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10-Q: REPAY HOLDINGS CORP

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(EDGAR Online via COMTEX) -- 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 $5.6 billion and $14.8 billion of total card payment volume for the three and nine months ended September 30, 2021, respectively, and our card payment volume growth over the same periods in 2020 was approximately 48% and 32%, 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 nine months 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 nine months ended September 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 nine months ended September 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 (Unaudited)
                                             Three Months ended September 30,          Nine Months ended September 30,
        (in $ thousands)                         2021                  2020                2021                 2020
        Revenue                            $          61,125       $      37,635     $        157,058       $     113,598
        Operating expenses
        Other costs of services            $          15,288       $      10,492     $         40,483       $      29,990
        Selling, general and
        administrative                                33,696              28,581               86,632              65,765
        Depreciation and amortization                 25,907              15,421               63,379              44,031
        Change in fair value of
        contingent consideration                      (1,550 )            (3,750 )               (101 )            (3,010 )
        Total operating expenses           $          73,341       $      50,744     $        190,393       $     136,776
        Loss from operations               $         (12,216 )     $     (13,109 )   $        (33,335 )     $     (23,178 )
        Interest expense                                (764 )            (3,624 )             (2,764 )           (10,847 )
        Loss on extinguishment of debt                     -                   -               (5,941 )                 -
        Change in fair value of warrant
        liabilities                                        -               2,740                    -             (70,827 )
        Change in fair value of tax
        receivable liability                           3,411              (1,475 )                 99             (12,056 )
        Other income                                      19                  25                   81                  70
        Other loss                                       (19 )                 -               (9,099 )                 -
        Total other (expenses) income                  2,647              (2,334 )            (17,624 )           (93,660 )
        Loss before income tax expense                (9,569 )           (15,443 )            (50,959 )          (116,838 )
        Income tax benefit                             2,261               3,383               12,320               8,395
        Net loss                           $          (7,308 )     $     (12,060 )   $        (38,639 )     $    (108,443 )
        Net loss attributable to
        non-controlling interest                      (1,042 )            (5,298 )             (4,310 )           (12,053 )
        Net loss attributable to the
        Company                            $          (6,266 )     $      (6,762 )   $        (34,329 )     $     (96,390 )
        Weighted-average shares of Class
        A common stock outstanding -
        basic and diluted                         88,273,194          57,913,089           81,595,128          45,806,225
        Loss per Class A share - basic
        and diluted                        $           (0.07 )     $       (0.12 )   $          (0.42 )     $       (2.10 )
        


Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

Revenue

Total revenue was $61.1 million for the three months ended September 30, 2021 and $37.6 million for the three months ended September 30, 2020, an increase of $23.5 million or 62.4%. 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 September 30, 2021, incremental revenues of approximately $17.8 million are attributable to cPayPlus, CPS, BillingTree and Kontrol.

Other Costs of Services

Other costs of services were $15.3 million for the three months ended September 30, 2021 and $10.5 million for the three months ended September 30, 2020, an increase of $4.8 million or 45.7%. For the three months ended September 30, 2021, incremental costs of services of approximately $3.2 million are attributable to cPayPlus, CPS, BillingTree and Kontrol.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $33.7 million for the three months ended September 30, 2021 and $28.6 million for the three months ended September 30, 2020, an increase of $5.1 million or 17.9%. This increase was primarily due to increased compensation expenses with general business growth and increased expenses relating to software and technological services.

Depreciation and Amortization Expenses

Depreciation and amortization expenses were $25.9 million for the three months ended September 30, 2021 and $15.4 million for the three months ended September 30, 2020, an increase of $10.5 million or 68.0%. The increase was primarily due to depreciation and amortization of fixed assets and intangibles from the acquisitions of CPS, BillingTree and Kontrol.

Change in the Fair Value of Contingent Consideration

Change in the fair value of contingent consideration was $(1.6) million for the three months ended September 30, 2021, which consisted of fair value adjustments related to the contingent consideration for the acquisitions of Ventanex, CPS and Kontrol.

Interest Expense

Interest expense was $0.8 million for the three months ended September 30, 2021 and $3.6 million for the three months ended September 30, 2020, a decrease of $2.9 million or 78.9%. 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 $2.7 million for the three months ended September 30, 2020, which was due to the redemption of all of our outstanding warrants in July 2020.

Change in Fair Value of Tax Receivable Liability

We incurred a net gain, related to accretion expense and fair value adjustment of the tax receivable liability of $3.4 million for the three months ended September 30, 2021 compared to a $1.5 million loss for the three months ended September 30, 2020, an increase of $4.9 million. This increase 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, as well as final adjustments related to the value of the 2020 exchanges of Post-Merger Repay Units.

Income Tax

The income tax benefit was $2.3 million for the three months ended September 30, 2021 and the income tax benefit was $3.4 million for the three months ended September 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.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Revenue

Total revenue was $157.1 million for the nine months ended September 30, 2021 and $113.6 million for the nine months ended September 30, 2020, an increase of $43.5 million or 38.3%. 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 nine months ended September 30, 2021, incremental revenues of approximately $26.8 million are attributable to cPayPlus, CPS, BillingTree and Kontrol.

