,841
Non-cash interest expense(o)
802
Pro forma taxes at effective rate(p)
(7,693
(4,427
Adjusted Net Income
13,983
11,082
Shares of Class A common stock outstanding (on an as-converted basis)(q)
87,734,237
69,623,608
Adjusted Net income per share
0.16
33,309
27,044
1,338
(16,473
(6,124
29,066
23,445
86,165,128
68,405,601
0.34
(a)
See footnote (n) for details on our amortization and depreciation expenses.
(b)
Reflects the mark-to-market fair value adjustments of the warrant liabilities.
(c)
Reflects the changes in management’s estimates of future cash consideration to be paid in connection with prior acquisitions from the amount estimated as of the most recent balance sheet date.
(d)
Reflects the changes in management’s estimates of the fair value of the liability relating to the Tax Receivable Agreement.
(e)
Represents compensation expense associated with equity compensation plans, totaling $5,505,490 and $10,656,088 in the three and six months ended June 30, 2021, respectively, and totaling $5,475,449 and $8,998,180 in the three and six months ended June 30, 2020 respectively.
(f)
Primarily consists of (i) during the three and six months ended June 30, 2021, professional service fees and other costs incurred in connection with the acquisitions of Ventanex, cPayPlus, CPS, BillingTree and Kontrol, as well as professional service expenses related to the January 2021 equity and convertible notes offerings, and (ii) during the three and six months ended June 30, 2020, professional service fees and other costs incurred in connection with the acquisition of Ventanex, and additional transaction expenses incurred in connection with the Business Combination and the acquisitions of TriSource and APS.
(g)
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.
(h)
Reflects franchise taxes and other non-income based taxes.
(i)
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 six months ended June 30, 2021 and 2020.
(j)
For the three and six months ended June 30, 2021 and the three and six months ended June 30, 2020 reflects extraordinary refunds to customers and other payments related to COVID-19. Additionally, in the three months ended June 30, 2021 reflects non-cash rent expense, and in the three and six months ended June 30, 2020, reflects expenses incurred related to one-time accounting system and compensation plan implementation related to becoming a public company.
(k)
Does not include adjustment for incremental depreciation and amortization recorded due to fair-value adjustments under ASC 805.
(l)
Reflects write-offs of debt issuance costs relating to Hawk Parent’s term loans.
(m)
Reflects realized loss of our interest rate hedging arrangement which terminated in conjunction with the repayment of Term Loans.
(n)
For the three and six months ended June 30, 2021, reflects amortization of customer relationships, non-compete agreement, software, and channel relationship intangibles acquired through the Business Combination, and customer relationships, non-compete agreement, and software intangibles acquired through our acquisitions of TriSource, APS, Ventanex, cPayPlus, CPS, BillingTree and Kontrol. For the three and six months ended June 30, 2020 reflects amortization of customer relationships, non-compete agreement, software, and channel relationship intangibles acquired through the Business Combination, and customer relationships, non-compete agreement, and software intangibles acquired through our acquisitions of TriSource, APS, and Ventanex. 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 June 30,
Six months ended June 30,
Acquisition-related intangibles
Software
2,120
605
3,291
1,067
19,390
14,446
36,600
28,111
Depreciation
289
260
872
499
Total Depreciation and amortization1
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-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.
(o)
Represents non-cash deferred debt issuance costs.
(p)
Represents pro forma income tax adjustment effect associated with items adjusted above.
(q)
Represents the weighted average number of shares of Class A common stock outstanding (on an as-converted basis) for the three and six months ended June 30, 2021, and the three and six months ended June 30, 2020. These numbers do not include any shares issuable upon conversion of our 2026 Notes.
Adjusted EBITDA for the three months ended June 30, 2021 and 2020 was $20.4 million and $16.2 million, respectively, representing a 25.8% year-over-year increase. Adjusted EBITDA for the six months ended June 30, 2021 and 2020 was $40.9 million and $33.6 million, respectively, representing a 21.7% year-over-year increase.
40
Adjusted Net Income for the three months ended June 30, 2021 and 2020 was $14.0 million and $11.1 million, respectively, representing an 26.2% year-over-year increase. Adjusted Net Income for the six months ended June 30, 2021 and 2020 was $29.1 million and $23.4 million, respectively, representing an 24.0% year-over-year increase.
