Repay Holdings Corp: Form 10-Q for the period ended Sep 30, 2023

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 for the year ended December 31, 2022.

Overview

We provide integrated payment processing solutions to industry-oriented markets in which clients have specific transaction processing needs. We refer to these markets as “vertical markets” or “verticals.” Our proprietary, integrated payment technology platform reduces the complexity of the electronic payments process for businesses, while enhancing their consumers’ overall experience. We are a payments innovator, differentiated by our proprietary, integrated payment technology platform and our ability to reduce the complexity of the electronic payments for businesses. We intend to continue to strategically target verticals where we believe our ability to tailor payment solutions to our client needs, our deep knowledge of our vertical markets and the embedded nature of our integrated payment solutions will drive strong growth by attracting new clients and fostering long-term client relationships.

Since a significant portion of our revenue is derived from volume-based payment processing fees, card payment volume is a key operating metric that we use to evaluate our business. We processed approximately $6.4 billion and $19.2 billion of total card payment volume for the three and nine months ended September 30, 2023, respectively. Our card payment volume decreased by approximately 0.2% over the three months ended September 30, 2022, primarily due to a decrease in our media payments business related to the cyclical political media spending associated with the 2022 mid-term elections in the prior period. Our card payment volume increased by approximately 1.2% over the nine months ended September 30, 2022. This increase was the result of newly signed clients and the growth of our existing clients, partially offset by a decrease in our media payments business due to the cyclical political media spending associated with the 2022 mid-term elections in the prior period.

We report our financial results based on two reportable segments.

Consumer Payments – Our Consumer Payments segment provides payment processing solutions (including debit and credit card processing, ACH processing and other electronic payment acceptance solutions, as well as our loan disbursement product) that enable our clients to collect payments and disburse funds to consumers and includes our clearing and settlement solutions (“RCS”). RCS is our proprietary clearing and settlement platform through which we market customizable payment processing programs to other ISOs and payment facilitators. The strategic vertical markets served by our Consumer Payments segment primarily include personal loans, automotive loans, receivables management, credit unions, mortgage servicing, consumer healthcare and diversified retail.

Business Payments – Our Business Payments segment provides payment processing solutions (including accounts payable automation, debit and credit card processing, virtual credit card processing, ACH processing and other electronic payment acceptance solutions) that enable our clients to collect or send payments to other businesses. The strategic vertical markets served within our Business Payments segment primarily include retail automotive, education, field services, governments and municipalities, healthcare, HOA management and hospitality.

Macroeconomic Conditions

We have been monitoring the current economic environment in the U.S. and globally – characterized by heightened inflation (including changes in wages), rising interest rates, supply chain issues, slower growth and recent banking system volatility. Such macroeconomic conditions may continue to evolve in ways that are difficult to fully anticipate and may also include increased levels of unemployment and/or a recession. Some or all of these market factors have and could continue to adversely affect our payment volumes from the consumer loan market, the receivables management industry and consumer and commercial spending. The effect of these events on our financial condition, results of operations and cash flows is uncertain and cannot be predicted at this time. Finally, the impact of all of these various events on our results in the first nine months of 2023 may not be necessarily indicative of their impact on our results for the remainder of 2023.

Business Combination

The Company was formed upon closing of the merger of Hawk Parent with a subsidiary of Thunder Bridge, a special purpose acquisition company, on July 11, 2019. On the closing of the Business Combination, Thunder Bridge changed its name to “Repay Holdings Corporation.”

Key Factors Affecting Our Business

Key factors that we believe impact our business, results of operations and financial condition include, but are not limited to, the following:

• 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; and
• general economic conditions and consumer finance trends.

Key Components of Our Revenues and Expenses

Revenues

Revenue. As our clients process increased volumes of payments, our revenues increase as a result of the fees we charge for processing these payments. Most of our revenues are derived from volume-based payment processing fees (“discount fees”) and other related fixed per transaction fees. Discount fees represent a percentage of the dollar amount of each credit or debit transaction processed and include fees relating to processing and services that we provide. The transaction price for such processing services is determined, based on the judgment of 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 and nine months ended September 30, 2023 and 2022, our chargeback rate was less than 1% of our card payment volume.

Expenses

Costs of services. Costs of services primarily include commissions to our software integration partners and other third-party processing costs, such as front and back-end processing costs and sponsor bank fees.

