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Item 2. Management’s Discussion and Analysis

2022-05-10 compared with 2021-11-09 · 155 added, 247 removed, 158 unchanged (72% of the section changed)

4 unchanged sentences

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.

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 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 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.

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 $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.

We processed approximately $6.4 billion of total card payment volume for the three months ended March 31, 2022, and our card payment volume growth over the same period in 2021 was approximately 39%.

The ultimate impacts of the COVID-19 pandemic and related economic conditions on our 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.

In addition, the impact of COVID-19 on our results in the first quarter of 2022 may not be necessarily indicative of its impact on our results for the remainder of 2022.

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.”

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:

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;

the dollar amount volume and the number of transactions that are processed by the clients that we currently serve;

our ability to attract new clients and onboard them as active processing clients;

our ability to (i) successfully integrate recent acquisitions and (ii) complete future acquisitions;

our ability to offer new and competitive payment technology solutions to our clients;

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

As our customers process increased volumes of payments, our revenues increase as a result of the fees we charge for processing these payments.

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 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.

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.

The transaction price for such processing services is determined, based on the judgment of 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.

During the three months ended March 31, 2022 and 2021, our chargeback rate was less than 1% of our card payment volume.

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 .

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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.

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.

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 .

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Results of Operations (Unaudited)

Three Months ended September 30,

Nine Months ended September 30,

Three Months ended March 31,

(in $ thousands)

Operating expenses

Other costs of services

Costs of services (exclusive of depreciation and amortization shown separately below)

Selling, general and administrative

5 unchanged sentences

Loss on extinguishment of debt

Change in fair value of warrant liabilities

Change in fair value of tax receivable liability

Total other (expenses) income

Loss before income tax expense

Income tax benefit

Total other income (expense)

Income (loss) before income tax (expense) benefit

Income tax (expense) benefit

Net income (loss)

Net loss attributable to non-controlling interest

Net loss attributable to the Company

Weighted-average shares of Class A common stock outstanding - basic and diluted

Loss per Class A share - basic and diluted

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

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.

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.

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

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.

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.

Net income (loss) attributable to the Company

Weighted-average shares of Class A common stock outstanding - basic

Weighted-average shares of Class A common stock outstanding - diluted

Income (loss) per Class A share - basic

Income (loss) per Class A share - diluted

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

Total revenue was $67.6 million for the three months ended March 31, 2022 and $47.5 million for the three months ended March 31, 2021, an increase of $20.1 million or 42.2%.

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 three months ended March 31, 2022, incremental revenues of approximately $17.2 million are attributable to BillingTree, Kontrol and Payix.

Costs of Services

Costs of services were $16.6 million for the three months ended March 31, 2022 and $12.5 million for the three months ended March 31, 2021, an increase of $4.1 million or 32.8%.

This increase was the result of the acquisitions of BillingTree, Kontrol, and Payix.

For the three months ended March 31, 2022, incremental costs of services of approximately $3.0 million are attributable to BillingTree, Kontrol and Payix.

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.

Selling, general and administrative expenses were $32.2 million for the three months ended March 31, 2022 and $23.4 million for the three months ended March 31, 2021, an increase of $8.8 million or 37.7%, primarily due to a $6.2 million increase in compensation expenses with general business growth and a $1.6 million increase in 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.

Depreciation and amortization expenses were $28.6 million for the three months ended March 31, 2022 and $17.8 million for the three months ended March 31, 2021, an increase of $10.8 million or 60.7%, primarily due to a $9.4 million increase in depreciation and amortization of fixed assets and intangibles from the acquisitions of BillingTree, Kontrol and Payix.

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.

Change in the fair value of contingent consideration was $2.9 million for the three months ended March 31, 2022, which consisted of fair value adjustments related to the contingent consideration for the acquisitions of CPS, Kontrol and Payix.

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%.

Interest expense was $1.0 million for the three months ended March 31, 2022 and $1.2 million for the three months ended March 31, 2021, a decrease of $0.2 million or 16.4%.

This decrease was due to a lower 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 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.

We incurred a loss of $5.9 million on extinguishment of debt for the three months ended March 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 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.

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.

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.

We incurred a gain, related to accretion expense and fair value adjustment of the tax receivable liability of $24.6 million for the three months ended March 31, 2022 compared to a $1.0 million gain for the three months ended March 31, 2021, an increase of $23.6 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.

We incurred a loss of $9.1 million on the settlement of interest rate swaps for the three months ended March 31, 2021.

Income Tax (Expense) Benefit

The income tax expense was $3.8 million for the three months ended March 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 $5.9 million for the three months ended March 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.

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 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, 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 contingent consideration, non-cash change in fair value of assets and liabilities, share-based compensation expense, transaction expenses, 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.

