Repay Holdings Corp 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 our Annual Report on Form 10-K, as amended. Overview We are a leading payments technology company. We provide integrated payment processing solutions to industry-oriented vertical markets in which businesses have specific and bespoke transaction processing needs. We refer to these markets as “vertical markets” or “verticals.” 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 customers’ needs and the embedded nature of our integrated payment solutions will drive strong growth by attracting new customers and fostering long-term customer 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 $5.6 billion and $14.8 billion of total card payment volume for the three and nine months ended September 30, 2021, respectively, and our card payment volume growth over the same periods in 2020 was approximately 48% and 32%, respectively. The ultimate impacts of the COVID-19 pandemic and related economic conditions on the Company’s results remain uncertain. The scope, duration and magnitude of the direct and indirect effects of the COVID-19 pandemic continue to evolve and in ways that are difficult to fully anticipate. At this time, we cannot reasonably estimate the full impact of the pandemic on the Company, given the uncertainty over the duration and severity of the economic crisis. In addition, the impact of COVID-19 on the Company’s results in 2020 and in the first nine months of 2021 may not be necessarily indicative of its impact on the Company’s results in the remainder of 2021. As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, as amended, we restated our previously issued consolidated financial statements for periods following the Business Combination through December 31, 2020 to make accounting corrections related to warrant accounting. This Quarterly Report on Form 10-Q reflects the restated consolidated financial statements as of December 31, 2020 and for the three and nine months ended September 30, 2020. 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 (the “Closing Date”). On the Closing Date, 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: 31 ● the dollar amount volume and the number of transactions that are processed by the customers that we currently serve; ● our ability to attract new merchants and onboard them as active processing customers; ● our ability to successfully integrate recent acquisitions and complete future acquisitions; ● our ability to offer new and competitive payment technology solutions to our customers; and ● general economic conditions and consumer finance trends. Recent Acquisitions On June 15, 2021, we completed the acquisition of BillingTree for approximately $506.6 million, consisting of approximately $278.3 million in cash from our balance sheet and approximately 10 million shares of newly issued Class A common stock, representing approximately 10% of the voting power of our outstanding shares of common stock. On June 22, 2021, we completed the acquisition of Kontrol LLC (“Kontrol”) for up to $11.0 million, of which approximately $7.5 million was paid at closing. The acquisition was financed with cash on hand. Key Components of Our Revenues and Expenses Revenues Revenue. As our customers 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 are determined, based on the judgment of management, considering factors such as margin objectives, pricing practices and controls, customer segment pricing strategies, the product life cycle and the observable price of the service charged to similarly situated customers. During the three and nine months ended September 30, 2021 and 2020, we believe our chargeback rate was less than 1% of our card payment volume. In addition, our software revenue consists of term license fees related to software products and software maintenance and support. Expenses Other costs of services . Other 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 customer 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. 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. 