Selling, general and administrative. Selling, general and administrative expenses include salaries, share-based compensation and other employment costs, professional service fees, rent and utilities, and other operating costs.

Depreciation and amortization. Depreciation expense consists of depreciation on our investments in property, equipment and computer hardware. Depreciation expense is recognized on a straight-line basis over the estimated useful life of the asset. Amortization expense for software development costs and purchased software is recognized on the straight-line method over a three-year estimated useful life, between eight to ten years estimated useful life for client relationships and channel relationships, and between two to five years estimated useful life for non-compete agreements.

Interest expense. Interest expense consists of interest in respect of our indebtedness under the Amended Credit Agreement.

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)

(in $ thousands, except per share data)

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

Revenue

Total revenue was $74.3 million for the three months ended September 30, 2023 and $71.6 million for the three months ended September 30, 2022, an increase of $2.8 million or 3.9%. This increase was the result of newly signed clients and the growth of our existing clients, partially offset by a decrease in our media payments business due to the cyclical political media spending associated with the 2022 mid-term elections in the prior period. For the three months ended September 30, 2022, revenues of approximately $2.7 million are attributable to BCS.

Costs of Services

Costs of services were $17.6 million for the three months ended September 30, 2023 and $16.6 million for the three months ended September 30, 2022, an increase of $1.0 million or 6.0%. This increase was the result of newly signed clients and the growth of our existing clients, partially offset by a decrease in our media payments business due to the cyclical political media spending associated with the 2022 mid-term elections in the prior period. For the three months ended September 30, 2022, costs of services of less than $0.1 million are attributable to BCS.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $35.3 million for the three months ended September 30, 2023 and $36.0 million for the three months ended September 30, 2022, a decrease of $0.8 million or 2.1%, primarily due to a decrease in transaction expenses.

Depreciation and Amortization Expenses

Depreciation and amortization expenses were $26.5 million for the three months ended September 30, 2023 and $24.7 million for the three months ended September 30, 2022, an increase of $1.9 million or 7.5%. This increase was driven by amortization related to newly capitalized software.

Interest (Expense) Income, net

Interest (expense) income, net was ($0.1) million for the three months ended September 30, 2023, and included ($0.9) million of interest expense and $0.8 million of interest income. Interest (expense) income, net was ($1.1) million for the three months ended September 30, 2022, and included ($1.1) million of interest expense and $0.0 million of interest income. Interest expense decreased by $0.2 million compared to the prior year period, due to a lower outstanding principal balance under our Amended Credit Agreement. Interest income increased by $0.8 million compared to the prior year period, due to higher average interest rates earned on our cash and cash equivalents.

Change in Fair Value of Tax Receivable Liability

We incurred a loss, related to accretion expense and fair value adjustment of the tax receivable liability of $3.2 million for the three months ended September 30, 2023, compared to a $11.4 million net gain for the three months ended September 30, 2022, a decrease of $14.6 million. This decrease was due to lower fair value adjustments related to the tax receivable liability, primarily as a result of changes to the discount rate, or Early Termination rate, used to determine the fair value of the liability.

Income Tax Benefit

The income tax benefit was $2.0 million for the three months ended September 30, 2023. This was a result of the operating loss incurred by us, primarily driven by the change in fair value of the tax receivable liability, stock-based compensation deductions and the amortization of assets acquired in the Business Combination and prior acquisitions, offset by stock-based compensation expense net tax shortfall and the impact of the BCS disposition which are both required to be reported discretely in the interim period in which they occur. The income tax benefit was $0.5 million for the three months ended September 30, 2022, which reflected the expected income tax benefit to be received on the net earnings related to our economic interest in Hawk Parent.

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

Revenue

Total revenue was $220.6 million for the nine months ended September 30, 2023 and $206.6 million for the nine months ended September 30, 2022, an increase of $14.1 million or 6.8%. This increase was the result of newly signed clients and the growth of our existing clients, partially offset by a decrease in our media payments business due to the cyclical political media spending associated with the 2022 mid-term elections in the prior period. For the nine months ended September 30, 2022, incremental revenues of approximately $5.4 million are attributable to BCS.