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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).

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 months ended March 31, 2022 and 2021 (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.

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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.

REPAY HOLDINGS CORPORATION

Reconciliation of GAAP Net Income to Non-GAAP Adjusted EBITDA

For the three months ended September 30, 2021 and 2020

Three Months ended September 30,

(in $ thousands)

Operating expenses

Other costs of services

Selling, general and administrative

Depreciation and amortization

Change in fair value of contingent consideration

Total operating expenses

Loss from operations

Interest expense

Change in fair value of warrant liabilities

Change in fair value of tax receivable liability

Total other (expenses) income

Loss before income tax expense

Income tax benefit

Interest expense

Depreciation and amortization (a)

Income tax (benefit)

Non-cash change in fair value of warrant liabilities (b)

Non-cash change in fair value of contingent consideration (c)

Non-cash change in fair value of assets and liabilities (d)

Share-based compensation expense (e)

Transaction expenses (f)

Commission restructuring charges (g)

Employee recruiting costs (h)

Other taxes (i)

Restructuring and other strategic initiative costs (j)

Other non-recurring charges (k)

Adjusted EBITDA

The following tables set forth a reconciliation of our results of operations for the three months ended March 31, 2022 and 2021.

REPAY HOLDINGS CORPORATION

Reconciliation of GAAP Net Income to Non-GAAP Adjusted EBITDA

For the nine months ended September 30, 2021 and 2020

Nine Months ended September 30,

For the three months ended March 31, 2022 and 2021

Three Months ended March 31,

(in $ thousands)

Operating expenses

Other costs of services

Costs of services (exclusive of depreciation and amortization shown separately below)

Selling, general and administrative

5 unchanged sentences

Loss on extinguishment of debt

Change in fair value of warrant liabilities

Change in fair value of tax receivable liability

Total other (expenses) income

Loss before income tax expense

Income tax benefit

Total other income (expense)

Income (loss) before income tax (expense) benefit

Income tax (expense) benefit

Net income (loss)

Interest expense

Depreciation and amortization (a)

Income tax (benefit)

Loss on extinguishment of debt (m)

Loss on termination of interest rate hedge (n)

Non-cash change in fair value of warrant liabilities (b)

Non-cash change in fair value of contingent consideration (c)

Non-cash change in fair value of assets and liabilities (d)

Share-based compensation expense (e)

Transaction expenses (f)

Commission restructuring charges (g)

Income tax expense (benefit)

Loss on extinguishment of debt (b)

Loss on termination of interest rate hedge (c)

Non-cash change in fair value of contingent consideration (d)

Non-cash change in fair value of assets and liabilities (e)

Share-based compensation expense (f)

Transaction expenses (g)

Employee recruiting costs (h)

5 unchanged sentences

Reconciliation of GAAP Net Income to Non-GAAP Adjusted Net Income

For the three months ended September 30, 2021 and 2020

Three Months ended September 30,

(in $ thousands)

Operating expenses

Other costs of services

Selling, general and administrative

Depreciation and amortization

Change in fair value of contingent consideration

Total operating expenses

Loss from operations

Interest expense

Change in fair value of warrant liabilities

Change in fair value of tax receivable liability

Total other (expenses) income

Loss before income tax expense

Income tax benefit

Amortization of Acquisition-Related Intangibles (o)

Non-cash change in fair value of warrant liabilities (b)

Non-cash change in fair value of contingent consideration (c)

Non-cash change in fair value of assets and liabilities (d)

Share-based compensation expense (e)

Transaction expenses (f)

Commission restructuring charges (g)

Employee recruiting costs (h)

Restructuring and other strategic initiative costs (j)

Other non-recurring charges (k)

Non-cash interest expense (p)

Pro forma taxes at effective rate (q)

Adjusted Net Income

Shares of Class A common stock outstanding (on an as-converted basis) (r)

Adjusted Net income per share

REPAY HOLDINGS CORPORATION

Reconciliation of GAAP Net Income to Non-GAAP Adjusted Net Income

For the nine months ended September 30, 2021 and 2020

Nine Months ended September 30,

For the three months ended March 31, 2022 and 2021

Three Months ended March 31,

(in $ thousands)

Operating expenses

Other costs of services

Costs of services (exclusive of depreciation and amortization shown separately below)

Selling, general and administrative

5 unchanged sentences

Loss on extinguishment of debt

Change in fair value of warrant liabilities

Change in fair value of tax receivable liability

Total other (expenses) income

Loss before income tax expense

Income tax benefit

Amortization of Acquisition-Related Intangibles (o)

Loss on extinguishment of debt (m)

Loss on termination of interest rate hedge (n)

Non-cash change in fair value of warrant liabilities (b)

