Repay Holdings Corporation — Q3 2019 Form 10-Q Summary
Business context and reporting period
Repay provides integrated electronic payment processing solutions focused on vertical markets with specialized transaction needs. The report covers the quarter ended September 30, 2019 and was filed November 14, 2019. The July 11, 2019 Business Combination with Hawk Parent created a new accounting basis; therefore, 2019 results are presented as Successor from July 11 through September 30 and Predecessor before July 11. Management also presents simple combined figures for comparison purposes.
- Card payment volume was approximately $2.6 billion in the quarter, up approximately 40% sequentially, and $7.3 billion for the nine months, up approximately 33% year over year.
- The Company acquired TriSource Solutions on August 13, 2019 for preliminary total consideration of $62.3 million, including contingent consideration.
Financial performance and key metrics
| Metric | Q3 2019 | Comparable period | Change/comment |
|---|---|---|---|
| Combined revenue | $41.1 million | $32.3 million in Q3 2018 | Up 27.2% |
| Combined processing and service fees | $27.0 million | $20.3 million | Up approximately 33% |
| Combined interchange and network fees | $14.0 million | $12.0 million | Up 17.1% |
| Combined net income (loss) | $(48.6) million | $3.7 million | Primarily affected by transaction and other one-time expenses |
| Combined Adjusted EBITDA | $11.9 million | $9.2 million | Up 29.4%; approximately 29.0% of combined revenue |
| Combined Adjusted Net Income | $10.4 million | $7.0 million | Up 48.5% |
| Successor net loss attributable to the Company | $(8.5) million | Not directly comparable | $(0.25) basic and diluted loss per Class A share |
For the nine months, combined revenue was $116.5 million versus $96.2 million in 2018, up 21.2%. Combined Adjusted EBITDA was $33.7 million versus $27.1 million, up 24.4%, and combined Adjusted Net Income was $27.1 million versus $20.7 million, up 30.8%. Combined net loss was $39.6 million versus net income of $8.4 million in the prior-year period.
- Successor-period revenue was $37.2 million and Successor-period net loss was $15.9 million, including $7.4 million attributable to noncontrolling interests.
- Successor-period operating loss was $14.1 million. Operating expenses included $10.7 million of depreciation and amortization and $21.0 million of selling, general and administrative expense.
- Q3 combined selling, general and administrative expense was $55.1 million, versus $6.1 million in Q3 2018, primarily because of Business Combination costs, growth-related spending, and technology, marketing, rent and telecommunications expenses.
- Q3 combined depreciation and amortization was $11.0 million, versus $2.7 million, primarily due to purchase-accounting fair-value adjustments and the TriSource acquisition.
Cash flow, liquidity and capital structure
| Balance or cash flow | September 30, 2019 |
|---|---|
| Cash and cash equivalents | $45.5 million |
| Restricted cash | $11.6 million |
| Net cash provided by operating activities, Successor period | $4.9 million |
| Net cash used in investing activities, Successor period | $303.5 million |
| Net cash provided by financing activities, Successor period | $355.6 million |
| Long-term debt, net of current maturities | $198.9 million |
| Gross term loan borrowings | $210.0 million |
| Undrawn revolver commitment | $20.0 million commitment; $10.0 million reported as available borrowing capacity |
| Tax receivable agreement liability | $66.3 million at September 30, 2019 |
The New Credit Agreement, entered into July 11, 2019, includes a $170.0 million term loan, a $40.0 million delayed-draw term loan and a $20.0 million revolving facility, with maturity in July 2024. The stated variable borrowing rate was approximately 5.26% at September 30, 2019, and the Company reported compliance with its covenants. Principal maturities total $210.0 million, including $166.7 million due in 2024.
Management expects operating cash flow, cash on hand and available borrowing capacity to fund operations, planned capital expenditures and debt service for the next twelve months. The Company stated that it had no material off-balance-sheet arrangements.
Material changes, outlook, risks and unusual items
- The Business Combination materially changed the reporting basis, capital structure and expense profile. The transaction generated substantial new intangible assets and goodwill, including preliminary goodwill of $340.3 million for Hawk Parent and $29.7 million for TriSource.
- Business Combination and acquisition-related costs were significant. The Q3 non-GAAP reconciliation included approximately $35.0 million of transaction expenses, $10.4 million of share-based compensation and $1.3 million of debt extinguishment-related expense.
- The Tax Receivable Agreement requires payment of 100% of certain realized or deemed tax benefits to applicable former Hawk Parent owners. The Company estimated an initial and potential future obligation of approximately $126.6 million if all Post-Merger Repay Units are exchanged, although timing and amount depend on future exchanges, taxable income and tax rates.
- On October 1, 2019, 3.75 million additional Post-Merger Repay Units were issued after a stock-price earn-out trigger was met. Certain founder shares were also released from escrow, and other units were cancelled or released.
- On October 1, 2019, the Company entered into an interest-rate swap with an initial notional amount of $140.0 million, with fixed payments exchanged for three-month LIBOR-based floating payments through July 2024.
- On October 14, 2019, the Company announced the acquisition of APS Payments for up to $60 million, including a performance-based earn-out. The acquisition was financed with cash and New Credit Agreement borrowings.
- No formal revenue or earnings guidance is provided in the filing. Management’s outlook emphasizes continued volume growth, new customer additions, acquisition integration and technology investment.
- Key risks include payment-processing competition and pricing pressure, cybersecurity and data-security incidents, fraud and chargebacks, reliance on sponsor banks and third-party processors, payment-network and consumer-finance regulation, interest-rate exposure, acquisition integration, substantial leverage, Tax Receivable Agreement payments and potential dilution from exchangeable units, warrants and equity awards.
Important facts for investors to verify
- Reconcile Successor, Predecessor, combined and pro forma results before assessing growth, margins or year-over-year profitability.
- Assess whether the reported Adjusted EBITDA and Adjusted Net Income improvements remain after unusually large transaction, stock-compensation and purchase-accounting adjustments.
- Monitor debt maturities, variable-rate exposure, covenant compliance and the effect of the APS acquisition on leverage and liquidity.
- Verify the timing and magnitude of Tax Receivable Agreement payments and the effect of future Post-Merger Repay Unit exchanges.
- Evaluate integration progress and realized synergies from Hawk Parent, TriSource and APS Payments, including the transition of back-end processing capabilities.
- Track card payment volume, customer concentration, chargeback rates, sponsor-bank relationships and compliance with payment-network requirements.
- Consider potential dilution from approximately 22.0 million exchangeable Post-Merger Repay Units, earn-out units, warrants and unvested equity awards.