Costs of Services

Costs of services were $52.4 million for the nine months ended September 30, 2023 and $49.9 million for the nine months ended September 30, 2022, an increase of $2.5 million or 5.0%. This increase was the result of newly signed clients and the growth of our existing clients, partially offset by a decrease in our media payments business due to the cyclical political media spending associated with the 2022 mid-term elections in the prior period. For the nine months ended September 30, 2022, incremental costs of services of approximately $0.1 million are attributable to BCS.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $112.0 million for the nine months ended September 30, 2023 and $107.4 million for the nine months ended September 30, 2022, an increase of $4.6 million or 4.3%, primarily due to a $2.0 million increase in equity compensation expense related to restricted shares and stock options granted and a $1.6 million increase in software and technological services expenses related to the integration of acquired businesses.

Depreciation and Amortization Expenses

Depreciation and amortization expenses were $79.1 million for the nine months ended September 30, 2023 and $82.4 million for the nine months ended September 30, 2022, a decrease of $3.3 million or 4.0%. This decrease was driven by a significant component of capitalized software related to the Business Combination being fully amortized in the prior year, partially offset by additional amortization related to newly capitalized software.

Interest (Expense) Income, net

Interest (expense) income, net was ($1.4) million for the nine months ended September 30, 2023, and included ($3.0) million of interest expense and $1.6 million of interest income. Interest (expense) income, net was ($3.1) million for the nine months ended September 30, 2022, and included ($3.2) million of interest expense and $0.1 million of interest income. Interest expense decreased by $0.2 million compared to the prior year period, due to a lower outstanding principal balance under our Amended Credit Agreement. Interest income increased by $1.5 million compared to prior year period, due to higher average interest rates earned on our cash and cash equivalents.

Change in Fair Value of Tax Receivable Liability

We incurred a net loss, related to accretion expense and fair value adjustment of the tax receivable liability of $3.7 million for the nine months ended September 30, 2023, compared to a $55.5 million net gain for the nine months ended September 30, 2022, a decrease of $59.2 million. This decrease was due to lower fair value adjustments related to the tax receivable liability, primarily as a result of changes to the discount rate, or Early Termination rate, used to determine the fair value of the liability.

Income Tax Expense

The income tax expense was $1.3 million for the nine months ended September 30, 2023. This was a result of the operating loss incurred by us, primarily driven by the change in fair value of the tax receivable liability, stock-based compensation deductions and the amortization of assets acquired in the Business Combination and prior acquisitions, offset by stock-based compensation expense net tax shortfall and the impact of the BCS disposition which are both required to be reported discretely in the interim period in which they occur. The income tax expense was $6.4 million for the nine months ended September 30, 2022, which reflected the expected income tax benefit to be received on the net earnings related to our economic interest in Hawk Parent.

Segments

We provided our services through two reportable segments: (1) Consumer Payments and (2) Business Payments.

The following table presents our segment revenue and selected performance measures.

(1) Gross profit represents revenue less cost of services.

(2) Gross profit margin represents total gross profit / total revenue.

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

Consumer Payments

Revenue for the Consumer Payments segment was $68.7 million for the three months ended September 30, 2023 and $63.0 million for the three months ended September 30, 2022, representing a $5.7 million or 9.1% year-over-year increase. This increase was the result of newly signed clients and the growth of existing clients. For the three months ended September 30, 2022, revenues of approximately $2.7 million are attributable to BCS.

Gross profit for the Consumer Payments segment was $53.6 million for the three months ended September 30, 2023 and $49.7 million for three months ended September 30, 2022, representing a $3.9 million or 7.8% year-over-year increase. This increase was the result of newly signed clients and the growth of existing clients. For the three months ended September 30, 2022, gross profit of approximately $2.7 million is attributable to BCS.

Business Payments

Revenue for the Business Payments segment was $9.7 million for the three months ended September 30, 2023 and $11.4 million for the three months ended September 30, 2022, representing a $1.7 million or 15.2% year-over-year decrease. Growth from newly signed clients and existing clients was more than offset by declines in our media payments business due to the cyclical political media spending associated with the 2022 mid-term elections in the prior period.

Gross profit for the Business Payments segment was $7.2 million for the three months ended September 30, 2023 and $8.1 million for the three months ended September 30, 2022, representing a $0.9 million or 10.8% year-over-year decrease. Growth from newly signed and existing clients was more than offset by declines in our media payments business due to the cyclical political media spending associated with the 2022 mid-term elections in the prior period.

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

Consumer Payments

Revenue for the Consumer Payments segment was $204.6 million for the nine months ended September 30, 2023 and $183.9 million for the nine months ended September 30, 2022, representing a $20.7 million or 11.3% year-over-year increase. This increase was the result of newly signed clients and the growth of existing clients. For the nine months ended September 30, 2022, incremental revenues of approximately $5.4 million are attributable to BCS.

