Repay Holdings Corp (RPAY) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of financial condition and results of operations should be read together with our audited consolidated financial statements and the related notes to those statements included under Item 8, hereof. 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 this Annual Report on Form 10-K.
Overview
We provide integrated payment processing solutions to industry-oriented markets in which clients have specific transaction processing needs. We refer to these markets as “vertical markets” or “verticals.” Our proprietary, integrated payment technology platform reduces the complexity of the electronic payments process for businesses, while enhancing their consumers’ overall experience. 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 client needs, our deep knowledge of our vertical markets and the embedded nature of our integrated payment solutions will drive strong growth by attracting new clients and fostering long-term client 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 $25.6 billion of total card payment volume for the year ending December 31, 2022, and our year-over-year card payment volume growth was approximately 25%.
Starting from December 31, 2022, we report our financial results based on two reportable segments.
Consumer Payments – Our Consumer Payments segment provides payment processing solutions (including debit and credit card processing, ACH processing and other electronic payment acceptance solutions, as well as our loan disbursement product) that enable our clients to collect payments and disburse funds to consumers and includes our clearing and settlement solutions (“RCS”) and Blue Cow Software business (“BCS”). RCS is our proprietary clearing and settlement platform through which we market customizable payment processing programs to other ISOs and payment facilitators. BCS provides enterprise resource planning software solutions that are customized to propane and fuel oil dealers; however, BCS was sold on February 15, 2023. The strategic vertical markets served by our Consumer Payments segment primarily include personal loans, automotive loans, receivables management, credit unions, mortgage servicing, consumer healthcare, diversified retail and energy related software services.
Business Payments – Our Business Payments segment provides payment processing solutions (including accounts payable automation, debit and credit card processing, virtual credit card processing, ACH processing and other electronic payment acceptance solutions) that enable our clients to collect or send payments to other businesses. The strategic vertical markets served within our Business Payments segment primarily include retail automotive, education, field services, governments and municipalities, healthcare, HOA management and hospitality.
Macroeconomic Conditions and COVID-19
We have been monitoring the current economic environment in the U.S. and globally – characterized by heightened inflation (including changes in wages), rising interest rates, supply chain issues and slower growth. Such macroeconomic conditions may continue to evolve in ways that are difficult to fully anticipate and may also include increased levels of unemployment and/or a recession. Some or all of these market factors have and could continue to adversely affect our payment volumes from the consumer loan market, the receivables management industry and consumer and commercial spending. The effect of these events on our financial condition, results of operations and cash flows is uncertain and cannot be predicted at this time.
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In addition, the ultimate impact of the COVID-19 pandemic on our results remains uncertain. Although our operations have continued effectively despite social distancing and other measures taken in response to the pandemic, it is possible that we could be adversely affected if the COVID-19 pandemic (including the continued emergence of new variants) results in new or additional mitigation efforts (including actions which could cause or exacerbate economic conditions described in the preceding paragraph). However, the acceleration in the use of online payment solutions and continued economic recovery from the effects from the COVID-19 pandemic may positively affect our financial results.
Finally, the impact of all of these various events on our results in 2022 may not be necessarily indicative of their impact on our results in 2023.
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. On the closing of the Business Combination, 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:
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the dollar amount volume and the number of transactions that are processed by the clients that we currently serve;
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our ability to attract new clients and onboard them as active processing clients;
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our ability to (i) successfully integrate acquisitions and (ii) complete future acquisitions;
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our ability to offer new and competitive payment technology solutions to our clients; and
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general economic conditions and consumer finance trends.
Key Components of Our Revenues and Expenses
Revenues
Revenue. As our clients 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 is determined, based on the judgment of our management, considering factors such as margin objectives, pricing practices and controls, client segment pricing strategies, the product life cycle and the observable price of the service charged to similarly situated clients. We believe our chargeback rate was less than 1% of our card payment volume, during the years ended December 31, 2022, 2021 and 2020.
Expenses
Costs of services. 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 client 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.
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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
| Year ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in thousands) | 2022 | 2021 | 2020 | |||||||||
| Revenue | $ | 279,227 | $ | 219,258 | $ | 155,036 | ||||||
| Operating expenses | ||||||||||||
| Costs of services (exclusive of depreciation and amortization shown separately below) | $ | 64,826 | $ | 55,484 | $ | 41,447 | ||||||
| Selling, general and administrative | 149,061 | 120,053 | 87,302 | |||||||||
| Depreciation and amortization | 107,751 | 89,692 | 60,807 | |||||||||
| Change in fair value of contingent consideration | (3,300 | ) | 5,846 | (2,510 | ) | |||||||
| Impairment loss | 8,090 | 2,180 | — | |||||||||
| Total operating expenses | $ | 326,428 | $ | 273,255 | $ | 187,046 | ||||||
| Loss from operations | $ | (47,201 | ) | $ | (53,997 | ) | $ | (32,010 | ) | |||
| Interest expense | (4,375 | ) | (3,679 | ) | (14,445 | ) | ||||||
| Loss on extinguishment of debt | — | (5,941 | ) | — | ||||||||
| Change in fair value of warrant liabilities | — | — | (70,827 | ) | ||||||||
| Change in fair value of tax receivable liability | 66,871 | (14,109 | ) | (12,439 | ) | |||||||
| Other (expense) income | (135 | ) | 97 | (3 | ) | |||||||
| Other loss | (245 | ) | (9,099 | ) | — | |||||||
| Total other income (expense) | 62,116 | (32,731 | ) | (97,714 | ) | |||||||
| Income (loss) before income tax (expense) benefit | 14,915 | (86,728 | ) | (129,724 | ) | |||||||
| Income tax (expense) benefit | (6,174 | ) | 30,691 | 12,358 | ||||||||
| Net income (loss) | $ | 8,741 | $ | (56,037 | ) | $ | (117,366 | ) | ||||
| Net loss attributable to non-controlling interest | (4,095 | ) | (5,953 | ) | (11,769 | ) | ||||||
| Net income (loss) attributable to the Company | $ | 12,836 | $ | (50,084 | ) | $ | (105,597 | ) | ||||
| Weighted-average shares of Class A common stock outstanding - basic | 88,792,453 | 83,318,189 | 52,180,911 | |||||||||
| Weighted-average shares of Class A common stock outstanding - diluted | 110,671,731 | 83,318,189 | 52,180,911 | |||||||||
| Income (loss) per Class A share - basic | $ | 0.14 | $ | (0.60 | ) | $ | (2.02 | ) | ||||
| Income (loss) per Class A share - diluted | $ | 0.12 | $ | (0.60 | ) | $ | (2.02 | ) |
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Revenue
Total revenue was $279.2 million for the year ended December 31, 2022 and $219.3 million for the year ended December 31, 2021, an increase of $60.0 million or 27.4%. This increase was the result of newly signed clients, the growth of our existing clients, as well as the acquisitions of BillingTree, Kontrol and Payix. For the year ended December 31, 2022, incremental revenues of approximately $37.9 million are attributable to BillingTree, Kontrol and Payix.