Other Costs of Services

Other costs of services were $40.5 million for the nine months ended September 30, 2021 and $30.0 million for the nine months ended September 30, 2020, an increase of $10.5 million or 35.0%. For the nine months ended September 30, 2021, incremental costs of services of approximately $5.9 million are attributable to cPayPlus, CPS, BillingTree and Kontrol.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $86.6 million for the nine months ended September 30, 2021 and $65.8 million for the nine months ended September 30, 2020, an increase of $20.9 million or 31.7%. This increase was primarily due to increased compensation expenses with general business growth and increased expenses relating to software and technological services.

Depreciation and Amortization Expenses

Depreciation and amortization expenses were $63.4 million for the nine months ended September 30, 2021 and $44.0 million for the nine months ended September 30, 2020, an increase of $19.4 million or 43.9%. The increase was primarily due to depreciation and amortization of fixed assets and intangibles from the acquisitions of CPS, BillingTree and Kontrol.

Change in the Fair Value of Contingent Consideration

Change in the fair value of contingent consideration was $0.1 million for the nine months ended September 30, 2021, which consisted of fair value adjustments related to the contingent consideration for the acquisitions of Ventanex, CPS and Kontrol.

Interest Expense

Interest expense was $2.8 million for the nine months ended September 30, 2021 and $10.8 million for the nine months ended September 30, 2020, a decrease of $8.0 million or 74.5%. 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 nine months ended September 30, 2021, due to the termination in full of all outstanding Delayed Draw Term Loan commitments under the Successor Credit Agreement.

Change in Fair Value of Warrant Liabilities

We incurred a change in the fair value of warrant liabilities of $70.8 million for the nine months ended September 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 net gain, related to accretion expense and fair value adjustment of the tax receivable liability of $0.1 million for the nine months ended September 30, 2021 compared to a $12.1 million loss for the nine months ended September 30, 2020, an increase of $12.2 million. This increase 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, as well as final adjustments related to the value of the 2020 exchanges of Post-Merger Repay Units.

Other Loss

We incurred a loss of $9.1 million on the settlement of interest rate swaps and disposal of property, plant, and equipment for the nine months ended September 30, 2021.

Income Tax

The income tax benefit was $12.3 million for the nine months ended September 30, 2021 and the income tax benefit was $8.4 million for the nine months ended September 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 charges deemed to not be part of normal operating expenses, non-cash charges and/or 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, commission restructuring related charges, 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 charges deemed to not be part of normal operating expenses, non-cash charges and/or 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, commission restructuring related charges, 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 assuming conversion of the outstanding Post-Merger Repay Units) for the three and nine months ended September 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 nine months ended September 30, 2021 and 2020.







                                   REPAY HOLDINGS CORPORATION
                 Reconciliation of GAAP Net Income to Non-GAAP Adjusted EBITDA
                     For the three months ended September 30, 2021 and 2020
                                          (Unaudited)
                                                            Three Months ended September 30,
        (in $ thousands)                                       2021                 2020(l)
        Revenue                                          $         61,125       $         37,635
        Operating expenses
        Other costs of services                          $         15,288       $         10,492
        Selling, general and administrative                        33,696                 28,581
        Depreciation and amortization                              25,907                 15,421
        Change in fair value of contingent consideration           (1,550 )               (3,750 )
        Total operating expenses                         $         73,341       $         50,744
        Loss from operations                             $        (12,216 )     $        (13,109 )
        Interest expense                                             (764 )               (3,624 )
        Change in fair value of warrant liabilities                     -                  2,740
        Change in fair value of tax receivable liability            3,411                 (1,475 )
        Other income                                                   19                     25
        Other loss                                                    (19 )                    -
        Total other (expenses) income                               2,647                 (2,334 )
        Loss before income tax expense                             (9,569 )              (15,443 )
        Income tax benefit                                          2,261                  3,383
        Net loss                                         $         (7,308 )     $        (12,060 )
        Add:
        Interest expense                                              764                  3,624
        Depreciation and amortization(a)                           25,907                 15,421
        Income tax (benefit)                                       (2,261 )               (3,383 )
        EBITDA                                           $         17,102       $          3,602
        Non-cash change in fair value of warrant
        liabilities(b)                                                  -                 (2,740 )
        Non-cash change in fair value of contingent
        consideration(c)                                           (1,550 )               (3,750 )
        Non-cash change in fair value of assets and
        liabilities(d)                                             (3,411 )                1,475
        Share-based compensation expense(e)                         5,573                  5,768
        Transaction expenses(f)                                     4,425                  3,332
        Commission restructuring charges(g)                         2,527                  7,221
        Employee recruiting costs(h)                                  256                     67
        Other taxes(i)                                                 66                    171
        Restructuring and other strategic initiative
        . . .
        


Nov 09, 2021

COMTEX_396599759/2041/2021-11-09T16:35:40

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