32 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 (Unaudited) Three Months ended September 30, Nine Months ended September 30, (in $ thousands) 2021 2020 2021 2020 Revenue $ 61,125 $ 37,635 $ 157,058 $ 113,598 Operating expenses Other costs of services $ 15,288 $ 10,492 $ 40,483 $ 29,990 Selling, general and administrative 33,696 28,581 86,632 65,765 Depreciation and amortization 25,907 15,421 63,379 44,031 Change in fair value of contingent consideration (1,550 ) (3,750 ) (101 ) (3,010 ) Total operating expenses $ 73,341 $ 50,744 $ 190,393 $ 136,776 Loss from operations $ (12,216 ) $ (13,109 ) $ (33,335 ) $ (23,178 ) Interest expense (764 ) (3,624 ) (2,764 ) (10,847 ) Loss on extinguishment of debt — — (5,941 ) — Change in fair value of warrant liabilities — 2,740 — (70,827 ) Change in fair value of tax receivable liability 3,411 (1,475 ) 99 (12,056 ) Other income 19 25 81 70 Other loss (19 ) — (9,099 ) — Total other (expenses) income 2,647 (2,334 ) (17,624 ) (93,660 ) Loss before income tax expense (9,569 ) (15,443 ) (50,959 ) (116,838 ) Income tax benefit 2,261 3,383 12,320 8,395 Net loss $ (7,308 ) $ (12,060 ) $ (38,639 ) $ (108,443 ) Net loss attributable to non-controlling interest (1,042 ) (5,298 ) (4,310 ) (12,053 ) Net loss attributable to the Company $ (6,266 ) $ (6,762 ) $ (34,329 ) $ (96,390 ) Weighted-average shares of Class A common stock outstanding - basic and diluted 88,273,194 57,913,089 81,595,128 45,806,225 Loss per Class A share - basic and diluted $ (0.07 ) $ (0.12 ) $ (0.42 ) $ (2.10 ) Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020 Revenue Total revenue was $61.1 million for the three months ended September 30, 2021 and $37.6 million for the three months ended September 30, 2020, an increase of $23.5 million or 62.4%. This increase was the result of newly signed customers, the growth of our existing customers, as well as the acquisitions of cPayPlus, CPS, BillingTree and Kontrol. For the three months ended September 30, 2021, incremental revenues of approximately $17.8 million are attributable to cPayPlus, CPS, BillingTree and Kontrol. Other Costs of Services Other costs of services were $15.3 million for the three months ended September 30, 2021 and $10.5 million for the three months ended September 30, 2020, an increase of $4.8 million or 45.7%. For the three months ended September 30, 2021, incremental costs of services of approximately $3.2 million are attributable to cPayPlus, CPS, BillingTree and Kontrol. Selling, General and Administrative Expenses Selling, general and administrative expenses were $33.7 million for the three months ended September 30, 2021 and $28.6 million for the three months ended September 30, 2020, an increase of $5.1 million or 17.9%. This increase was primarily due to increased compensation expenses with general business growth and increased expenses relating to software and technological services. 33 Depreciation and Amortization Expenses Depreciation and amortization expenses were $25.9 million for the three months ended September 30, 2021 and $15.4 million for the three months ended September 30, 2020, an increase of $10.5 million or 68.0%. The increase was primarily due to depreciation and amortization of fixed assets and intangibles from the acquisitions of CPS, BillingTree and Kontrol. Change in the Fair Value of Contingent Consideration Change in the fair value of contingent consideration was $(1.6) million for the three months ended September 30, 2021, which consisted of fair value adjustments related to the contingent consideration for the acquisitions of Ventanex, CPS and Kontrol. Interest Expense Interest expense was $0.8 million for the three months ended September 30, 2021 and $3.6 million for the three months ended September 30, 2020, a decrease of $2.9 million or 78.9%. 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. Change in Fair Value of Warrant Liabilities We incurred a change in the fair value of warrant liabilities of $2.7 million for the three months ended September 30, 2020, which was due to the redemption of all of our outstanding warrants in July 2020. Change in Fair Value of Tax Receivable Liability We incurred a net gain, related to accretion expense and fair value adjustment of the tax receivable liability of $3.4 million for the three months ended September 30, 2021 compared to a $1.5 million loss for the three months ended September 30, 2020, an increase of $4.9 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. Income Tax The income tax benefit was $2.3 million for the three months ended September 30, 2021 and the income tax benefit was $3.4 million for the three months ended September 30, 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 and the amortization of assets acquired in the Business Combination and prior acquisitions. Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020 Revenue Total revenue was $157.1 million for the nine months ended September 30, 2021 and $113.6 million for the nine months ended September 30, 2020, an increase of $43.5 million or 38.3%. This increase was the result of newly signed customers, the growth of our existing customers, as well as the acquisitions of cPayPlus, CPS, BillingTree and Kontrol. For the nine months ended September 30, 2021, incremental revenues of approximately $26.8 million are attributable to cPayPlus, CPS, BillingTree and Kontrol. 34 Other Costs of Services Other costs of services were $40.5 million for the nine months ended September 30, 2021 and $30.0 million for the nine months ended September 30, 2020, an increase of $10.5 million or 35.0%. For the nine months ended September 30, 2021, incremental costs of services of approximately $5.9 million are attributable to cPayPlus, CPS, BillingTree and Kontrol. Selling, General and Administrative Expenses Selling, general and administrative expenses were $86.6 million for the nine months ended September 30, 2021 and $65.8 million for the nine months ended September 30, 2020, an increase of $20.9 million or 31.7%. 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 Expenses Depreciation and amortization expenses were $63.4 million for the nine months ended September 30, 2021 and $44.0 million for the nine months ended September 30, 2020, an increase of $19.4 million or 43.9%. The increase was primarily due to depreciation and amortization of fixed assets and intangibles from the acquisitions of CPS, BillingTree and Kontrol. Change in the Fair Value of Contingent Consideration Change in the fair value of contingent consideration was $0.1 million for the nine months ended September 30, 2021, which consisted of fair value adjustments related to the contingent consideration for the acquisitions of Ventanex, CPS and Kontrol. Interest Expense Interest expense was $2.8 million for the nine months ended September 30, 2021 and $10.8 million for the nine months ended September 30, 2020, a decrease of $8.0 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 nine months ended September 30, 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 nine months ended September 30, 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 net gain, related to accretion expense and fair value adjustment of the tax receivable liability of $0.1 million for the nine months ended September 30, 2021 compared to a $12.1 million loss for the nine months ended September 30, 2020, an increase of $12.2 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. Other Loss We incurred a loss of $9.1 million on the settlement of interest rate swaps and disposal of property, plant, and equipment for the nine months ended September 30, 2021. 35 Income Tax The income tax benefit was $12.3 million for the nine months ended September 30, 2021 and the income tax benefit was $8.4 million for the nine months ended September 30, 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. Non-GAAP Financial Measures This report includes certain non-GAAP financial measures that 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 warrant liabilities, 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, commission restructuring related charges, employee recruiting costs, other taxes, 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 warrant liabilities, 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, commission restructuring related charges, employee recruiting costs, 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 three and nine months ended September 30, 2021 and 2020 (excluding shares 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 three and nine months ended September 30, 2021 and 2020. 36 REPAY HOLDINGS CORPORATION Reconciliation of GAAP Net Income to Non-GAAP Adjusted EBITDA For the three months ended September 30, 2021 and 2020 (Unaudited) Three Months ended September 30, (in $ thousands) 2021 2020 (l) Revenue $ 61,125 $ 37,635 Operating expenses Other costs of services $ 15,288 $ 10,492 Selling, general and administrative 33,696 28,581 Depreciation and amortization 25,907 15,421 Change in fair value of contingent consideration (1,550 ) (3,750 ) Total operating expenses $ 73,341 $ 50,744 Loss from operations $ (12,216 ) $ (13,109 ) Interest expense (764 ) (3,624 ) Change in fair value of warrant liabilities — 2,740 Change in fair value of tax receivable liability 3,411 (1,475 ) Other income 