Costs of Services
Costs of services were $64.8 million for the year ended December 31, 2022 and $55.5 million for the year ended December 31, 2021, an increase of $9.3 million or 16.8%. This increase was the result of newly signed clients, the growth of our existing clients, as well as the acquisitions of BillingTree, Kontrol and Payix. For the year ended December 31, 2022, incremental costs of services of approximately $7.5 million are attributable to BillingTree, Kontrol and Payix.
Selling, General and Administrative
Selling, general and administrative expenses were $149.1 million for the year ended December 31, 2022 and $120.1 million for the year ended December 31, 2021, an increase of $29.0 million or 24.2%. This increase was primarily due to a
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$19.4 million increase in compensation expenses with general business growth and increased employees related to acquisitions, and a $7.0 million increase in software and technological services expenses related to the integration of acquired businesses.
Depreciation and Amortization
Depreciation and amortization expenses were $107.8 million for the year ended December 31, 2022 and $89.7 million for year ended December 31, 2021, an increase of $18.1 million or 20.1%. The increase was primarily due to a $20.9 million increase in depreciation and amortization of fixed assets and intangibles from the acquisitions of BillingTree, Kontrol, and Payix.
Change in Fair Value of Contingent Consideration
Change in the fair value of contingent consideration was ($3.3) million for the year ended December 31, 2022, which consisted of fair value adjustments related to the contingent consideration for the acquisitions of CPS, Kontrol, and Payix.
Impairment Loss
We incurred an impairment loss of $8.1 million for the year ended December 31, 2022, due to trade names write-offs related to BillingTree, Kontrol and Payix. We incurred an impairment loss of $2.2 million for the year ended December 31, 2021, due to trade names write-offs related to TriSource, APS, Ventanex, cPayPlus and CPS. These trade names were strategically phased out, and service offerings are marketed under the REPAY name.
Interest Expense
Interest expense was $4.4 million for the year ended December 31, 2022 and $3.7 million for the year ended December 31, 2021, an increase of $0.7 million or 18.9%. This increase was due to a higher average outstanding principal balance under our Amended Credit Agreement.
Loss on Extinguishment of Debt
We incurred a loss of $5.9 million on extinguishment of debt for the year ended December 31, 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 Tax Receivable Liability
We incurred a gain, related to accretion expense and fair value adjustment of the tax receivable liability of $66.9 million for the year ended December 31, 2022 compared to a net loss of $14.1 million for the year ended December 31, 2021, an increase of $81.0 million. This increase was due to larger fair value adjustments related to the tax receivable liability, primarily as a result of changes to the discount rate, or Early Termination Rate, used to determine the fair value of the liability.
Other Loss
We incurred a loss of $0.2 million on termination of lease and disposal of fixed assets for the year ended December 31, 2022. We incurred a loss of $9.1 million on the settlement of interest rate swaps and disposal of property and equipment for the year ended December 31, 2021.
Income Tax Expense and Benefit
The income tax expense was $6.2 million for the year ended December 31, 2022, reflecting the expected income tax expense on the income generated over the same period. This was a result of the operating income incurred by the Company, primarily driven by the change in fair value of the tax receivable liability and contingent consideration, offset by stock-based compensation deductions and the amortization of assets acquired in the Business Combination and prior acquisitions. The income tax benefit was $30.7 million for the year ended December 31, 2021, which reflected the expected income tax benefit to be received on the net earnings related to the Company’s economic interest in Hawk Parent.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Revenue
Total revenue was $219.3 million for the year ended December 31, 2021 and $155.0 million for the year ended December 31, 2020, an increase of $64.3 million or 41.4%. This increase was the result of newly signed clients, the growth of
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our existing clients, as well as the acquisitions of BillingTree and Kontrol. For the year ended December 31, 2021, incremental revenues of approximately $42.7 million are attributable to BillingTree, Kontrol and Payix.
Costs of Services
Costs of services were $55.5 million for the year ended December 31, 2021 and $41.4 million for the year ended December 31, 2020, an increase of $14.1 million or 33.9%. For the year ended December 31, 2021, incremental costs of services of approximately $8.4 million are attributable to BillingTree, Kontrol and Payix.
Selling, General and Administrative
Selling, general and administrative expenses were $120.1 million for the year ended December 31, 2021 and $87.3 million for the year ended December 31, 2020, an increase of $32.8 million or 37.5%. 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
Depreciation and amortization expenses were $89.7 million for the year ended December 31, 2021 and $60.8 million for year ended December 31, 2020, an increase of $28.9 million or 47.5%. The increase was primarily due to depreciation and amortization of fixed assets and intangibles from the acquisitions of BillingTree and Kontrol.
Change in Fair Value of Contingent Consideration
Change in the fair value of contingent consideration was $5.8 million for the year ended December 31, 2021, which consisted of fair value adjustments related to the contingent consideration for the acquisitions of Ventanex, CPS, BillingTree and Kontrol.
Impairment Loss
We incurred an impairment loss of $2.2 million for the year ended December 31, 2021, due to trade names write-offs related to TriSource, APS, Ventanex, cPayPlus and CPS as we strategically phased out these trade names and marketed service offerings under the REPAY name.
Interest Expense
Interest expense was $3.7 million for the year ended December 31, 2021 and $14.4 million for the year ended December 31, 2020, a decrease of $10.7 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 year ended December 31, 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 year ended December 31, 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 change in the fair value of the tax receivable liability of $14.1 million for the year ended December 31, 2021 compared to $12.4 million for the year ended December 31, 2020, an increase of $1.7 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.