Gross profit for the Consumer Payments segment was $159.9 million for the nine months ended September 30, 2023 and $143.3 million for nine months ended September 30, 2022, representing a $16.6 million or 11.6% year-over-year increase. This increase was the result of newly signed clients and the growth of existing clients. For the nine months ended September 30, 2022, incremental gross profit of approximately $5.3 million is attributable to BCS.

Business Payments

Revenue for the Business Payments segment was $28.2 million for the nine months ended September 30, 2023 and $30.3 million for the nine months ended September 30, 2022, representing a $2.1 million or 6.9% year-over-year decrease. Growth from newly signed clients and existing clients was more than offset by declines in our media payments business due to the cyclical political media spending associated with the 2022 mid-term elections in the prior period.

Gross profit for the Business Payments segment was $20.4 million for the nine months ended September 30, 2023 and $20.9 million for the nine months ended September 30, 2022, representing a $0.5 million or 2.4% year-over-year decrease. Growth from newly signed and existing clients was more than offset by declines in our media payments business due to the cyclical political media spending associated with the 2022 mid-term elections in the prior period.

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 business disposition, non-cash change in fair value of contingent consideration, non-cash impairment loss, non-cash change in fair value of assets and liabilities, share-based compensation charges, transaction expenses, restructuring and other strategic initiative costs and other non-recurring charges.

Adjusted Net Income is a non-GAAP financial measure that represents net income prior to amortization of acquisition-related intangibles, as adjusted to add back certain charges deemed to not be part of normal operating expenses, non-cash charges and/or non-recurring charges, such as loss on business disposition, non-cash change in fair value of contingent consideration, non-cash impairment loss, non-cash change in fair value of assets and liabilities, share-based compensation expense, transaction expenses, restructuring and other strategic initiative costs, other non-recurring charges, non-cash interest expense and net of tax effect associated with these adjustments. Adjusted Net Income is adjusted to exclude amortization of all acquisition-related intangibles as such amounts are inconsistent in amount and frequency and are significantly impacted by the timing and/or size of acquisitions. Management believes that the adjustment of acquisition-related intangible amortization supplements GAAP financial measures because it allows for greater comparability of operating performance. Although we exclude amortization from acquisition-related intangibles from our non-GAAP expenses, management believes that it is important for investors to understand that such intangibles were recorded as part of purchase accounting and contribute to revenue generation.

Adjusted Net Income per share is a non-GAAP financial measure that represents Adjusted Net Income divided by the weighted average number of shares of Class A common stock outstanding (on an as-converted basis assuming conversion of the outstanding Post-Merger Repay Units) for the three and nine months ended September 30, 2023 and 2022 (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, 2023 and 2022.

Reconciliation of GAAP Net Income to Non-GAAP Adjusted EBITDA

For the three months ended September 30, 2023 and 2022

(Unaudited)

29

Reconciliation of GAAP Net Income to Non-GAAP Adjusted EBITDA

For the nine months ended September 30, 2023 and 2022

(Unaudited)

30

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

For the three months ended September 30, 2023 and 2022

(Unaudited)

31

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

For the nine months ended September 30, 2023 and 2022

(Unaudited)

(a) See footnote (j) for details on amortization and depreciation expenses.

(b) Reflects the changes in management’s estimates of future cash consideration to be paid in connection with prior acquisitions from the amount estimated as of the most recent balance sheet date.

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

(d) Represents compensation expense associated with equity compensation plans, totaling $5.7 million and $16.3 million for the three and nine months ended September 30, 2023, respectively, and totaling $5.3 million and $14.5 million for the three and nine months ended September 30, 2022, respectively.

(e) Primarily consists of (i) during the three and nine months ended September 30, 2023, professional service fees and other costs incurred in connection with the disposition of BCS, and (ii) during the three and nine months ended September 30, 2022, professional service fees and other costs incurred in connection with the acquisitions of BillingTree, Kontrol and Payix.

(f) Reflects costs associated with reorganization of operations, consulting fees related to processing services and other operational improvements, including restructuring and integration activities related to acquired businesses, that were not in the ordinary course during the three and nine months ended September 30, 2023 and 2022.