Non-cash change in fair value of contingent consideration (c)

Non-cash change in fair value of assets and liabilities (d)

Share-based compensation expense (e)

Transaction expenses (f)

Commission restructuring charges (g)

Total other income (expense)

Income (loss) before income tax (expense) benefit

Income tax (expense) benefit

Net income (loss)

Amortization of Acquisition-Related Intangibles (l)

Loss on extinguishment of debt (b)

Loss on termination of interest rate hedge (c)

Non-cash change in fair value of contingent consideration (d)

Non-cash change in fair value of assets and liabilities (e)

Share-based compensation expense (f)

Transaction expenses (g)

Employee recruiting costs (h)

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Other non-recurring charges (k)

Non-cash interest expense (p)

Pro forma taxes at effective rate (q)

Non-cash interest expense (m)

Pro forma taxes at effective rate (n)

Adjusted Net Income

Shares of Class A common stock outstanding (on an as-converted basis) (r)

Shares of Class A common stock outstanding (on an as-converted basis) (o)

Adjusted Net income per share

See footnote (o) for details on our amortization and depreciation expenses.

Reflects the mark-to-market fair value adjustments of the warrant liabilities.

See footnote (l) for details on our amortization and depreciation expenses.

Reflects write-offs of debt issuance costs relating to Hawk Parent’s term loans.

Reflects realized loss of our interest rate hedging arrangement which terminated in conjunction with the repayment of Term Loans.

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.

Reflects the changes in management’s estimates of the fair value of the liability relating to TRA.

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.

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,

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 .

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.

Represents compensation expense associated with equity compensation plans, totaling $3.4 million and $5.2 million for the three months ended March 31, 2022 and 2021, respectively.

Primarily consists of (i) during the three months ended March 31, 2022, professional service fees and other costs incurred in connection with the acquisitions of BillingTree, Kontrol and Payix, and (ii) during the three months ended March 31, 2021, professional service fees and other costs incurred in connection with the

acquisition of Ventanex, cPayPlus, and CPS, as well as professional service expenses related to the January 2021 equity and convertible notes offerings .

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.

Reflects franchise taxes and other non-income based taxes.

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.

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.

Does not include adjustment for incremental depreciation and amortization recorded due to fair-value adjustments under ASC 805.

Reflects write-offs of debt issuance costs relating to Hawk Parent’s term loans.

Reflects realized loss of our interest rate hedging arrangement which terminated in conjunction with the repayment of Term Loans.

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.

For the three months ended March 31, 2022 and 2021, reflects extraordinary refunds to clients and other payments related to COVID-19 and non-cash rent expense.

For the three months ended March 31, 2022, 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 three months ended March 31, 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 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:

Three months ended September 30,

Nine months ended September 30,

Three Months ended March 31,

(in $ thousands)

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Represents pro forma income tax adjustment effect associated with items adjusted above.

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,

Three Months ended March 31,

Weighted average shares of Class A common stock outstanding - basic

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Shares of Class A common stock outstanding (on an as-converted basis)

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.

Adjusted EBITDA for the three months ended March 31, 2022 and 2021 was $29.3 million and $20.5 million, respectively, representing a 43.3% year-over-year increase.

Adjusted Net Income for the three months ended March 31, 2022 and 2021 was $18.4 million and $15.1 million, respectively, representing a 21.6% year-over-year increase.

Our net income (loss) attributable to the Company for the three months ended March 31, 2022 and 2021 was $13.7 million and ($15.8) million, respectively, representing a 186.4% year-over-year increase.

These increases in Adjusted EBITDA, Adjusted Net Income, and net income (loss) attributable to the Company for the three months ended March 31, 2022 are primarily due to the organic growth of our business, along with contributions from acquisitions.

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.

Volumes and revenues, per each client 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.

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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

and related contingent consideration, make scheduled principal payments and interest payments on our outstanding indebtedness and pay tax distributions to members of Hawk Parent.

As of March 31, 2022, we had $65.3 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 $15.5 million at March 31, 2022.

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.

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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.

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 for the year ended December 31, 2021.

The following table presents a summary of cash flows from operating, investing and financing activities for the periods indicated:

Nine Months ended September 30,

Three Months ended March 31,

(in $ thousands)

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Net cash used in investing activities

Net cash provided by financing activities

Net cash (used in) provided by financing activities

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.

Net cash provided by operating activities was $13.8 million and $4.8 million for the three months ended March 31, 2022 and 2021, respectively , 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.

Net cash used in investing activities was $7.6 million and $5.2 million for the three months ended March 31, 2022 and 2021, respectively, due to the 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.

Net cash used in financing activities was $1.7 million for the three months ended March 31, 2022, due to the shares repurchased under Equity Plan.