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Other Loss
We incurred a loss of $9.1 million on the settlement of interest rate swaps and disposal of property and equipment for the year ended December 31, 2021.
Income Tax Benefit
The income tax benefit was $30.7 million for the year ended December 31, 2021 and $12.4 million for year ended December 31, 2020, which reflected the expected income tax benefit to be received on the net earnings related to the Company’s economic interest in Hawk Parent. This was a result of the operating loss incurred by the Company, primarily driven by stock-based compensation deductions, the amortization of assets acquired in the Business Combination and prior acquisitions, the write-off of deferred debt issuance costs and the loss recognized as part of the settlement of interest rate swaps, in addition to, the state rate change impact on deferred taxes.
Segments
We provided our services through two reportable segments: (1) Consumer Payments and (2) Business Payments.
The following table presents our segment revenue and selected performance measures.
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| ($ in thousand) | 2022 | 2021 | ||||||
| Revenue | ||||||||
| Consumer Payments | $ | 248,191 | $ | 194,044 | ||||
| Business Payments | 42,600 | 33,818 | ||||||
| Elimination of intersegment revenues | (11,564 | ) | (8,604 | ) | ||||
| Total revenue | $ | 279,227 | $ | 219,258 | ||||
| Gross profit (1) | ||||||||
| Consumer Payments | $ | 195,542 | $ | 148,614 | ||||
| Business Payments | 30,423 | 23,764 | ||||||
| Elimination of intersegment revenues | (11,564 | ) | (8,604 | ) | ||||
| Total gross profit | $ | 214,401 | $ | 163,774 | ||||
| Total gross profit margin (2) | 77% | 75% |
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| ($ in thousand) | 2021 | 2020 | ||||||
| Revenue | ||||||||
| Consumer Payments | $ | 194,044 | $ | 140,844 | ||||
| Business Payments | 33,818 | 20,620 | ||||||
| Elimination of intersegment revenues | (8,604 | ) | (6,428 | ) | ||||
| Total revenue | $ | 219,258 | $ | 155,036 | ||||
| Gross profit (1) | ||||||||
| Consumer Payments | 148,614 | 106,016 | ||||||
| Business Payments | 23,764 | 14,001 | ||||||
| Elimination of intersegment revenues | (8,604 | ) | (6,428 | ) | ||||
| Total gross profit | $ | 163,774 | $ | 113,589 | ||||
| Total gross profit margin (2) | 75% | 73% |
(1)
Gross profit represents revenue less cost of services.
(2)
Gross profit margin represents total gross profit / total revenue.
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Consumer Payments
Revenue for the Consumer Payments segment was $248.2 million for the year ended December 31, 2022 and $194.0 million for the year ended December 31, 2021, representing a $54.2 million or 27.9%year-over-year increase. This increase was the result of newly signed clients, the growth of existing clients, as well as the acquisitions of BillingTree and Payix. For the year ended December 31, 2022, incremental revenues of approximately $34.3 million are attributable to BillingTree and Payix.
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Gross profit for the Consumer Payments segment was $195.5 million for the year ended December 31, 2022 and $148.6 million for the year ended December 31, 2021, representing a $46.9 million or 31.6% year-over-year increase. This increase was the result of newly signed clients, the growth of existing clients, as well as the acquisitions of BillingTree and Payix. For the year ended December 31, 2022, incremental gross profit of approximately $27.9 million is attributable to BillingTree and Payix.
Business Payments
Revenue for the Business Payments segment was $42.6 million for the year ended December 31, 2022 and $33.8 million for the year ended December 31, 2021, representing a $8.8 million or 26.0% year-over-year increase. This increase was primarily driven by newly signed clients and growth of existing clients. For the year ended December 31, 2022, incremental revenues of approximately $1.1 million are attributable to the acquisition of Kontrol.
Gross profit for the Business Payments segment was $30.4 million for the year ended December 31, 2022 and $23.8 million for the year ended December 31, 2021, representing a $6.6 million or 28.0% year-over-year increase. This increase was primarily driven by newly signed clients and growth of existing clients. For the year ended December 31, 2022, incremental gross profit of approximately $0.5 million is attributable to the acquisition of Kontrol.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Consumer Payments
Revenue for the Consumer Payments segment was $194.0 million for the year ended December 31, 2021 and $140.8 million for the year ended December 31, 2020, representing a $53.2 million or 37.8% year-over-year increase. This increase was the result of newly signed clients, the growth of existing clients, as well as the acquisitions of BillingTree, Ventanex and Payix. For the year ended December 31, 2021, incremental revenues of approximately $32.0 million are attributable to BillingTree, Ventanex and Payix.
Gross profit for the Consumer Payments segment was $148.6 million for the year ended December 31, 2021 and $106.0 million for the year ended December 31, 2020, representing a $42.6 million or 40.2% year-over-year increase. This increase was the result of newly signed clients, the growth of existing clients, as well as the acquisitions of BillingTree, Ventanex and Payix. For the year ended December 31, 2021, incremental gross profit of approximately $27.3 million is attributable to BillingTree, Ventanex and Payix.
Business Payments
Revenue for the Business Payments segment was $33.8 million for the year ended December 31, 2021 and $20.6 million for the year ended December 31, 2020, representing a $13.2 million or 64.0% year-over-year increase. This increase was the result of newly signed clients, the growth of existing clients, as well as the acquisitions of Ventanex, CPS, cPayPlus and Kontrol. For the year ended December 31, 2021, incremental revenues of approximately $9.2 million are attributable to Ventanex, CPS, cPayPlus and Kontrol.
Gross profit for the Business Payments segment was $23.8 million for the year ended December 31, 2021 and $14.0 million for the year ended December 31, 2020, representing a $9.8 million or 69.7% year-over-year increase. This increase was the result of newly signed clients, the growth of existing clients, as well as the acquisitions of Ventanex, CPS, cPayPlus and Kontrol. For the year ended December 31, 2021, incremental gross profit of approximately $6.0 million is attributable to Ventanex, CPS, cPayPlus and Kontrol.
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Non-GAAP Financial Measures
This report includes certain non-GAAP financial measures that our 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 contingent consideration, non-cash change in fair value of assets and liabilities, share-based compensation charges, transaction expenses, 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 contingent consideration, non-cash change in fair value of assets and liabilities, share-based compensation expense, transaction expenses, 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 years ended December 31, 2022, 2021 and 2020 (excluding certain shares that were 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 years ended December 31, 2022, 2021 and 2020.