(g) For the three and nine months ended September 30, 2023, reflects payments made to third-parties in connection with an expansion of our personnel, franchise taxes and other non-income based taxes and one-time payments to certain partners. For the three and nine months ended September 30, 2022, reflects one-time payments to certain clients and partners, payments made to third-parties in connection with a significant expansion of our personnel, franchise taxes and other non-income based taxes, other payments related to COVID-19 and non-cash rent expense. Beginning in the period ended September 30, 2023, no longer reflects non-cash rent expense.

(h) Reflects the loss recognized related to the disposition of BCS.

(i) Reflects impairment loss related to trade name write-off of MPI.

(j) For the three and nine months ended September 30, 2023 and 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. 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:

(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.

(k) Represents amortization of non-cash deferred debt issuance costs.

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

(m) 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, 2023 and 2022. 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:

33

Adjusted EBITDA for the three months ended September 30, 2023 and 2022 was $31.9 million and $31.7 million, respectively, representing a 0.6% year-over-year increase. Adjusted EBITDA for the nine months ended September 30, 2023 and 2022 was $93.3 million and $88.6 million, respectively, representing a 5.3% year-over-year increase.

Adjusted Net Income for the three months ended September 30, 2023 and 2022 was $19.9 million and $22.8 million, respectively, representing a 12.7% year-over-year decrease. Adjusted Net Income for the nine months ended September 30, 2023 and 2022 was $58.6 million and $58.0 million, respectively, representing a 1.1% year-over-year increase.

Our net income (loss) attributable to the Company for the three months ended September 30, 2023 and 2022 was ($6.2) million and $5.8 million, respectively, representing a (205.5%) year-over-year decrease. Our net income (loss) attributable to the Company for the nine months ended September 30, 2023 and 2022 was ($37.2) million and $19.5 million, respectively, representing a (290.7%) year-over-year decrease.

The increases in Adjusted EBITDA for the three and nine months ended September 30, 2023 were primarily due to the organic growth of our business, which was partially offset from the disposition of BCS and declines in our media payments business.

The decrease in Adjusted Net Income for the three months ended September 30, 2023 was primarily due the loss in fair value adjustment of the tax receivable liability compared to a net gain in prior year period. The increase in Adjusted Net Income for the nine months ended September 30, 2023 was primarily due to the organic growth of our business, which was partially offset from the disposition of BCS and declines in our media payments business.

The decrease in net income (loss) attributable to the Company for the three and nine months ended September 30, 2023 was primarily due to the disposition of BCS and a loss in fair value adjustment of the tax receivable liability compared to a net gain in prior year.

Seasonality

We have experienced in the past, and may continue to experience, seasonal fluctuations in our volumes and revenues as a result of consumer spending patterns. Volumes and revenues during the first quarter of the calendar year tend to increase in comparison to the remaining three quarters of the calendar year. 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, 2023, we had $117.7 million of cash and cash equivalents and available borrowing capacity of $185.0 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 $23.7 million as of September 30, 2023. 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 and the following five years.

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 for the year ended December 31, 2022.

On May 16, 2022, our board of directors approved a share repurchase program under which we may repurchase up to $50 million of our outstanding Class A common stock (the “Share Repurchase Program”). The Share Repurchase Program has no expiration date but may be modified, suspended or discontinued at any time at our discretion.

Cash Flows

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

Cash Flow from Operating Activities

Net cash provided by operating activities was $68.8 million and $52.4 million for the nine months ended September 30, 2023 and 2022, respectively, which 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 provided by investing activities was $2.5 million for the nine months ended September 30, 2023, due to cash received from the disposition of BCS, partially offset by the capitalization of software development activities.

Net cash used in investing activities was $28.9 million for the nine months ended September 30, 2022, due to the capitalization of software development activities.

Cash Flow from Financing Activities

Net cash used in financing activities was $23.5 million for the nine months ended September 30, 2023, due to the repayment of the outstanding revolving credit facility balance, shares repurchased under the Incentive Plan and ESPP and the CPS earnout payment.

Net cash used in financing activities was $13.2 million for the nine months ended September 30, 2022, due to the shares repurchased under the Incentive Plan, ESPP and Share Repurchase Program, as well as the Ventanex earnout payment.

Indebtedness

Amended Credit Agreement

On February 3, 2021, we announced the closing of a new undrawn $125.0 million senior secured revolving credit facility through Truist Bank. The Amended Credit Agreement replaced our prior senior secured credit facility, which included an undrawn $30.0 million revolving credit facility.