19 25 Other loss (19 ) — Total other (expenses) income 2,647 (2,334 ) Loss before income tax expense (9,569 ) (15,443 ) Income tax benefit 2,261 3,383 Net loss $ (7,308 ) $ (12,060 ) Add: Interest expense 764 3,624 Depreciation and amortization (a) 25,907 15,421 Income tax (benefit) (2,261 ) (3,383 ) EBITDA $ 17,102 $ 3,602 Non-cash change in fair value of warrant liabilities (b) — (2,740 ) Non-cash change in fair value of contingent consideration (c) (1,550 ) (3,750 ) Non-cash change in fair value of assets and liabilities (d) (3,411 ) 1,475 Share-based compensation expense (e) 5,573 5,768 Transaction expenses (f) 4,425 3,332 Commission restructuring charges (g) 2,527 7,221 Employee recruiting costs (h) 256 67 Other taxes (i) 66 171 Restructuring and other strategic initiative costs (j) 1,362 389 Other non-recurring charges (k) 667 60 Adjusted EBITDA $ 27,017 $ 15,595 37 REPAY HOLDINGS CORPORATION Reconciliation of GAAP Net Income to Non-GAAP Adjusted EBITDA For the nine months ended September 30, 2021 and 2020 (Unaudited) Nine Months ended September 30, (in $ thousands) 2021 2020 (l) Revenue $ 157,058 $ 113,598 Operating expenses Other costs of services $ 40,483 $ 29,990 Selling, general and administrative 86,632 65,765 Depreciation and amortization 63,379 44,031 Change in fair value of contingent consideration (101 ) (3,010 ) Total operating expenses $ 190,393 $ 136,776 Loss from operations $ (33,335 ) $ (23,178 ) Interest expense (2,764 ) (10,847 ) Loss on extinguishment of debt (5,941 ) — Change in fair value of warrant liabilities — (70,827 ) Change in fair value of tax receivable liability 99 (12,056 ) Other income 81 70 Other loss (9,099 ) — Total other (expenses) income (17,624 ) (93,660 ) Loss before income tax expense (50,959 ) (116,838 ) Income tax benefit 12,320 8,395 Net loss $ (38,639 ) $ (108,443 ) Add: Interest expense 2,764 10,847 Depreciation and amortization (a) 63,379 44,031 Income tax (benefit) (12,320 ) (8,395 ) EBITDA $ 15,184 $ (61,960 ) Loss on extinguishment of debt (m) 5,941 — Loss on termination of interest rate hedge (n) 9,080 — Non-cash change in fair value of warrant liabilities (b) — 70,827 Non-cash change in fair value of contingent consideration (c) (101 ) (3,010 ) Non-cash change in fair value of assets and liabilities (d) (99 ) 12,056 Share-based compensation expense (e) 16,229 14,766 Transaction expenses (f) 13,743 7,777 Commission restructuring charges (g) 2,527 7,221 Employee recruiting costs (h) 430 123 Other taxes (i) 625 396 Restructuring and other strategic initiative costs (j) 2,935 579 Other non-recurring charges (k) 1,387 392 Adjusted EBITDA $ 67,881 $ 49,167 38 REPAY HOLDINGS CORPORATION Reconciliation of GAAP Net Income to Non-GAAP Adjusted Net Income For the three months ended September 30, 2021 and 2020 (Unaudited) Three Months ended September 30, (in $ thousands) 2021 2020 (l) Revenue $ 61,125 $ 37,635 Operating expenses Other costs of services $ 15,288 $ 10,492 Selling, general and administrative 33,696 28,581 Depreciation and amortization 25,907 15,421 Change in fair value of contingent consideration (1,550 ) (3,750 ) Total operating expenses $ 73,341 $ 50,744 Loss from operations $ (12,216 ) $ (13,109 ) Interest expense (764 ) (3,624 ) Change in fair value of warrant liabilities — 2,740 Change in fair value of tax receivable liability 3,411 (1,475 ) Other income 19 25 Other loss (19 ) — Total other (expenses) income 2,647 (2,334 ) Loss before income tax expense (9,569 ) (15,443 ) Income tax benefit 2,261 3,383 Net loss $ (7,308 ) $ (12,060 ) Add: Amortization of Acquisition-Related Intangibles (o) 23,449 14,240 Non-cash change in fair value of warrant liabilities (b) — (2,740 ) Non-cash change in fair value of contingent consideration (c) (1,550 ) (3,750 ) Non-cash change in fair value of assets and liabilities (d) (3,411 ) 1,475 Share-based compensation expense (e) 5,573 5,768 Transaction expenses (f) 4,425 3,332 Commission restructuring charges (g) 2,527 7,221 Employee recruiting costs (h) 256 67 Restructuring and other strategic initiative costs (j) 1,362 389 Other non-recurring charges (k) 667 60 Non-cash interest expense (p) 662 — Pro forma taxes at effective rate (q) (7,619 ) (3,218 ) Adjusted Net Income $ 19,034 $ 10,784 Shares of Class A common stock outstanding (on an as-converted basis) (r) 92,581,752 78,885,221 Adjusted Net income per share $ 0.21 $ 0.14 39 REPAY HOLDINGS CORPORATION Reconciliation of GAAP Net Income to Non-GAAP Adjusted