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REPAY HOLDINGS CORPORATION
Reconciliation of GAAP Net Income to Non-GAAP Adjusted EBITDA
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in thousands) | 2022 | 2021 | 2020 | |||||||||
| Revenue | $ | 279,227 | $ | 219,258 | $ | 155,036 | ||||||
| Operating expenses | ||||||||||||
| Costs of services (exclusive of depreciation and amortization shown separately below) | 64,826 | 55,484 | 41,447 | |||||||||
| Selling, general and administrative | 149,061 | 120,053 | 87,302 | |||||||||
| Depreciation and amortization | 107,751 | 89,692 | 60,807 | |||||||||
| Change in fair value of contingent consideration | (3,300 | ) | 5,846 | (2,510 | ) | |||||||
| Impairment loss | 8,090 | 2,180 | — | |||||||||
| Total operating expenses | $ | 326,428 | $ | 273,255 | $ | 187,046 | ||||||
| Loss from operations | $ | (47,201 | ) | $ | (53,997 | ) | $ | (32,010 | ) | |||
| Interest expense | (4,375 | ) | (3,679 | ) | (14,445 | ) | ||||||
| Loss on extinguishment of debt | — | (5,941 | ) | — | ||||||||
| Change in fair value of warrant liabilities | — | — | (70,827 | ) | ||||||||
| Change in fair value of tax receivable liability | 66,871 | (14,109 | ) | (12,439 | ) | |||||||
| Other (expense) income | (135 | ) | 97 | (3 | ) | |||||||
| Other loss | (245 | ) | (9,099 | ) | — | |||||||
| Total other income (expense) | 62,116 | (32,731 | ) | (97,714 | ) | |||||||
| Income (loss) before income tax (expense) benefit | 14,915 | (86,728 | ) | (129,724 | ) | |||||||
| Income tax (expense) benefit | (6,174 | ) | 30,691 | 12,358 | ||||||||
| Net income (loss) | $ | 8,741 | $ | (56,037 | ) | $ | (117,366 | ) | ||||
| Add: | ||||||||||||
| Interest expense | 4,375 | 3,679 | 14,445 | |||||||||
| Depreciation and amortization (a) | 107,751 | 89,692 | 60,807 | |||||||||
| Income tax expense (benefit) | 6,174 | (30,691 | ) | (12,358 | ) | |||||||
| EBITDA | $ | 127,041 | $ | 6,643 | $ | (54,472 | ) | |||||
| Loss on extinguishment of debt (i) | — | 5,941 | — | |||||||||
| Loss on termination of interest rate hedge (j) | — | 9,080 | — | |||||||||
| Non-cash change in fair value of warrant liabilities (k) | — | — | 70,827 | |||||||||
| Non-cash change in fair value of contingent consideration (b) | (3,300 | ) | 5,846 | (2,510 | ) | |||||||
| Non-cash impairment loss (c) | 8,090 | 2,180 | — | |||||||||
| Non-cash change in fair value of assets and liabilities (d) | (66,871 | ) | 14,109 | 12,439 | ||||||||
| Share-based compensation expense (e) | 20,532 | 22,311 | 19,446 | |||||||||
| Transaction expenses (f) | 18,993 | 19,250 | 10,924 | |||||||||
| Restructuring and other strategic initiative costs (g) | 7,870 | 4,578 | 1,103 | |||||||||
| Other non-recurring charges (h) | 12,294 | 3,262 | 1,794 | |||||||||
| Adjusted EBITDA | $ | 124,649 | $ | 93,200 | $ | 59,551 |
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REPAY HOLDINGS CORPORATION
Reconciliation of GAAP Net Income to Non-GAAP Adjusted Net Income
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in thousands) | 2022 | 2021 | 2020 | |||||||||
| Revenue | $ | 279,227 | $ | 219,258 | $ | 155,036 | ||||||
| Operating expenses | ||||||||||||
| Costs of services (exclusive of depreciation and amortization shown separately below) | 64,826 | 55,484 | 41,447 | |||||||||
| Selling, general and administrative | 149,061 | 120,053 | 87,302 | |||||||||
| Depreciation and amortization | 107,751 | 89,692 | 60,807 | |||||||||
| Change in fair value of contingent consideration | (3,300 | ) | 5,846 | (2,510 | ) | |||||||
| Impairment loss | 8,090 | 2,180 | — | |||||||||
| Total operating expenses | $ | 326,428 | $ | 273,255 | $ | 187,046 | ||||||
| Loss from operations | $ | (47,201 | ) | $ | (53,997 | ) | $ | (32,010 | ) | |||
| Interest expense | (4,375 | ) | (3,679 | ) | (14,445 | ) | ||||||
| Loss on extinguishment of debt | — | (5,941 | ) | — | ||||||||
| Change in fair value of warrant liabilities | — | — | (70,827 | ) | ||||||||
| Change in fair value of tax receivable liability | 66,871 | (14,109 | ) | (12,439 | ) | |||||||
| Other (expense) income | (135 | ) | 97 | (3 | ) | |||||||
| Other loss | (245 | ) | (9,099 | ) | — | |||||||
| Total other income (expense) | 62,116 | (32,731 | ) | (97,714 | ) | |||||||
| Income (loss) before income tax (expense) benefit | 14,915 | (86,728 | ) | (129,724 | ) | |||||||
| Income tax (expense) benefit | (6,174 | ) | 30,691 | 12,358 | ||||||||
| Net income (loss) | $ | 8,741 | $ | (56,037 | ) | $ | (117,366 | ) | ||||
| Add: | ||||||||||||
| Amortization of acquisition-related intangibles (l) | 89,473 | 79,932 | 52,126 | |||||||||
| Loss on extinguishment of debt (i) | — | 5,941 | — | |||||||||
| Loss on extinguishment of interest rate hedge (j) | — | 9,080 | — | |||||||||
| Non-cash change in fair value of warrant liabilities (k) | — | — | 70,827 | |||||||||
| Non-cash change in fair value of contingent consideration (b) | (3,300 | ) | 5,846 | (2,510 | ) | |||||||
| Non-cash goodwill impairment loss (c) | 8,090 | 2,180 | — | |||||||||
| Non-cash change in fair value of assets and liabilities (d) | (66,871 | ) | 14,109 | 12,439 | ||||||||
| Share-based compensation expense (e) | 20,532 | 22,311 | 19,446 | |||||||||
| Transaction expenses (f) | 18,993 | 19,250 | 10,924 | |||||||||
| Restructuring and other strategic initiative costs (g) | 7,870 | 4,578 | 1,103 | |||||||||
| Other non-recurring charges (h) | 12,294 | 3,262 | 1,794 | |||||||||
| Non-cash interest expense (m) | 2,835 | 2,536 | — | |||||||||
| Pro forma taxes at effective rate (n) | (18,871 | ) | (39,219 | ) | (11,883 | ) | ||||||
| Adjusted Net Income | $ | 79,786 | $ | 73,769 | $ | 36,900 | ||||||
| Shares of Class A common stock outstanding (on an as-converted basis) (o) | 96,684,629 | 91,264,512 | 73,373,106 | |||||||||
| Adjusted Net Income per share | $ | 0.83 | $ | 0.81 | $ | 0.50 |
(a)
See footnote (l) for details on our amortization and depreciation expenses.