Our net loss attributable to the Company for the three months ended June 30, 2021 and 2020 was $12.3 million and $79.3 million, respectively, representing an 84.5% year-over-year decrease. Our net loss attributable to the Company for the six months ended June 30, 2021 and 2020 was $28.1 million and $89.6 million, respectively, representing a 68.7% year-over-year decrease.
These increases in Adjusted EBITDA and Adjusted Net Income for the three and six months ended June 30, 2021 are primarily due to the organic growth of our business, along with contributions from acquisitions. The decreases in net income (loss) attributable to the Company for the three and six months ended June 30, 2021 are primarily due to the change in fair value of warrant liabilities which occurred in 2020.
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 June 30, 2021, we had $120.4 million of cash and cash equivalents and available borrowing capacity of $125.0 million under the Amended Credit Agreement. This balance does not include restricted cash, which reflects cash accounts holding reserves for potential losses and customer settlement funds of $20.1 million at June 30, 2021. Our primary cash needs are to fund working capital requirements, invest in technology development, fund acquisitions and related contingent consideration, make scheduled principal payments and interest payments on our outstanding indebtedness and pay tax distributions to members of Hawk Parent. We expect that our cash flow from operations, current cash and cash equivalents and available borrowing capacity under the 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 I, Item 1A "Risk Factors - Risks Related to Our Class A Common Stock" in our Annual Report on Form 10-K, as amended.
Cash Flows
The following table presents a summary of cash flows from operating, investing and financing activities for the periods indicated:
16,867
9,418
(286,510
(43,728
303,676
176,119
Cash Flow from Operating Activities
Net cash provided by operating activities was $16.9 million for the six months ended June 30, 2021.
41
Net cash provided by operating activities was $9.4 million for the six months ended June 30, 2020.
Cash provided by operating activities for the six months ended June 30, 2021 and 2020, 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 $286.5 million for the six months ended June 30, 2021, due to the acquisitions of BillingTree and Kontrol, as well as the capitalization of software development activities.
Net cash used in investing activities was $43.7 million for the six months ended June 30, 2020, due to the acquisition of Ventanex, and capitalization of software development activities.
Cash Flow from Financing Activities
Net cash provided by financing activities was $303.7 million for the six months ended June 30, 2021, due to proceeds from the issuance of new shares in the Equity Offering, and proceeds from the 2026 Notes, offset by repayment of the outstanding revolver balance related to the Successor Credit Agreement, and repayments of the Term Loan principal balance under the Successor Credit Agreement.
Net cash provided by financing activities was $176.1 million for the six months ended June 30, 2020, due to proceeds from the issuance of new shares of Class A common stock in the 2020 June underwritten offering, 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 amendment and the acquisition of Ventanex, and repayments of the Term Loan principal balance under the Successor Credit Agreement.
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 “Successor 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 Successor Credit Agreement.
On January 20, 2021, we used a portion of the proceeds from the 2026 Notes to prepay in full the entire amount of the outstanding term loans under the Successor Credit Agreement. We also terminated in full all outstanding delayed draw term loan commitments under such credit facilities.
On February 3, 2021, the Company announced the closing of a new undrawn $125 million senior secured revolving credit facility through Truist Bank. The Amended Credit Agreement replaced the Successor Credit Agreement, which included an undrawn $30 million revolving credit facility. We currently expect that we will remain in compliance with the restrictive financial covenants of the Amended Credit Agreement, prospectively.
As of June 30, 2021, the Amended Credit Agreement provides for a revolving credit facility of $125.0 million. As of June 30, 2021, we had $0.0 million drawn against the revolving credit facility. We paid $119,792 and $217,014 in fees related to unused commitments for the three and six months ended June 30, 2021, respectively. We paid $92,240 and $134,601 in fees related to unused commitments for the three and six months ended June 30, 2020, respectively.
42
On January 19, 2021, we issued $440.0 million in aggregate principal amount of 0.00% Convertible Senior Notes due 2026 in a private placement (the “Notes Offering”) to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. $40.0 million in aggregate principal amount of such 2026 Notes were sold in the Notes Offering in connection with the full exercise of the initial purchasers’ option to purchase such additional 2026 Notes pursuant to the purchase agreement. Upon conversion, the Company may choose to pay or deliver cash, shares of the Company’s Class A Common Stock, or a combination of cash and shares of the Company’s Class A Common Stock. The 2026 Notes will mature on February 1, 2026, unless earlier converted, repurchased or redeemed.
