Repay Holdings Corporation — Q1 2020 Form 10-Q Summary
Business context and reporting period
Repay is a payments technology company providing integrated payment processing solutions to vertical markets, including consumer finance, automotive, healthcare and business-to-business payments. This report covers the three months ended March 31, 2020. The 2020 period is presented as the Successor, while the 2019 comparable period is the Predecessor following the July 2019 Business Combination; therefore, comparisons are not fully comparable.
Repay processed approximately $3.8 billion of card payment volume during the quarter, with stated quarter-over-quarter volume growth of approximately 58%. The February 2020 acquisition of Ventanex expanded the company into mortgage and B2B healthcare payments.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $39.5 million | $23.0 million | +71.4% |
| Operating expenses | $42.8 million | $16.7 million | +156.4% |
| Operating income (loss) | $(3.4) million | $6.3 million | Declined |
| Net income (loss) | $(6.3) million | $4.9 million | Declined |
| Net loss attributable to Repay | $(3.4) million | $4.9 million | Declined |
| Loss per Class A share | $(0.09) | Not clearly provided | Not comparable |
| Adjusted EBITDA | $17.4 million | $11.3 million | +53.0% |
| Adjusted net income | $11.4 million | $8.9 million | +28.5% |
GAAP operating margin was approximately negative 8.6%, compared with approximately 27.4% in Q1 2019. GAAP net margin was approximately negative 15.9%. Adjusted EBITDA margin was approximately 44.0%.
- Revenue growth reflected new customers, organic growth and approximately $12.5 million of incremental revenue from the TriSource, APS Payments and Ventanex acquisitions.
- Costs of services increased to $10.8 million from $5.1 million, while selling, general and administrative expense increased to $18.2 million from $8.7 million.
- Depreciation and amortization increased to $13.9 million from $2.9 million, primarily because of purchase-accounting fair value adjustments and acquired intangible assets.
- Interest expense increased to $3.5 million from $1.4 million because of higher average debt balances.
- The company recorded a $1.1 million income tax benefit and a $0.5 million change in the fair value of its tax receivable agreement liability.
Cash flow, debt and liquidity
| Metric | March 31, 2020 | December 31, 2019 |
|---|---|---|
| Cash and cash equivalents | $32.7 million | $24.6 million |
| Restricted cash | $11.7 million | $13.3 million |
| Total assets | $829.8 million | $782.0 million |
| Term loan borrowings, before issuance costs | $253.4 million | $208.9 million |
| Revolver borrowings | $0 | $10.0 million |
| Tax receivable agreement liability | $67.7 million | $67.2 million |
- Operating cash flow was $8.6 million, compared with $(0.3) million in Q1 2019.
- Investing cash flow was $(38.3) million, primarily reflecting $35.5 million of cash paid for the Ventanex acquisition and $2.4 million of software purchases.
- Financing cash flow was $36.2 million, including $46.0 million of new long-term debt, repayment of the $10.0 million revolver balance, term-loan repayments, warrant proceeds and debt issuance costs.
- The amended credit agreement provided for a $255.0 million term loan, a $60.0 million delayed-draw term loan and a $30.0 million revolving facility. Repay had $90.0 million of stated available borrowing capacity at March 31, 2020 and was in compliance with its covenants.
- Two interest-rate swaps with aggregate notional amounts of $170.0 million converted a portion of variable-rate debt to fixed-rate payments. Management estimated that a 1% change in applicable borrowing rates would affect annual cash interest expense by approximately $0.8 million.
Material changes versus the prior comparable period
- Revenue increased 71.4%, but operating expenses grew substantially faster, driven by acquisitions, transaction costs, higher personnel and technology costs, and purchase-accounting amortization.
- The company moved from $4.9 million of net income attributable to the company to a $3.4 million net loss attributable to the company.
- Adjusted EBITDA and adjusted net income increased despite the GAAP loss, reflecting management’s exclusion of acquisition-related amortization, transaction expenses, stock-based compensation and other items.
- The company completed the Ventanex acquisition for approximately $36.0 million in cash plus contingent consideration with a March 31, 2020 fair value of $10.8 million. Ventanex contributed $1.9 million of revenue and $0.1 million of net income after acquisition.
- Contingent consideration increased to $31.6 million, including a $6.6 million measurement-period adjustment related to APS Payments and $10.8 million related to Ventanex.
- Accumulated other comprehensive loss increased to $5.3 million, primarily because of the decline in the fair value of designated interest-rate hedges.
Guidance, outlook, risks and unusual items
The filing does not provide formal quarterly or full-year financial guidance. Management stated that operating cash flow, cash on hand and available borrowing capacity were expected to fund operations, planned capital expenditures and debt service for the next twelve months, while noting that COVID-19 could affect access to capital and liquidity.
- COVID-19 was identified as a material and highly uncertain risk. Potential effects include lower consumer and business spending, reduced loan payments and collections, payment deferrals, lower healthcare activity, higher unemployment, customer financial distress and reduced card payment volume.
- The company stated that COVID-19 had begun affecting results late in the first quarter, so Q1 results might not be indicative of the remainder of 2020. The full impact could not be reasonably estimated.
- Acquisition integration and execution risks remain significant, particularly in the mortgage, B2B healthcare, back-end processing and B2B payment markets.
- Other key risks include data security, chargebacks and fraud, regulatory and technology changes, competition, customer and payment-ecosystem relationships, covenant compliance and the ability to generate sufficient cash to service debt and tax-related obligations.
- On April 6, 2020, after quarter-end, the company borrowed approximately $14.4 million under the delayed-draw term loan to fund part of the APS earnout.
- The company reported $32.8 million of unrecognized stock-based compensation expense at March 31, 2020, expected to be recognized over a weighted-average period of 2.64 years.
- The company reported no material off-balance-sheet arrangements and stated that no pending legal proceeding was expected to have a material adverse effect.
Most important facts for investors to verify
- Whether COVID-19 materially reduced card payment volume, revenue, margins or customer activity after March 31, 2020.
- The sustainability of reported Adjusted EBITDA and Adjusted Net Income after excluding significant acquisition, amortization, stock-compensation and other nonrecurring items.
- Post-acquisition performance and integration progress for TriSource, APS Payments and Ventanex, including achievement of earnout targets.
- Debt repayment capacity, covenant headroom, interest-rate exposure and the effect of the additional $14.4 million borrowing after quarter-end.
- The timing and amount of payments under the $67.7 million tax receivable agreement liability and whether future payments could exceed realized tax benefits.
- The comparability of 2020 Successor results with 2019 Predecessor results, particularly when assessing growth and profitability trends.