(b)
Reflects the changes in management’s estimates of future cash consideration to be paid in connection with prior acquisitions from the amount estimated as of the most recent balance sheet date.
(c)
For the year ended December 31, 2022, reflects impairment loss related to trade names write-offs of BillingTree and Kontrol. For the year ended December 31, 2021, reflects impairment loss related to trade names write-offs of TriSource, APS, Ventanex, cPayPlus and CPS.
(d)
Reflects the changes in management’s estimates of the fair value of the liability relating to TRA.
(e)
Represents compensation expense associated with equity compensation plans, totaling $20.5 million, $22.3 million and $19.4 million for the years ended December 31, 2022, 2021 and 2020, respectively.
(f)
Primarily consists of (i) during the year ended December 31, 2022, professional service fees and other costs incurred in connection with the acquisitions of BillingTree, Kontrol and Payix, (ii) during the year ended December 31, 2021, professional service fees and other costs incurred in connection with the acquisitions of Ventanex, cPayPlus, CPS, BillingTree, Kontrol and Payix, as well as professional service expenses related to the January 2021 equity and convertible notes offerings and (iii) during the year ended December 31, 2020, professional service fees and other costs incurred in connection with the acquisition of CPS, and additional transaction expenses incurred in connection with the Business Combination and the acquisitions of TriSource,
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APS, Ventanex and cPayPlus, as well as professional service expenses related to the June and September 2020 equity offerings.
(g)
Reflects costs associated with reorganization of operations, consulting fees related to our processing services and other operational improvements, including restructuring and integration activities related to our acquired businesses, that were not in the ordinary course during the years ended December 31, 2022, 2021 and 2020. Additionally, for the year ended December 31, 2022, reflects one-time severance payments.
(h)
For the year ended December 31, 2022, reflects one-time settlement payments to certain clients and partners, payments made to third-parties in connection with expansion of our personnel, non-recurring performance incentives to employees, franchise taxes and other non-income based taxes, other payments related to COVID-19, non-cash rent expense, loss on termination of lease and loss on disposal of fixed assets. For the year ended December 31, 2021, reflects one-time payments to certain clients and partners, other payments related to COVID-19, non-cash rent expense and loss on disposal of fixed assets. For the year ended December 31, 2020, reflects expenses incurred related to one-time accounting system and compensation plan implementation related to becoming a public company, one-time payments to certain clients and other payments related to COVID-19. Additionally, to be consistent with the current year presentation, for the year ended December 31, 2021 and 2020, reflects payments made to third-parties in connection with expansion of our personnel, franchise taxes and other non-income based taxes.
(i)
Reflects write-offs of debt issuance costs relating to Term Loans.
(j)
Reflects realized loss of our interest rate hedging arrangement which terminated in conjunction with the repayment of Term Loans.
(k)
Reflects the mark-to-market fair value adjustments of the warrant liabilities.
(l)
For the years ended December 31, 2022 and 2021, reflects amortization of client relationships, non-compete agreement, software, and channel relationship intangibles acquired through the Business Combination, and client relationships, non-compete agreement, and software intangibles acquired through our acquisitions of TriSource, APS, Ventanex, cPayPlus, CPS, BillingTree, Kontrol and Payix. For the year ended December 31, 2020 reflects (i) amortization of the client relationships intangibles acquired through Hawk Parent’s acquisitions of PaidSuite and Paymaxx during the year ended December 31, 2017 and the recapitalization transaction in 2016, through which Hawk Parent was formed in connection with the acquisition of a majority interest in Repay Holdings, LLC by certain investment funds sponsored by, or affiliated with, Corsair, (ii) client relationships, non-compete agreement, software, and channel relationship intangibles acquired through the Business Combination, and (iii) client relationships, non-compete agreement, and software intangibles acquired through Repay Holdings, LLC’s acquisitions of TriSource, APS, Ventanex, cPayPlus and CPS. This adjustment excludes the amortization of other intangible assets which were acquired in the regular course of business, such as capitalized internally developed software and purchased software. See additional information below for an analysis of our amortization expenses:
| Year ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in thousands) | 2022 | 2021 | 2020 | ||||||||
| Acquisition-related intangibles | $ | 89,473 | $ | 79,932 | $ | 52,126 | |||||
| Software | 15,921 | 8,464 | 7,467 | ||||||||
| Reseller buyouts | — | — | 58 | ||||||||
| Amortization | $ | 105,394 | $ | 88,396 | $ | 59,651 | |||||
| Depreciation | 2,357 | 1,296 | 1,156 | ||||||||
| Total Depreciation and amortization (1) | $ | 107,751 | $ | 89,692 | $ | 60,807 |
(1)
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 (see corresponding adjustments in the reconciliation of net income to Adjusted Net Income presented above). 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 may contribute to revenue generation. Amortization of intangibles that relate to past acquisitions will recur in future periods until such intangibles have been fully amortized. Any future acquisitions may result in the amortization of additional intangibles.
(m)
Represents amortization of non-cash deferred debt issuance costs.
(n)
Represents pro forma income tax adjustment effect associated with items adjusted above.