Net Income For the nine months ended September 30, 2021 and 2020 (Unaudited) Nine Months ended September 30, (in $ thousands) 2021 2020 (l) Revenue $ 157,058 $ 113,598 Operating expenses Other costs of services $ 40,483 $ 29,990 Selling, general and administrative 86,632 65,765 Depreciation and amortization 63,379 44,031 Change in fair value of contingent consideration (101 ) (3,010 ) Total operating expenses 190,393 $ 136,776 Loss from operations $ (33,335 ) $ (23,178 ) Interest expense (2,764 ) (10,847 ) Loss on extinguishment of debt (5,941 ) — Change in fair value of warrant liabilities — (70,827 ) Change in fair value of tax receivable liability 99 (12,056 ) Other income 81 70 Other loss (9,099 ) — Total other (expenses) income (17,624 ) (93,660 ) Loss before income tax expense (50,959 ) (116,838 ) Income tax benefit 12,320 8,395 Net loss $ (38,639 ) $ (108,443 ) Add: Amortization of Acquisition-Related Intangibles (o) 56,758 41,151 Loss on extinguishment of debt (m) 5,941 — Loss on termination of interest rate hedge (n) 9,080 — Non-cash change in fair value of warrant liabilities (b) — 70,827 Non-cash change in fair value of contingent consideration (c) (101 ) (3,010 ) Non-cash change in fair value of assets and liabilities (d) (99 ) 12,056 Share-based compensation expense (e) 16,229 14,766 Transaction expenses (f) 13,743 7,777 Commission restructuring charges (g) 2,527 7,221 Employee recruiting costs (h) 430 123 Restructuring and other strategic initiative costs (j) 2,935 579 Other non-recurring charges (k) 1,387 392 Non-cash interest expense (p) 1,860 — Pro forma taxes at effective rate (q) (24,171 ) (9,160 ) Adjusted Net Income $ 47,881 $ 34,279 Shares of Class A common stock outstanding (on an as-converted basis) (r) 89,548,106 71,307,517 Adjusted Net income per share $ 0.53 $ 0.48 (a) See footnote (o) for details on our amortization and depreciation expenses. (b) Reflects the mark-to-market fair value adjustments of the warrant liabilities. (c) 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. (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 $5,573,294 and $16,229,382 in the three and nine months ended September 30, 2021, respectively, and totaling $5,768,220 and $14,766,440,180 in the three and nine months ended September 30, 2020 respectively. (f) Primarily consists of (i) during the three and nine months ended September 30, 2021, professional service fees and other costs incurred in connection with the acquisitions of Ventanex, cPayPlus, CPS, BillingTree and Kontrol, as well as professional service expenses related to the January 2021 equity and convertible notes offerings, and (ii) during the three and nine months ended September 30, 2020, professional service fees and other costs incurred in connection with the acquisition of cPayPlus, and additional transaction expenses incurred in connection with the Business Combination and the acquisitions of TriSource, APS, and Ventanex, 40 which closed in prior periods, as well as professional service expenses related to the issuance of new shares of Class A common stock in the June 2020 underwritten offering . (g) Represents fully discretionary charges incurred to restructure certain sales representatives’ commission arrangements, by making a one-time payment to the representative to buy out the right to receive future monthly commission payments associated with a portfolio of customer contracts. The commission restructuring transactions are subject to negotiation and therefore do not follow a fixed structure, timetable, or standard terms. Neither the Company nor the representatives are obligated to offer or accept such restructuring of commission arrangements. (h) Represents payments made to third-party recruiters in connection with a significant expansion of our personnel, which we expect will become more moderate in subsequent periods. (i) Reflects franchise taxes and other non-income based taxes. (j) Reflects 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 three and nine months ended September 30, 2021 and 2020. (k) For the three and nine months ended September 30, 2021 and 2020, reflects extraordinary refunds to customers and other payments related to COVID-19. Additionally, in the three and nine months ended September 30, 2021, reflects non-cash rent expense and loss on disposal of fixed assets, and in the three and nine months ended September 30, 2020, reflects expenses incurred related to one-time accounting system and