Repay Holdings Corporation — Q2 2020 Form 10-Q Summary
Business Context and Reporting Period
Repay is a payments technology company providing integrated payment-processing solutions to industry-focused vertical markets. This report covers the quarter and six months ended June 30, 2020. Comparisons with 2019 are between the post-Business Combination “Successor” period and the pre-Business Combination “Predecessor” period and are therefore not fully comparable.
- Card payment volume was approximately $3.6 billion in the quarter and $7.4 billion for the six months, up approximately 63% and 61%, respectively, from the comparable 2019 periods.
- Revenue is primarily generated from volume-based payment-processing fees and fixed per-transaction fees.
Financial Performance and Key Metrics
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Revenue | $36.5 million | $21.7 million | $76.0 million | $44.7 million |
| Operating income (loss) | $(6.7) million | $5.6 million | $(10.1) million | $11.9 million |
| Operating margin | (18.3%) | 25.9% | (13.3%) | 26.7% |
| Net income (loss) | $(16.5) million | $4.2 million | $(22.8) million | $9.0 million |
| Net loss attributable to Repay | $(12.6) million | $4.2 million | $(16.1) million | $9.0 million |
| Basic and diluted EPS | $(0.30) | Not provided | $(0.40) | Not provided |
| Adjusted EBITDA | $16.2 million | $10.4 million | $33.6 million | $21.8 million |
| Adjusted EBITDA margin | 44.4% | 48.2% | 44.2% | 48.7% |
| Adjusted net income | $9.9 million | $7.8 million | $21.4 million | $16.7 million |
- Revenue increased 68.3% in Q2 and 69.9% for the six months, driven by new customers, existing-customer growth and the TriSource, APS Payments and Ventanex acquisitions.
- Costs of services increased 88.5% in Q2 and 100.0% for the six months, generally tracking higher processing volume.
- SG&A increased 124.9% in Q2 and 117.0% for the six months, reflecting follow-on offering and acquisition expenses, business growth, technology and other operating costs, and higher stock-based compensation.
- Depreciation and amortization increased to $14.7 million in Q2 and $28.6 million for the six months, primarily because of purchase-accounting adjustments to acquired intangible assets.
- The company recorded a $10.0 million Q2 and $10.6 million six-month expense from changes in the fair value of its tax receivable agreement liability.
- Stock-based compensation expense was $5.5 million in Q2 and $9.0 million for the six months.
Cash Flow, Liquidity and Capital Structure
- Operating cash flow was $9.4 million for the six months ended June 30, 2020, compared with $8.2 million in the 2019 comparable period.
- Investing cash flow was $(43.7) million, including $35.5 million for Ventanex, $0.5 million for APS Payments and $7.2 million of software investment.
- Financing cash flow was $176.1 million, including $174.0 million from the follow-on equity offering, $55.3 million from warrant exercises and $60.4 million of new long-term debt, partly offset by $98.8 million of Post-Merger Repay Unit redemptions and debt repayments.
- Cash and cash equivalents were $165.9 million at June 30, 2020, compared with $24.6 million at December 31, 2019. Restricted cash was $13.8 million.
- Management reported $75.6 million of available borrowing capacity under the New Credit Agreement and stated that cash flow, cash on hand and available capacity should fund operations, planned capital expenditures and debt service for the next twelve months.
- Term-loan borrowings were $259.7 million net of deferred issuance costs, versus $208.9 million at year-end 2019. The revolving facility had no outstanding balance at June 30, 2020.
- The credit agreement provides for a $255.0 million term loan, a $60.0 million delayed-draw term loan and a $30.0 million revolving facility. The company was in compliance with its restrictive covenants.
- The company had a $107.6 million tax receivable agreement liability and $18.1 million of contingent acquisition consideration at June 30, 2020.
Material Changes Versus the Prior Comparable Period
- Revenue and payment volume grew substantially, but GAAP profitability declined because of higher acquisition-related amortization, stock-based compensation, transaction costs, interest expense and fair-value adjustments.
- Adjusted EBITDA increased 55.3% in Q2 and 54.1% for the six months; adjusted net income increased 27.3% and 28.0%, respectively. These non-GAAP improvements occurred alongside lower GAAP margins.
- The company completed the $174.0 million net follow-on offering on June 2, 2020 and acquired 5.2 million Post-Merger Repay Units from Corsair for $98.8 million.
- Ventanex was acquired in February 2020 for approximately $36.0 million in cash, with contingent consideration valued at $10.8 million. Ventanex contributed $4.4 million of revenue through June 30, 2020.
- APS Payments contributed $6.9 million of revenue and $0.7 million of net income during the six months ended June 30, 2020.
- Goodwill increased to $412.2 million from $389.7 million at December 31, 2019. Management concluded that goodwill was not impaired as of June 30, 2020.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a specific revenue, earnings or full-year quantitative guidance range. Management stated that available cash, operating cash flow and borrowing capacity are expected to support operations and debt service for the next twelve months.
- COVID-19 effects remain highly uncertain. Potential impacts include lower consumer and business spending, reduced loan originations and payments, loan-payment deferrals, collection moratoriums, lower B2B payments, reduced healthcare activity and operational or cybersecurity disruption.
- Management noted that the pandemic may have accelerated adoption of electronic payments but could have an overall adverse effect on future results, and that first-half performance may not indicate the remainder of 2020.
- The company is exposed to variable-rate debt and LIBOR transition risk. Interest-rate swaps with notional amounts of $140.0 million and $30.0 million hedge a combined $170.0 million of term debt.
- TRA payments could be substantial, may exceed realized tax benefits and are not conditioned on continued ownership of the company or Hawk Parent. The company expects to fund them from realized tax savings but cannot assure it will be able to finance all obligations.
- Acquisition integration, contingent earnouts, payment-industry competition and regulation, data security, chargebacks, fraud, customer concentration and future acquisition execution remain material risks.
- Subsequent to quarter-end, Repay announced the acquisition of cPayPlus for up to $16.0 million, including $8.0 million paid at closing. It also completed the redemption of all outstanding warrants on July 27, 2020; approximately 2.7 million shares were issued from exercises before redemption, generating $31.5 million.
Important Facts for Investors to Verify
- Reconcile the strong payment-volume and revenue growth with declining GAAP operating and net margins.
- Assess the sustainability and composition of Adjusted EBITDA and Adjusted Net Income, including the substantial add-backs for amortization, stock compensation, fair-value changes and transaction costs.
- Review debt maturities, variable-rate exposure, covenant requirements and the remaining availability under the credit facility.
- Evaluate the timing and potential cash burden of the $107.6 million TRA liability and acquisition-related earnouts.
- Monitor COVID-19 effects on consumer finance, automotive, B2B and healthcare payment volumes.
- Confirm post-quarter-end dilution from warrant exercises, the warrant redemption and the cPayPlus acquisition.
- Consider the limited comparability between Successor 2020 and Predecessor 2019 financial statements because of the July 2019 Business Combination and purchase accounting.