(o)
Represents the weighted average number of shares of Class A common stock outstanding (on an as-converted basis assuming conversion of outstanding Post-Merger Repay Units) for the years ended December 31, 2022, 2021 and
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2020. These numbers do not include any shares issuable upon conversion of our 2026 Notes. See the reconciliation of basic weighted average shares outstanding to the non-GAAP Class A common stock outstanding on an as-converted basis for each respective period below:
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||
| Weighted average shares of Class A common stock outstanding - basic | 88,792,453 | 83,318,189 | 52,180,911 | |||
| Add: Non-controlling interests Weighted average Post-Merger Repay Units exchangeable for Class A common stock | 7,892,176 | 7,946,323 | 21,192,195 | |||
| Shares of Class A common stock outstanding (on an as-converted basis) | 96,684,629 | 91,264,512 | 73,373,106 |
Adjusted EBITDA for the years ended December 31, 2022 and 2021 was $124.6 million and $93.2 million, respectively, representing a 33.7% year-over-year increase. Adjusted Net Income for the years ended December 31, 2022 and 2021 was $79.8 million and $73.8 million, respectively, representing a 8.2% year-over-year increase. Our net income (loss) attributable to the Company for the years ended December 31, 2022 and 2021 was $12.8 million and ($50.1) million, respectively, representing a 125.6% year-over-year increase.
These increases in Adjusted EBITDA, Adjusted Net Income and net income (loss) attributable to the Company for the year ended December 31, 2022 are primarily due to the organic growth of our business, along with contributions from acquisitions.
For discussion on Adjusted EBITDA, Adjusted Net income, and net income (loss) attributable to the Company for the year ended December 31, 2021 compared to the year ended December 31, 2020, see Part II, Item 7 of the Company’s 2021 Form 10-K.
Seasonality
We have experienced in the past, and may continue to experience, seasonal fluctuations in our volumes and revenues as a result of consumer spending patterns. Volumes and revenues during the first quarter of the calendar year tend to increase in comparison to the remaining three quarters of the calendar year on a same store basis. This increase is due to consumers’ receipt of tax refunds and the increases in repayment activity levels that follow. Operating expenses show less seasonal fluctuation, with the result that net income is subject to the similar seasonal factors as our volumes and revenues.
Liquidity and Capital Resources
We have historically financed our operations and working capital through net cash from operating activities. We also finance our operations through proceeds from the issuance of our Class A common stock in June 2020 and our January 2021 convertible notes offering. As of December 31, 2022, we had $64.9 million of cash and cash equivalents and available borrowing capacity of $165.0 million under the Amended Credit Agreement. This balance does not include restricted cash, which reflects cash accounts holding reserves for potential losses and client settlement funds of $28.7 million as of December 31, 2022. In February 2021, we used a portion of the proceeds from the January 2021 convertible notes offering to prepay in full the entire principal amount of the term loans then outstanding under the Successor Credit Agreement and also terminated in full all delayed draw term loan commitments then outstanding. At that time, we also amended and restated the Successor Credit Agreement and entered into the Amended Credit Agreement, which established a $125.0 million senior secured revolving credit facility in favor of Hawk Parent. In December 2021, we increased our existing senior secured credit facilities by $60.0 million to a $185.0 million revolving credit facility pursuant to an amendment to the Amended Credit Agreement.
Our primary cash needs are to fund working capital requirements, invest in technology development, fund acquisitions and related contingent consideration, make scheduled principal payments and interest payments on our outstanding indebtedness and pay tax distributions to members of Hawk Parent. We expect that our cash flow from operations, current cash and cash equivalents and available borrowing capacity under the Amended Credit Agreement will be sufficient to fund our operations and planned capital expenditures and to service our debt obligations for the next twelve months.
We may also from time to time depending on market conditions and prices, contractual restrictions, our financial liquidity and other factors, seek to prepay outstanding debt or repurchase our outstanding debt through open market purchases,
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privately negotiated purchases, or otherwise. The amounts involved in any such transactions, individually or in the aggregate, may be material and may be funded from available cash or from additional borrowings.
We are a holding company with no operations and depend on our subsidiaries for cash to fund all of our consolidated operations, including future dividend payments, if any. We depend on the payment of distributions by our current subsidiaries, including Hawk Parent, which distributions may be restricted by law or contractual agreements, including agreements governing their indebtedness. For a discussion of those considerations and restrictions, refer to Part II, Item 1A “Risk Factors - Risks Related to Our Class A Common Stock.”
As of December 31, 2022, our material contractual obligations primarily consist of operating leases liabilities and contingent considerations. See Note 5. Business Combinations and Note 12. Commitments and Contingencies to the financial statements in Item 8 of this Annual Report on Form 10-K for more information related to contingent considerations and operating leases liabilities, respectively. Contingent considerations are associated with the acquisition of CPS, which include approximately $1.0 million due within the next twelve months. Based on our current lease terms, $2.3 million of operating lease liabilities are due within the next twelve months, and the remaining lease liabilities of $8.3 million are due within the next six years. We believe the cash flows from operations and available borrowing capacity from our existing revolving credit facility will be sufficient to satisfy our cash requirement for the next twelve months and the following five years.
On May 16, 2022, our board of directors approved a share repurchase program under which we may repurchase up to $50 million of our outstanding Class A common stock (the “Share Repurchase Program”). The Share Repurchase Program has no expiration date but may be modified, suspended or discontinued at any time at our discretion. During the year ended December 31, 2022, we repurchased 1,078,141 shares for a total of approximately $10.0 million under the Share Repurchase Program.
Cash Flows
The following table presents a summary of cash flows from operating, investing and financing activities for the periods indicated:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in thousands) | 2022 | 2021 | 2020 | |||||||||
| Net cash provided by operating activities | $ | 74,223 | $ | 53,330 | $ | 28,487 | ||||||
| Net cash used in investing activities | (39,541 | ) | (397,335 | ) | (145,980 | ) | ||||||
| Net cash (used in) provided by financing activities | (17,459 | ) | 313,840 | 186,097 |
Cash Flow from Operating Activities
Net cash provided by operating activities was $74.2 million for the year ended December 31, 2022.
Net cash provided by operating activities was $53.3 million for the year ended December 31, 2021.
Net cash provided by operating activities was $28.5 million for the year ended December 31, 2020.