compensation plan implementation related to becoming a public company. (l) Does not include adjustment for incremental depreciation and amortization recorded due to fair-value adjustments under ASC 805. (m) Reflects write-offs of debt issuance costs relating to Hawk Parent’s term loans. (n) Reflects realized loss of our interest rate hedging arrangement which terminated in conjunction with the repayment of Term Loans. (o) For the three and nine months ended September 30, 2021, reflects amortization of customer relationships, non-compete agreement, software, and channel relationship intangibles acquired through the Business Combination, and customer relationships, non-compete agreement, and software intangibles acquired through our acquisitions of TriSource, APS, Ventanex, cPayPlus, CPS, BillingTree and Kontrol. For the three and nine months ended September 30, 2020 reflects amortization of customer relationships, non-compete agreement, software, and channel relationship intangibles acquired through the Business Combination, and customer relationships, non-compete agreement, and software intangibles acquired through our acquisitions of TriSource, APS, Ventanex and cPayPlus. 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: Three months ended September 30, Nine months ended September 30, (in $ thousands) 2021 2020 2021 2020 Acquisition-related intangibles $ 23,449 $ 14,240 $ 56,758 $ 41,151 Software 2,169 921 5,748 2,381 Amortization $ 25,618 $ 15,161 $ 62,507 $ 43,532 Depreciation 289 260 872 499 Total Depreciation and amortization 1 $ 25,907 $ 15,421 $ 63,379 $ 44,031 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 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. 41 ( p ) Represents non-cash deferred debt issuance costs. ( q ) Represents pro forma income tax adjustment effect associated with items adjusted above. ( r ) 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 three and nine months ended September 30, 2021 and 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: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Weighted average shares of Class A common stock outstanding - basic 88,273,194 57,913,089 81,595,128 45,806,225 Add: Non-controlling interests Weighted average Post-Merger Repay Units exchangeable for Class A common stock 4,308,558 20,972,132 7,952,978 25,501,292 Shares of Class A common stock outstanding (on an as-converted basis) 92,581,752 78,885,221 89,548,106 71,307,517 Adjusted EBITDA for the three months ended September 30, 2021 and 2020 was $27.0 million and $15.6 million, respectively, representing a 73.2% year-over-year increase. Adjusted EBITDA for the nine months ended September 30, 2021 and 2020 was $67.9 million and $49.2 million, respectively, representing a 38.1% year-over-year increase. Adjusted Net Income for the three months ended September 30, 2021 and 2020 was $19.0 million and $10.8 million, respectively, representing a 76.5% year-over-year increase. Adjusted Net Income for the nine months ended September 30, 2021 and 2020 was $47.9 million and $34.3 million, respectively, representing a 39.7% year-over-year increase. Our net loss attributable to the Company for the three months ended September 30, 2021 and 2020 was $6.3 million and $6.8 million, respectively, representing a 7.3% year-over-year decrease. Our net loss attributable to the Company for the nine months ended September 30, 2021 and 2020 was $34.3 million and $96.4 million, respectively, representing a 64.4% year-over-year decrease. These increases in Adjusted EBITDA and Adjusted Net Income for the three and nine months ended September 30, 2021 are primarily due to the organic growth of our business, along with contributions from acquisitions. The decreases in net loss attributable to the Company for the three and nine months ended September 30, 2021 are primarily due to the change in fair value of warrant liabilities which occurred in 2020. 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, per each customer store, during the first quarter of the calendar year tend to increase in comparison to the remaining three quarters of the calendar year. 