As of June 30, 2021, we had convertible senior debt of $428.0 million, net of deferred issuance costs, under the 2026 Notes, and we were in compliance with the related restrictive financial covenants. Additionally, we currently expect that we will remain in compliance with the restrictive financial covenants of the 2026 Notes, prospectively.
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 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, 2020, as amended, for a complete discussion of critical accounting policies.
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 I, Item 1 of this Form 10-Q.
Off-Balance Sheet Arrangements
We did not have any material off-balance sheet arrangements as of June 30, 2021 or December 31, 2020.
43
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Effects of Inflation
While inflation may impact our revenues and cost of services, we believe the effects of inflation, if any, on our results of operations and financial condition have not been significant. However, there can be no assurance that our results of operations and financial condition will not be materially impacted by inflation in the future.
Interest Rate Risk
Interest rates are highly sensitive to many factors, including U.S. fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. Interest rate risk is the exposure to loss resulting from changes in the level of interest rates and the spread between different interest rates. We are exposed to market risk from changes in interest rates on debt, which bears interest at variable rates. Our debt has floating interest rates. We are exposed to changes in the level of interest rates and to changes in the relationship or spread between interest rates for its floating rate debt. Our floating rate debt requires payments based on variable interest rates such as the federal funds rate, prime rate, eurocurrency rate, and LIBOR. Therefore, increases in interest rates may reduce our net income or loss by increasing the cost of debt. As of June 30, 2021, we had convertible senior debt of $428.0 million and revolver borrowings of $0.0 million outstanding under the respective credit agreements. As of December 31, 2020, we had term loan borrowings of $256.7 million, and revolver borrowings of $0.0 million outstanding under the respective credit agreements. The borrowings accrue interest at either base rate, described above under “Liquidity and Capital Resources — Indebtedness,” plus a margin of 1.50% to 2.50% or at an adjusted LIBOR rate plus a margin of 2.50% to 3.50% under the Amended Credit Agreement, in each case depending on the total net leverage ratio, as defined in the respective agreements governing the Amended Credit Agreement.
In October 2019, we entered into a $140.0 million notional interest rate swap agreement, and in February 2020, we entered into a $30.0 million notional interest rate swap agreement, then a revised notional amount of $65.0 million beginning on September 30, 2020. These interest rate swaps effectively converted $205.0 million of the outstanding term loan into to fixed rate payments for 57 months and 60 months, respectively. A 1.0% increase or decrease in the interest rate applicable to borrowings under the Successor Credit Agreement during the year ended December 31, 2020 would have increased or decreased cash interest expense on our indebtedness by approximately $1.0 million per annum and $1.0 million per annum, respectively. As of June 30, 2021, both interest rate swaps were settled.
We may incur additional borrowings from time to time for general corporate purposes, including working capital and capital expenditures.
In July 2017, the U.K. Financial Conduct Authority announced its intention to phase out LIBOR rates by the end of 2021. It is not possible to predict the effect of any changes in the methods by which the LIBOR is determined, or any other reforms to LIBOR that may be enacted in the United Kingdom or elsewhere. Such developments may cause LIBOR to perform differently than in the past, including sudden or prolonged increases or decreases in LIBOR, or cease to exist, resulting in the application of a successor base rate under the Amended Credit Agreement, which in turn could have unpredictable effects on our interest payment obligations under the Amended Credit Agreement.
Foreign Currency Exchange Rate Risk
Invoices for our services are denominated in U.S. dollars and Canadian dollars. We do not expect our future operating results to be significantly affected by foreign currency transaction risk.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we conducted an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2021, our disclosure controls and procedures were not effective due solely to the material weakness in our internal control over financial reporting related to the restatement described below. Notwithstanding this material weakness, management has concluded that our financial statements included in this Quarterly Report on Form 10-Q are fairly stated in all material respects in accordance with GAAP for each of the periods presented therein.
Changes in Internal Control over Financial Reporting
Our internal control over financial reporting, specifically the review controls over the evaluation of complex, non-routine transactions, were previously determined to be insufficient to detect the proper accounting and reporting for the public warrants and private placement warrants previously issued by Thunder Bridge (collectively, the “Warrants”), which were outstanding and recorded on our consolidated financial statements at the time of the Business Combination. Management identified this error when the Securities and Exchange Commission issued a statement (the “Statement”) on the accounting and reporting considerations for warrants issued by special purpose acquisition companies on April 12, 2021. The Statement addresses certain accounting and reporting considerations related to warrants of a kind similar to the Warrants. This control deficiency resulted in the Company having to restate certain of our audited consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2020 and the quarterly periods included therein, and if not remediated, could have resulted in a material misstatement to future annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management previously determined that this control deficiency constituted a material weakness at March 31, 2021. Since the restatement, management has implemented remediation steps to address that material weakness and to improve our internal control over financial reporting. Specifically, we expanded and improved our review process for complex securities and related accounting standards. We have further improved this process by enhancing access to accounting literature, identification of third-party professionals with whom to consult regarding complex accounting applications and consideration of additional staff with the requisite experience and training to supplement existing accounting professionals.
Other than the remediation efforts relating to the material weakness described above, there have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 1. LEGAL PROCEEDINGS
From time to time we are named as a defendant in legal actions arising from our normal business activities. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, prospects, financial condition, cash flows or results of operations.
ITEM 1A. RISK FACTORS
There have been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, as amended.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In connection with the vesting of restricted stock awards, shares of Class A common stock are delivered to the Company by employees to satisfy tax withholding obligations. The following table summarizes such purchases of Class A common stock for the three months ended June 30, 2021:
Total Number of Shares Purchased (1)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares that May yet be Purchased Under the Plans or Programs
April 1-30, 2021
10,033
24.08
May 1-31, 2021
10,030
21.98
June 1-30, 2021
10,058
23.99
30,121
23.35
During the three months ended June 30, 2021, pursuant to the Incentive Plan, we withheld 30,121 shares at an average price per share of $23.35 in order to satisfy employees' tax withholding and payment obligations in connection with the vesting of awards of restricted stock, which we withheld at fair market value on the vesting date.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
The exhibits listed in the following exhibit index are furnished as part of this report.
EXHIBIT INDEX
Exhibit
Number
Exhibit Description
2.1†
Agreement and Plan of Merger, dated as of May 7, 2021, by and among BT Intermediate, LLC, Repay Holdings Corporation, Beckham Acquisition LLC, Beckham Merger Sub LLC and BillingTree Parent, L.P. (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on May 10, 2021).
3.1
Certificate of Corporate Domestication of Repay Holdings Corporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on July 17, 2019).
3.2
Certificate of Incorporation of Repay Holdings Corporation (incorporated by reference to Exhibit 3.2 to the Company’s Form 8-K filed on July 17, 2019).
3.3
By-Laws of Repay Holdings Corporation (incorporated by reference to Exhibit 3.3 to the Company’s Form 8-K filed on July 17, 2019).
10.1
Registration Rights Agreement, dated as of May 7, 2021, by and among Repay Holdings Corporation and BillingTree Parent, L.P. (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on May 10, 2021).
10.2
Limited Consent, Waiver and First Amendment to Amended and Restated Revolving Credit Agreement, dated June 15, 2021, by and among Repay Holdings Corporation, Hawk Parent Holdings LLC, Truist Bank, as administrative agent, and the other parties thereto (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on June 15, 2021).
31.1*
Certification of Principal Executive Officer of Repay Holdings Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Principal Financial Officer of Repay Holdings Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of Principal Executive Officer of Repay Holdings Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
Certification of Principal Financial Officer of Repay Holdings Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
The following financial statements from the Company’s Form 10‑Q for the quarter ended June 30, 2021, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Changes In Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to the Unaudited Consolidated Financial Statements.
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
*Filed herewith.
†
Schedules to this exhibit have been omitted pursuant to Item 601(b)(2) of Registration S-K. The registrant hereby agrees to furnish a copy of any omitted schedules to the Commission upon request.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date: August 9, 2021
By:
/s/ John Morris
John Morris
Chief Executive Officer(Principal Executive Officer)
/s/ Timothy J. Murphy
Timothy J. Murphy
Chief Financial Officer
(Principal Financial Officer)