Cash provided by operating activities for the years ended December 31, 2022, 2021 and 2020, reflects net income as adjusted for non-cash operating items including depreciation and amortization, share-based compensation, and changes in working capital accounts.
Cash Flow from Investing Activities
Net cash used in investing activities was $39.5 million for the year ended December 31, 2022, due to the capitalization of software development activities.
Net cash used in investing activities was $397.3 million for the year ended December 31, 2021, due to the acquisitions of BillingTree, Kontrol and Payix, as well as the capitalization of software development activities.
Net cash used in investing activities was $146.0 million for the year ended December 31, 2020, due to the acquisition of Ventanex, cPayPlus, and CPS, as well as capitalization of software development activities.
Cash Flow from Financing Activities
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Net cash used in financing activities was $17.5 million for the year ended December 31, 2022, due to the shares repurchased under the Incentive Plan, ESPP and Share Repurchase Program, as well as the Ventanex earnout payment.
Net cash provided by financing activities was $313.8 million for the year ended December 31, 2021, due to proceeds from the issuance of new shares in the Equity Offering, and proceeds from the 2026 Notes, offset by repayment of the outstanding revolver balance related to the Successor Credit Agreement, repayments of the Term Loan principal balance under the Successor Credit Agreement and the cPayPlus earnout payment.
Net cash provided by financing activities was $186.1 million for the year ended December 31, 2020, due to proceeds from the issuance of new shares in the June 2020 offering of Class A common stock, new borrowings related to the acquisition of Ventanex under the Successor Credit Agreement, as well as funds received related to the exercise of warrants, offset by repayment of the outstanding revolver balance related to the Successor Credit Agreement in connection with its amendment and the acquisition of Ventanex, and repayments of the term loan principal balance under the Successor Credit Agreement.
Indebtedness
Successor Credit Agreement
In connection with the Business Combination, on July 11, 2019, TB Acquisition Merger Sub LLC, Hawk Parent and certain subsidiaries of Hawk Parent, as guarantors, entered into a Revolving Credit and Term Loan Agreement (the “Successor Credit Agreement”) with certain financial institutions, as lenders, and Truist Bank (formerly SunTrust Bank), as the administrative agent.
On February 10, 2020, we announced the acquisition of Ventanex. The closing of the acquisition was financed partially from new borrowings under our existing credit facility. As part of the financing for the transaction, we entered into an agreement with Truist Bank and other members of its existing bank group to amend and upsize the Successor Credit Agreement.
On January 20, 2021, we used a portion of the proceeds from the 2026 Notes to prepay in full the entire amount of the outstanding term loans under the Successor Credit Agreement. We also terminated in full all outstanding delayed draw term loan commitments under such credit facilities.
Amended Credit Agreement
In February 2021, we also amended and restated the Successor Credit Agreement and entered into the Amended Credit Agreement, which establishes a $125.0 million senior secured revolving credit facility in favor of Hawk Parent.
In December 2021, we increased our existing senior secured credit facilities by $60.0 million to a $185.0 million revolving credit facility pursuant to an amendment to the Amended Credit Agreement. We currently expect that we will remain in compliance with the restrictive financial covenants of the Amended Credit Agreement, prospectively.
In February 2023, we further amended the Amended Credit Agreement to replace LIBOR with term SOFR as the interest rate benchmark.
In February 2023, we repaid in full the entire amount of $20.0 million of the outstanding revolving credit facility. The undrawn capacity of the existing revolving credit facility under the Amended Credit Agreement became $185.0 million after the repayment.
As of December 31, 2022, the Amended Credit Agreement provides for a revolving credit facility of $185.0 million. As of December 31, 2022, we had $20.0 million drawn against the revolving credit facility at a variable interest rate of 2.25% plus 1-month LIBOR due 2026. We paid $0.6 million and $0.4 million in fees related to unused commitments for the years ended December 31, 2022 and 2021, respectively. See Note 10. Borrowings to the financial statements in Item 8 of this Annual Report on Form 10-K for more information.
Convertible Senior Debt
On January 19, 2021, we issued $440.0 million in aggregate principal amount of 0.00% Convertible Senior Notes due 2026 in a private placement (the “Notes Offering”) to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. $40.0 million in aggregate principal amount of such 2026 Notes were sold in the Notes Offering in connection with the full exercise of the initial purchasers’ option to purchase such additional 2026 Notes pursuant to the purchase agreement. Upon conversion, the Company may choose to pay or deliver cash, shares of the Company’s Class A
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Common Stock, or a combination of cash and shares of the Company’s Class A Common Stock. The 2026 Notes will mature on February 1, 2026, unless earlier converted, repurchased or redeemed.
As of December 31, 2022, we had convertible senior debt outstanding of $433.1 million, net of deferred issuance costs, under the 2026 Notes, and revolving credit facility debt outstanding of $18.2 million, net of deferred issuance costs, under the Amended Credit Agreement. We were in compliance with the related restrictive financial covenants. Additionally, we currently expect that we will remain in compliance with the restrictive financial covenants prospectively.
Tax Receivable Agreement
Upon the completion of the Business Combination, we entered into that certain Tax Receivable Agreement (the “Tax Receivable Agreement” or “TRA”) with holders (other than the Company) of limited liability company interests of Hawk Parent (the “Post-Merger Repay Units”). As a result of the TRA, we established a liability in our consolidated financial statements. Such liability, which will increase upon the exchanges of Post-Merger Repay Units for Class A common stock, generally represents 100% of the estimated future tax benefits, if any, relating to the increase in tax basis that will result from exchanges of the Post-Merger Repay Units for shares of Class A common stock pursuant to the Exchange Agreement and certain other tax attributes of the Company and tax benefits of entering into the TRA, including tax benefits attributable to payments under the TRA.
Under the terms of the TRA, we may elect to terminate the TRA early but will be required to make an immediate payment equal to the present value of the anticipated future cash tax savings. As a result, the associated liability reported on our consolidated financial statements may be increased. We expect that the payment obligations of the Company required under the TRA will be substantial. The actual increase in tax basis, as well as the amount and timing of any payments under the TRA, will vary depending upon a number of factors, including the timing of redemptions or exchanges by the holders of Post-Merger Repay Units, the price of our Class A common stock at the time of the redemption or exchange, whether such redemptions or exchanges are taxable, the amount and timing of the taxable income we generate in the future, the tax rate then applicable and the portion of our payments under the TRA constituting imputed interest. We expect to fund the payment of the amounts due under the TRA out of the cash savings that we actually realize in respect of the attributes to which the TRA relates. However, the payments required to be made could be in excess of the actual tax benefits that we realize and there can be no assurance that we will be able to finance our obligations under the TRA.