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. As of September 30, 2021, we had $116.5 million of cash and cash equivalents and available borrowing capacity of $125.0 million under the Amended Credit Agreement. This balance does not include restricted cash, which reflects cash accounts holding reserves for potential losses and customer settlement funds of $20.6 million at September 30, 2021. Our primary cash needs are to fund working capital requirements, invest in technology development, fund acquisitions 42 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 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 I, Item 1A "Risk Factors - Risks Related to Our Class A Common Stock" in our Annual Report on Form 10-K, as amended. Cash Flows The following table presents a summary of cash flows from operating, investing and financing activities for the periods indicated: Nine Months ended September 30, (in $ thousands) 2021 2020 Net cash provided by operating activities $ 31,482 $ 6,711 Net cash used in investing activities (296,615 ) (55,176 ) Net cash provided by financing activities 295,710 203,242 Cash Flow from Operating Activities Net cash provided by operating activities was $31.5 million for the nine months ended September 30, 2021. Net cash provided by operating activities was $6.7 million for the nine months ended September 30, 2020. Cash provided by operating activities for the nine months ended September 30, 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 $296.6 million for the nine months ended September 30, 2021, due to the acquisitions of BillingTree and Kontrol, as well as the capitalization of software development activities. Net cash used in investing activities was $55.2 million for the nine months ended September 30, 2020, due to the acquisition of Ventanex and cPayPlus, as well as capitalization of software development activities. Cash Flow from Financing Activities Net cash provided by financing activities was $295.7 million for the nine months ended September 30, 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 $203.2 million for the nine months ended September 30, 2020, due to proceeds from the issuance of new shares of Class A common stock in the June 2020 underwritten offering, 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. 43 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 (as amended, 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 On February 3, 2021, the Company announced the closing of a new undrawn $125 million senior secured revolving credit facility through Truist Bank. The Amended Credit Agreement replaced the Successor Credit Agreement, which included an undrawn $30 million revolving credit facility. We currently expect that we will remain in compliance with the restrictive financial covenants of the Amended Credit Agreement, prospectively. As of September 30, 2021, the Amended Credit Agreement provides for a revolving credit facility of $125.0 million. As of September 30, 2021, we had $0.0 million drawn against the revolving credit facility. We paid $79,861 and $296,875 in fees related to unused commitments for the three and nine months ended September 30, 2021, respectively. We paid $96,567 and $231,168 in fees related to unused commitments for the three and nine months ended September 30, 2020, respectively. 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 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 September 30, 2021, we had convertible senior debt of $430.3 million, net of deferred issuance costs, under the 2026 Notes, and 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 of the 2026 Notes, prospectively. Tax Receivable Agreement Upon the completion of the Business Combination, we entered into the Tax Receivable Agreement (the “TRA”) with holders 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 redemptions or exchanges of Post-Merger Repay Units for the Class A common stock of the Company, generally represents 100% of the estimated future tax benefit, if any, relating to the increase in tax basis that will result from redemptions or 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. 44 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 the Class A common stock of the Company 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 expec t 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 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 Recently Issued Accounting Pronouncements See Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as amended, for a complete discussion of critical accounting policies. 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 I, Item 1 of this Form 10-Q. Off-Balance Sheet Arrangements We did not have any material off-balance sheet arrangements as of September 30, 2021 or December 31, 2020.