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. On February 9, 2023, we further amended the Amended Credit Agreement to replace LIBOR with term SOFR as the interest rate benchmark.

On February 28, 2023, we repaid in full the entire amount of $20.0 million of the outstanding revolving credit facility. The undrawn capacity of the existing revolving credit facility under the Amended Credit Agreement became $185.0 million after the repayment.

As of September 30, 2023, the Amended Credit Agreement provides for a revolving credit facility of $185.0 million. As of September 30, 2023, we had $0 million drawn against the revolving credit facility. We paid $0.1 million and $0.4 million in fees related to unused commitments for the three and nine months ended September 30, 2023, respectively. We paid $0.1 million and $0.3 million in fees related to unused commitments for the three and nine months ended September 30, 2022, 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, we may choose to pay or deliver cash, shares of our Class A Common Stock, or a combination of cash and shares of our Class A Common Stock. The 2026 Notes will mature on February 1, 2026, unless earlier converted, repurchased or redeemed.

As of September 30, 2023, we had convertible senior debt outstanding of $433.5 million, net of deferred issuance costs, under the 2026 Notes. 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

Upon the completion of the Business Combination, we entered into the TRA with holders of Post-Merger Repay Units. As a result of the TRA, we established a liability in our condensed consolidated financial statements. Such liability, which will increase upon the redemptions or exchanges of Post-Merger Repay Units for our Class A common stock, 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.

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 condensed consolidated financial statements may be increased. We expect that the payment obligations required under the TRA will be substantial. The actual increase in tax basis, as well as the amount and timing of any payments under the TRA, will vary depending upon a number of factors, including the timing of redemptions or exchanges by the holders of Post-Merger Repay Units, the price of our Class A common stock at the time of the redemption or exchange, whether such redemptions or exchanges are taxable, the amount and timing of the taxable income we generate in the future, the tax rate then applicable and the portion of our payments under the TRA constituting imputed interest. We expect to fund the payment of the amounts due under the TRA out of the cash savings that we actually realize in respect of the attributes to which 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

There have been no significant changes to our critical accounting policies and critical accounting estimates for the nine months ended September 30, 2023. 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, 2022, for a complete discussion of critical accounting policies and critical accounting estimates.

For information related to recent accounting pronouncements and the impact of these pronouncements on our condensed consolidated financial statements, see Note 2. Basis of Presentation and Summary of Significant Accounting Policies, to our Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.

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 SOFR. Therefore, increases in interest rates may reduce our net income or loss by increasing the cost of debt. As of September 30, 2023, we had convertible senior debt of $433.5 million, net of deferred issuance costs outstanding under the respective debt agreement. As of December 31, 2022, we had convertible senior debt of $433.1 million, net of deferred issuance costs, and revolving credit facility borrowings of $18.2 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 SOFR 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 Amended Credit Agreement.

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

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.

Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2023, our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, except as set forth below. The disclosure set forth below supplements and updates, and should be read together with the risk factors in such Form 10-K.

Actual or perceived adverse developments affecting financial institutions could have a material and adverse impact on our business, financial condition or results of operations.

In our business, we maintain relationships with financial institutions in various capacities. Our cash and cash equivalents are held in accounts with banks or other financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”). In most cases, the amounts held in these accounts exceed the FDIC insurance limits. We also rely on financial institutions to act as our sponsor banks in order to enable us to process electronic payment transactions for our clients. In this regard, we maintain relationships with multiple sponsor banks in an effort to secure competitive pricing for our clients and to maintain redundancy. In addition, our clients include credit unions, banks and non-bank lenders who utilize our payment technology solutions in exchange for processing fees.

Since March 2023, Silicon Valley Bank, Signature Bank and First Republic Bank were each closed by their applicable regulators and the FDIC was appointed as receiver. We did not use Silicon Valley Bank, Signature Bank or First Republic Bank for any of our depository or investment accounts nor did we have any payment processing relationships with these particular financial institutions. However, we cannot guarantee that there will not be similar issues with any of the financial institutions with whom we maintain relationships.

The failure of or any other adverse development impacting one or more of our financial institution relationships (or rumors or concerns about such events) could adversely affect our liquidity, our ability to process transactions for our clients or our client relationships. Similarly, our clients could be adversely affected by any bank failure or other adverse event involving their financial institution relationships, which could result in a decrease in the amount of payment volume we receive from these clients.