Repay Holdings Corporation — Q3 2020 Form 10-Q Summary
Business context and reporting period
Repay is a payments technology company providing integrated payment processing solutions to industry-specific vertical markets. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020. Comparisons with 2019 are complicated by the July 11, 2019 Business Combination, which created separate Successor and Predecessor reporting periods; management also presents combined 2019 figures for comparison.
Card payment volume was approximately $3.8 billion in the quarter and $11.2 billion for the nine months, representing growth of approximately 44% and 55%, respectively, versus the comparable 2019 periods.
Key financial metrics
| Metric | Q3 2020 | 9M 2020 | Comparable change |
|---|---|---|---|
| Revenue | $37.6 million | $113.6 million | +43.3% and +60.1%, respectively |
| Operating loss | $(13.1) million | $(23.2) million | 2019 combined operating losses were $(46.7) million and $(34.7) million |
| Net loss | $(14.8) million | $(37.6) million | 2019 combined net losses were $(48.6) million and $(39.6) million |
| Net loss attributable to Repay | $(9.5) million | $(25.6) million | Improved from $(41.2) million and $(32.2) million |
| GAAP loss per share | $(0.16) | $(0.56) | Basic and diluted |
| Adjusted EBITDA | $15.6 million | $49.2 million | +30.9% and +45.9% |
| Adjusted net income | $9.5 million | $31.1 million | $(8.8)% and +14.5% |
GAAP operating margin was approximately negative 34.8% for the quarter and negative 20.4% for the nine months. Adjusted EBITDA margin was approximately 41.4% and 43.3%, respectively. The filing emphasizes that Adjusted EBITDA and Adjusted Net Income are non-GAAP measures and may not be comparable with similarly titled measures used by other companies.
Operating expenses included $15.4 million of depreciation and amortization in the quarter and $44.0 million for the nine months, $5.8 million and $14.8 million of share-based compensation, and $1.4 million and $3.5 million of acquisition-related transaction expenses.
Cash flow, liquidity, debt and balance sheet
- Cash and cash equivalents were $182.3 million at September 30, 2020, compared with $24.6 million at December 31, 2019. Restricted cash was $10.4 million.
- Cash provided by operating activities was $6.7 million for the nine months. Cash used in investing activities was $55.2 million, primarily for the Ventanex and cPayPlus acquisitions and software development. Cash provided by financing activities was $203.2 million.
- Available borrowing capacity was $75.6 million at September 30, 2020. Management stated that operating cash flow, cash on hand and available borrowing capacity should fund operations, planned capital expenditures and debt service for the next twelve months.
- Total borrowings under the credit facility were $264.4 million before debt issuance costs, including $14.4 million drawn under the delayed draw term loan; the revolver was undrawn. Net borrowings were approximately $258.1 million.
- The credit facility consisted of a $255.0 million term loan, a $60.0 million delayed draw term loan and a $30.0 million revolving facility. The stated interest rate was 3.65% at September 30, 2020, and the Company was in compliance with its covenants.
- Interest-rate swaps with aggregate notional amounts of $170.0 million effectively converted part of the variable-rate debt to fixed-rate payments.
- The tax receivable agreement liability was $222.9 million, up from $67.2 million at December 31, 2019. The Company is obligated to pay holders 100% of specified realized or deemed tax benefits, and payments could exceed actual tax savings.
Material changes versus the prior comparable period
- Revenue and payment volume increased substantially, driven by new customers, growth among existing customers and acquisitions.
- Quarterly and nine-month GAAP losses attributable to Repay improved materially, primarily because 2019 included significant one-time Business Combination expenses.
- Adjusted EBITDA increased to $15.6 million in the quarter and $49.2 million for the nine months. Adjusted net income declined in the quarter but increased for the nine-month period.
- Depreciation and amortization increased substantially because of purchase-accounting fair-value adjustments and additional acquired intangible assets.
- Interest expense increased to $3.6 million in the quarter and $10.8 million for the nine months, reflecting higher average debt balances.
- The fair-value expense related to the tax receivable liability increased to $1.5 million in the quarter and $12.1 million for the nine months, primarily due to changes in the valuation discount rate and additional unit purchases and exchanges.
- Repay completed the Ventanex acquisition in February 2020 and acquired cPayPlus in July 2020. cPayPlus had a potential $8.0 million earnout; Ventanex had remaining accrued earnout consideration of $4.3 million at quarter-end.
- The Company completed June and September follow-on offerings and received substantial equity proceeds. Warrant exercises during the quarter generated $31.5 million, and all outstanding warrants were redeemed on July 27, 2020.
Guidance, outlook, commentary and risks
The filing does not provide a formal numerical revenue or earnings outlook. Management expects continued growth from payment volume, new customer additions, existing-customer growth, technology offerings and acquisitions. Management also expects available cash, operating cash flow and borrowing capacity to support the business for at least the next twelve months.
- COVID-19 effects remain highly uncertain. Potential impacts include lower loan origination and repayment activity, reduced receivables management payments, lower B2B spending, reduced healthcare payments and disruption to sales and operations.
- The pandemic may also increase cybersecurity, fraud, chargeback, customer-credit and business-continuity risks. The full financial effect cannot be reasonably estimated.
- Acquisition integration, realization of expected synergies, contingent earnouts and the ability to execute future acquisitions remain important risks.
- The business is exposed to competition, technology changes, payment-network and sponsor-bank relationships, regulatory changes and data-security incidents.
- Variable-rate debt exposes the Company to higher interest costs. Management estimated that a 1% change in applicable interest rates would change annual cash interest expense by approximately $1.0 million, after considering the debt structure and swaps.
- The Company expects to adopt lease accounting and credit-loss standards as it ceases to qualify as an emerging growth company; the quantitative effect of lease adoption was not yet reasonably estimated.
- Subsequent to quarter-end, Repay acquired CPS Payment Services on November 2, 2020 for up to $93 million, including up to $15 million of performance-based earnouts, funded with cash on hand. The credit facility was amended on November 5, 2020 to extend availability of the $60 million delayed draw facility through August 2021.
Most important facts for investors to verify
- Reconcile the Successor, Predecessor and combined 2019 periods before assessing year-over-year growth or margins.
- Evaluate the sustainability of strong payment-volume growth and Adjusted EBITDA after separating organic growth from acquisitions.
- Review the reconciliation and recurring nature of non-GAAP adjustments, particularly amortization, share-based compensation, transaction costs and fair-value changes.
- Assess the cash requirements and potential volatility associated with the $222.9 million tax receivable agreement liability.
- Confirm post-quarter-end liquidity after the CPS acquisition and monitor debt maturities, covenant compliance and variable-rate exposure.
- Evaluate COVID-19 effects on Repay’s consumer lending, automotive, receivables management, B2B and healthcare payment verticals.
- Review acquisition earnouts, integration performance and the effect of acquired intangible amortization on future GAAP earnings.