Critical Accounting Policies and Estimates
Recently Issued Accounting Standards
For information related to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 2. Basis of Presentation and Summary of Significant Accounting Policies, to our Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported consolidated statements of operations during the reporting period. We base our estimates and judgments on historical experience and available relevant information that we believe to be reasonable under the circumstances, and we continue to review and evaluate these estimates. Actual results may materially differ from these estimates under different assumptions or conditions as new or additional information become available in future periods. Accounting policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods. Subsequent changes in economic or market conditions could have a material impact on these estimates and our financial condition and operating results in future periods. There have been no significant changes in our application of accounting estimates during the year ended December 31, 2022.
Revenue Recognition
The consideration to be received in our contracts with clients consists of variable consideration where the timing and quantity of transactions to be processed is not determinable at contract inception. Our performance obligation in our contracts with clients is the promise to stand-ready to provide front-end authorization and back-end settlement payment processing services ("processing services") for an unknown or unspecified quantity of transactions and the consideration received is contingent upon the client’s use (e.g., number of transactions submitted and processed) of the related processing services.
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Accordingly, the total transaction price is variable. These services are stand-ready obligations, as the timing and quantity of transactions to be processed is not determinable.
We follow the requirements of ASC 606-10-55-36 through -40, Revenue from Contracts with Customers, Principal Agent Considerations, in determining the gross versus net revenue recognition for performance obligation(s) in the contract with a client.
The principal versus agent evaluation is matter of judgment that depends on the facts and circumstances of the arrangement and is dependent on whether we control the good or service before it is transferred to the client or whether we are acting as an agent of a third party. This evaluation is performed separately for each performance obligation identified.
Business Combinations
We account for business combinations using the acquisition method of accounting. Under the acquisition method, the consolidated financial statements reflect the operations of an acquired business starting from the closing date of the acquisition.
All assets acquired and liabilities assumed are recorded at fair value as of the acquisition date. We allocate the purchase price of an acquired business to the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed, with any excess purchase price recorded as goodwill. Contingent consideration, if any, is included within the purchase price and is recognized at its fair value on the acquisition date. The application of the acquisition method of accounting for business combinations and determination of fair value requires management to make judgments and may involve the use of significant estimates, including assumptions related to estimated future revenues, growth rates, cash flows, and discount rates, among other items. Management generally evaluates fair value at acquisition using three valuation techniques–the replacement cost, market and income methods–and weights the valuation methods based on what is most appropriate in the circumstances. The process of assigning fair values, particularly to acquired intangible assets, is highly subjective. Management also typically utilizes third party valuation specialists to assist in the determination of the fair value of assets acquired and liabilities assumed. Fair value estimates are based on assumptions believed to be reasonable, but are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. If the actual results differ from the estimates and judgments used, the amounts recorded in the consolidated financial statements may be exposed to potential impairment of the intangible assets and goodwill as discussed in the “Impairment” section below. The determination of fair value is considered a critical accounting estimate because the valuation techniques mentioned use significant estimates and assumptions, including projected future revenues, the expected economic life of the asset, tax rates and a discount rate that reflects the level of risk associated with the future earnings attributable to the asset.
During the measurement period, which is up to one year from the acquisition date, adjustments to the assets acquired and liabilities assumed may be recorded, with the corresponding offset to goodwill.
Impairment
We review goodwill and indefinite-lived intangible assets for impairment annually in the fourth quarter of our fiscal year, or more frequently as warranted by events or changes in circumstances which indicate that the carrying amount may not be recoverable. We may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying amount. If, based on the results of the qualitative assessment, it is concluded that it is not more likely than not that the fair value of a reporting unit or indefinite-lived asset exceeds its carrying value, a quantitative test is performed. Under the quantitative test, we compare the carrying value of the reporting unit or indefinite-lived intangible asset to its fair value, which we estimate using a discounted cash flow analysis or by comparison to the market values of similar assets. If the carrying value exceeds its fair value, we record an impairment charge equal to the excess of the carrying value over the related fair value. The assumptions used in such valuations such as projected future cash flows, discount rates, growth rates, and determination of appropriate market comparables and recent transactions, are subject to volatility and may differ from actual results. Under a qualitative assessment, we assess various factors including industry and market conditions, macroeconomic conditions and performance of our businesses.
We review other long-lived assets, including ROU assets, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or an asset group may not be recoverable. In evaluating long-lived assets for recoverability, we estimate the future cash flows at the individual asset or asset group level. Impairment losses are measured and recorded for the excess of an asset's carrying value over its fair value. To determine the fair value of long-lived assets, included ROU assets, we utilize the valuation technique or techniques deemed most appropriate based on the nature of the asset or asset group, which may include the use of quoted market prices, prices for similar assets or other valuation techniques such as discounted future cash flows or earnings.
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The determination of fair value is considered a critical accounting estimate because the valuation techniques mentioned use significant estimates and assumptions, including projected future cash flows, discount rates and growth rates.
Income Taxes
Under ASC 740, Income Taxes, deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to net operating losses, tax credits, and temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, which will result in taxable or deductible amounts in the future. Our income tax expense/benefit, deferred tax assets and tax receivable liability reflect management’s best assessment of estimated current and future taxes. Significant judgments and estimates are required in determining the consolidated income tax expense/benefits, deferred tax assets and tax receivable agreement liability. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including projected future taxable income and results of recent operations. Estimating future taxable income is inherently uncertain, requires judgment and is consistent with estimates we are using to manage our business. If we determine in the future that we will not be able to fully utilize all or part of the deferred tax assets, we would record a valuation allowance through earnings in the period the determination was made.
We record the TRA liability at fair value based on estimates of discounted future cash flows associated with the estimated payments to the Post-Merger Repay Unit holders. These inputs are not observable in the market. Therefore, in estimating fair value, management uses a discount rate, also referred to as the early termination rate, to determine the present value based on a risk-free rate plus a spread pursuant to the TRA. A significant increase or decrease in the discount rate could result in a lower or higher balance, respectively, as of the measurement date.