Net cash provided by financing activities was $304.4 million for the three months ended March 31, 2021, due to proceeds from the issuance of new shares in the January 2021 equity offering and the 2026 Notes, offset by repayment of the outstanding revolver balance related to the Successor Credit Agreement and repayments of the term loan principal balance under the Successor Credit Agreement.

Successor Credit Agreement

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The Amended Credit Agreement replaced the Successor Credit Agreement, which included an undrawn $30.0 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.

On December 29, 2021, we increased our existing senior secured credit facilities by $60.0 million to provide for a $185.0 million revolving credit facility pursuant to an amendment to the Amended Credit Agreement.

As of March 31, 2022, the Amended Credit Agreement provides for a revolving credit facility of $185.0 million.

As of March 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 $0.2 million and $0.1 million in fees related to unused commitments for the three months ended March 31, 2022 and 2021, respectively.

Convertible Senior Debt

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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.

As of March 31, 2022, we had convertible senior debt outstanding of $431.5 million, net of deferred issuance costs, under the 2026 Notes, and revolving credit facility debt outstanding of $17.7 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 under the 2026 Notes and the Amended Credit Agreement, prospectively.

Tax Receivable Agreement

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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.

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 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.

There have been no significant changes to our critical accounting policies for the three months ended March 31, 2022.

See Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2021, 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.

QUANTITATIVE AND QUALITAT IVE DISCLOSURE ABOUT MARKET RISK

Effects of Inflation

While inflation may impact our revenues and cost of services, we believe the effects of inflation, if any, on our results of operations and financial condition have not been significant.

However, there can be no assurance that our results of operations and financial condition will not be materially impacted by inflation in the future.

Interest Rate Risk

Interest rates are highly sensitive to many factors, including U.S.

fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control.

Interest rate risk is the exposure to loss resulting from changes in the level of interest rates and the spread between different interest rates.

We are exposed to market risk from changes in interest rates on debt, which bears interest at variable rates.

Our debt has floating interest rates.

We are exposed to changes in the level of interest rates and to changes in the relationship or spread between interest rates for its floating rate debt.

Our floating rate debt requires payments based on variable interest rates such as the federal funds rate, prime rate, eurocurrency rate, and LIBOR.

Therefore, increases in interest rates may reduce our net income or loss by increasing the cost of debt.

As of March 31, 2022, we had convertible senior debt of $431.5 million, net of deferred issuance costs, and revolving credit facility borrowings of $17.7 million, net of deferred issuance costs, outstanding under the respective debt agreements.

As of December 31, 2021, we had convertible senior debt of $429.3 million, net of deferred issuance costs, and revolving credit facility borrowings of $19.2 million, net of deferred issuance costs, outstanding.

The borrowings under the Amended Credit Agreement accrue interest at either base rate, described above under “Liquidity and Capital Resources — Indebtedness ,” plus a margin of 1.50% to 2.50% or at an adjusted LIBOR rate plus a margin of 2.50% to 3.50% under the Amended Credit Agreement, in each case depending on the total net leverage ratio, as defined in the respective agreements governing the Amended Credit Agreement.

In October 2019, we entered into a $140.0 million notional interest rate swap agreement, and in February 2020, we entered into a $30.0 million notional interest rate swap agreement, then a revised notional amount of $65.0 million beginning on September 30, 2020.

These interest rate swaps effectively converted $205.0 million of the outstanding term loan into to fixed rate payments for 57 months and 60 months, respectively.

A 1.0% increase or decrease in the interest rate applicable to borrowings under the Successor Credit Agreement during the year ended December 31, 2020 would have increased or decreased cash interest expense on our indebtedness by approximately $1.0 million per annum and $1.0 million per annum, respectively.

Both interest rate swaps were settled in January 2021.

We may incur additional borrowings from time to time for general corporate purposes, including working capital and capital expenditures.

In July 2017, the U.K.

Financial Conduct Authority announced its intention to phase out LIBOR rates by the end of 2021.

The deadline has been mostly extended and most U.S.

dollar-denominated LIBOR maturity tenors will continue to be published until June 30, 2023.

It is not possible to predict the effect of any changes in the methods by which the LIBOR is determined, or any other reforms to LIBOR that may be enacted in the United Kingdom or elsewhere.

Such developments may cause LIBOR to perform differently than in the past, including sudden or prolonged increases or decreases in LIBOR, or cease to exist, resulting in the application of a successor base rate under the Amended Credit Agreement, which in turn could have unpredictable effects on our interest payment obligations under the Amended Credit Agreement.

Foreign Currency Exchange Rate Risk

Invoices for our services are denominated in U.S.

dollars and Canadian dollars.

We do not expect our future operating results to be significantly affected by foreign currency transaction risk.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis