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 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

or

         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                

Commission file number: 001-38504

EVO Payments, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

    

82-1304484

State or Other Jurisdiction of Incorporation or Organization

I.R.S. Employer Identification No.

Ten Glenlake Parkway
South Tower, Suite 950
Atlanta, Georgia

30328

Address of Principal Executive Offices

Zip Code

(770) 336-8463

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A common stock, par value $0.0001 per share

EVOP

Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes      No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes     No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer 

Accelerated filer 

Non-accelerated filer  

Smaller reporting company 

Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes     No  

As of April 25, 2022, there were 47,819,598 shares of the registrant’s Class A common stock, par value $0.0001 per share, and 3,783,074 shares of the registrant’s Class D common stock, par value $0.0001 per share, issued and outstanding. As of April 25, 2022, there were 32,163,538 common membership interests of EVO Investco, LLC (“Common Units”) issued and outstanding held by Blueapple, Inc., a Delaware corporation, which is controlled by entities affiliated with the registrant’s founder and Chairman of the board of directors, Rafik R. Sidhom, and which Common Units are subject to Blueapple, Inc.’s right to cause the registrant to use its commercially reasonable best efforts to pursue a public offering of an equivalent number of the registrant’s Class A common stock and use the net proceeds therefrom to purchase such holder’s Common Units. As a result, the registrant believes that these Common Units are most appropriately viewed as equivalent to additional shares of Class A common stock when considering the registrant’s overall capitalization.

EVO PAYMENTS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

4

Item 1.

Unaudited Condensed Consolidated Financial Statements

5

Unaudited Condensed Consolidated Balance Sheets

5

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

6

Unaudited Condensed Consolidated Statements of Changes in Equity (Deficit)

7

Unaudited Condensed Consolidated Statements of Cash Flows

9

Notes to Unaudited Condensed Consolidated Financial Statements

10

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

38

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

46

Item 4.

Controls and Procedures

46

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

47

Item 1A.

Risk Factors

47

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47

Item 3.

Defaults Upon Senior Securities

48

Item 4.

Mine Safety Disclosures

48

Item 5.

Other Information

48

Item 6.

Exhibits

49

Signatures

50

2

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains statements about future events and expectations that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are based on our current beliefs, assumptions, estimates, and expectations, taking into account the information currently available to us, and are not guarantees of future results or performance. None of the forward-looking statements in this Quarterly Report on Form 10-Q are statements of historical fact. Forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from the expectations of future results we express or imply in any forward-looking statements, and you should not place undue reliance on such statements. Factors that could contribute to these differences include the following: (1) the continuing uncertainties regarding the ultimate scope and trajectory of the COVID-19 pandemic (including its variant strains) on our business and our merchants, including the impact of social distancing, shelter-in-place, shutdowns of non-essential businesses and similar measures imposed or undertaken by governments; (2) our ability to anticipate and respond to changing industry trends and the needs and preferences of our customers and consumers; (3) the impact of substantial and increasingly intense competition; (4) the impact of changes in the competitive landscape, including disintermediation from other participants in the payments chain; (5) the effects of global economic, political, market, health and other conditions, including the continuing impact of the COVID-19 pandemic; (6) our compliance with governmental regulations and other legal obligations, particularly related to privacy, data protection, information security, and consumer protection laws; (7) our ability to protect our systems and data from continually evolving cybersecurity risks or other technological risks; (8) failures in our processing systems, software defects, computer viruses, and development delays; (9) degradation of the quality of the products and services we offer, including support services; (10) our ability to recruit, retain and develop qualified personnel; (11) risks associated with our ability to successfully complete, integrate and realize the expected benefits of acquisitions; (12) continued consolidation in the banking and payment services industries, including the impact of the combination of Banco Popular and Grupo Santander and the related bank branch consolidation; (13) increased customer, referral partner, or sales partner attrition; (14) the incurrence of chargebacks; (15) failure to maintain or collect reimbursements; (16) fraud by merchants or others; (17) the failure of our third-party vendors to fulfill their obligations; (18) failure to maintain merchant and sales relationships or financial institution alliances; (19) ineffective risk management policies and procedures; (20) our inability to retain smaller-sized merchants and the impact of economic fluctuations on such merchants, (21) damage to our reputation, or the reputation of our partners; (22) seasonality and volatility; (23) geopolitical and other risks associated with our operations outside of the United States, such as the conflict between Russia and Ukraine; (24) any decline in the use of cards as a payment mechanism or other adverse developments with respect to the card industry in general; (25) increases in card network fees; (26) failure to comply with card networks requirements; (27) a requirement to purchase the equity interests of our eService subsidiary in Poland held by our JV partner; (28) changes in foreign currency exchange rates; (29) future impairment charges; (30) risks relating to our indebtedness, including our ability to raise additional capital to fund our operations on economized terms or at all and exposure to interest rate risks; (31) the phase out of LIBOR and the transition to other benchmarks; (32) restrictions imposed by our credit facilities and outstanding indebtedness; (33) participation in accelerated funding programs; (34) failure to enforce and protect our intellectual property rights; (35) failure to comply with, or changes in, laws, regulations and enforcement activities, including those relating to corruption, anti-money laundering, data privacy, and financial institutions; (36) impact of new or revised tax regulations; (37) legal proceedings; (38) our dependence on distributions from EVO, LLC (as defined in Part I – Financial Information—“Financial Statements Introductory Note”) to pay our taxes and expenses, including certain payments to the Continuing LLC Owners (as defined in Part I – Financial Information—“Financial Statements Introductory Note”) and, in the event that any tax benefits are disallowed, our inability to be reimbursed for payments made to the Continuing LLC Owners; (39) our organizational structure, including benefits available to the Continuing LLC Owners that are not available to holders of our Class A common stock to the same extent; (40) the risk that we could be deemed an investment company under the Investment Company Act of 1940, as amended; (41) the significant influence the Continuing LLC Owners continue to have over us, including control over decisions that require the approval of stockholders; (42) certain provisions of Delaware law and antitakeover provisions in our organizational documents could delay or prevent a change of control; (43) certain provisions in our organizational documents, including those that provide Delaware as the exclusive forum for litigation matters and that renounce the doctrine of corporate opportunity; (44) our ability to maintain effective internal control over financial reporting and disclosure controls and procedures; (45) changes in our stock price, including relating to downgrades, analyst reports, and future sales by us or by existing stockholders; and (46) the other risks and uncertainties listed under Item 1A “Risk Factors” contained in Part I of our Annual Report on Form 10-K for the year ended December 31, 2021.

Words such as “anticipates,” “believes,” “continues,” “estimates,” “expects,” “goal,” “objectives,” “intends,” “may,” “opportunity,” “plans,” “potential,” “near-term,” “long-term,” “projections,” “assumptions,” “projects,” “guidance,” “forecasts,” “outlook,” “target,” “trends,” “should,” “could,” “would,” “will” and similar expressions are intended to identify such forward-looking statements. We qualify any forward-looking statements entirely by the cautionary factors listed above, among others. Other risks, uncertainties and factors, not listed above, could also cause our actual results to differ materially from those projected in any forward-looking statements we make. We assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

3

PART I – FINANCIAL INFORMATION

Financial Statements Introductory Note

The unaudited condensed consolidated financial statements and other disclosures contained in this quarterly report on Form 10-Q include those of EVO Payments, Inc., which is the registrant, and those of EVO Investco, LLC, a Delaware limited liability company, which became the principal operating subsidiary of the Company following a series of reorganization transactions completed on May 25, 2018 in connection with the initial public offering of EVO, Inc.’s Class A common stock (the “IPO”). For more information regarding these transactions, see Note 21, “Shareholders’ Equity,” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

EVO, Inc. is the managing member of EVO, LLC and, as of March 31, 2022, was the owner of approximately 57.1% of the LLC Interests.

As used in this quarterly report on Form 10-Q, unless the context otherwise requires, references to:

“EVO,” “we,” “us,” “our,” the “Company” and similar references refer (1) on or prior to the completion of the Reorganization Transactions, including our initial public offering, to EVO, LLC and, unless otherwise stated, all of its direct and indirect subsidiaries, and (2) following the consummation of the Reorganization Transactions, including our initial public offering, to EVO, Inc., and, unless otherwise stated, all of its direct and indirect subsidiaries, including EVO, LLC.
“EVO, Inc.” refers to EVO Payments, Inc., a Delaware corporation, and, unless otherwise stated, all of its direct and indirect subsidiaries.
“EVO, LLC” refers to EVO Investco, LLC, a Delaware limited liability company, and, unless otherwise stated, all of its direct and indirect subsidiaries.
“Continuing LLC Owners” refers collectively to the remaining holders of LLC Interests (other than EVO, Inc.), which includes Blueapple, MDP, our executive officers and certain of our current and former employees.
“EVO LLC Agreement” refers to the second amended and restated limited liability company agreement, dated as of May 22, 2018, by and between EVO, LLC and the Continuing LLC Owners, as amended.
“LLC Interests” refers to the single class of common membership interests of EVO, LLC.
“Blueapple” refers to Blueapple, Inc., a Delaware S corporation, which is controlled by entities affiliated with our founder and Chairman of our board of directors, Rafik R. Sidhom.
“MDP” refers to entities controlled by Madison Dearborn Partners, LLC.
“markets” refers to countries and territories where we are authorized by card networks to acquire transactions. For purposes of determining our markets, territories refers to non-sovereign geographic areas that fall under the authority of another government. As an example, we consider Gibraltar (a territory of the United Kingdom) and the United Kingdom to be two distinct markets as our licensing agreements with the card networks gives us the ability to acquire transactions in both markets.
“merchant” refers to an organization that accepts electronic payments, including for-profit, not-for-profit and governmental entities.
“Reorganization Transactions” refers to the series of reorganization transactions described herein that were undertaken in connection with our initial public offering to implement our “Up-C” capital structure.
“transactions processed” refers to the number of transactions we processed during any given period of time and is a meaningful indicator of our business and financial performance, as a significant portion of our revenue is driven by the number of transactions we process. In addition, transactions processed provides a valuable measure of the level of economic activity across our merchant base. In our Americas segment, transactions include acquired Visa and Mastercard credit and signature debit, American Express, Discover, UnionPay, JCB, PIN-debit, electronic benefit transactions, and gift card transactions. In our Europe segment, transactions include acquired Visa and Mastercard credit and signature debit, other card network merchant acquiring transactions, and ATM transactions.

4

EVO PAYMENTS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except share data)

March 31, 

December 31,

    

2022

    

2021

Assets

Current assets:

Cash and cash equivalents

$

422,485

$

410,368

Accounts receivable, net

 

16,539

 

16,065

Other receivables

 

19,592

 

18,087

Inventory

 

5,704

 

4,210

Settlement processing assets

 

340,465

 

311,681

Other current assets

 

23,729

 

20,514

Total current assets

 

828,514

 

780,925

Equipment and improvements, net

 

69,770

 

68,506

Goodwill, net

 

384,905

 

385,651

Intangible assets, net

 

197,527

 

200,726

Deferred tax assets

 

239,299

 

238,261

Operating lease right-of-use assets

39,577

34,704

Investment in equity securities, at fair value

26,014

25,398

Other assets

 

20,414

 

19,214

Total assets

$

1,806,020

$

1,753,385

Liabilities and Shareholders' Equity (Deficit)

Current liabilities:

Settlement lines of credit

$

6,972

$

7,887

Current portion of long-term debt

14,092

14,058

Accounts payable

 

8,989

 

6,889

Accrued expenses and other current liabilities

 

126,518

 

127,060

Settlement processing obligations

 

458,485

 

422,109

Current portion of operating lease liabilities, inclusive of related party liability of $1.3 million at March 31, 2022 and December 31, 2021

7,194

7,122

Total current liabilities

 

622,250

 

585,125

Long-term debt, net of current portion

 

565,197

 

568,632

Deferred tax liabilities

 

23,306

 

22,207

Tax receivable agreement obligations, inclusive of related party liability of $169.4 million at March 31, 2022 and December 31, 2021

 

180,143

 

180,143

Operating lease liabilities, net of current portion, inclusive of related party liability of $0.6 million and $1.0 million at March 31, 2022 and December 31, 2021, respectively

33,871

28,948

Other long-term liabilities

6,887

7,891

Total liabilities

 

1,431,654

 

1,392,946

Commitments and contingencies

Redeemable non-controlling interests

 

959,467

 

1,029,090

Redeemable preferred stock (par value, $0.0001 per share), Authorized, Issued and Outstanding – 152,250 shares at March 31, 2022 and December 31, 2021. Liquidation preference: $170,804 and $168,309 at March 31, 2022 and December 31, 2021, respectively

166,541

164,007

Shareholders' equity (deficit):

Class A common stock (par value, $0.0001 per share), Authorized - 200,000,000 shares, Issued and Outstanding - 47,775,986 and 47,446,061 shares at March 31, 2022 and December 31, 2021, respectively

5

5

Class D common stock (par value, $0.0001 per share), Authorized - 32,000,000 shares, Issued and Outstanding - 3,783,074 and 3,783,074 shares at March 31, 2022 and December 31, 2021, respectively

Additional paid-in capital

2,479

Accumulated deficit attributable to Class A common stock

 

(582,926)

 

(652,871)

Accumulated other comprehensive loss

 

(5,658)

 

(9,154)

Total EVO Payments, Inc. shareholders' deficit

 

(586,100)

 

(662,020)

Nonredeemable non-controlling interests

 

(165,542)

 

(170,638)

Total deficit

 

(751,642)

 

(832,658)

Total liabilities, redeemable non-controlling interests, redeemable preferred stock, and shareholders’ deficit

$

1,806,020

$

1,753,385

See accompanying notes to unaudited condensed consolidated financial statements.

5

EVO PAYMENTS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(In thousands, except share and per share data)

    

Three Months Ended March 31, 

2022

2021

Revenue

$

126,926

$

106,180

Operating expenses:

Cost of services and products

 

22,016

 

17,127

Selling, general, and administrative

 

72,713

 

60,398

Depreciation and amortization

 

20,511

 

20,926

Total operating expenses

 

115,240

 

98,451

Income from operations

 

11,686

 

7,729

Other expense:

Interest income

 

822

 

241

Interest expense

 

(4,254)

 

(6,098)

Gain (loss) on investment in equity securities

615

(240)

Other (expense) income, net

 

(354)

 

75

Total other expense

 

(3,171)

 

(6,022)

Income before income taxes

 

8,515

 

1,707

Income tax expense

 

(3,359)

 

(4,530)

Net income (loss)

 

5,156

 

(2,823)

Less: Net income attributable to non-controlling interests in consolidated entities

 

1,856

 

1,068

Less: Net income (loss) attributable to non-controlling interests of EVO Investco, LLC

717

(3,049)

Net income (loss) attributable to EVO Payments, Inc.

2,583

(842)

Less: Accrual of redeemable preferred stock paid-in-kind dividends

2,534

2,382

Net income (loss) attributable to Class A common stock

$

49

$

(3,224)

Earnings per share

Basic

$

0.00

$

(0.07)

Diluted

$

0.00

$

(0.07)

Weighted-average Class A common stock outstanding

Basic

47,539,924

46,509,375

Diluted

47,539,924

46,509,375

Comprehensive income (loss):

Net income (loss)

$

5,156

$

(2,823)

Change in fair value of interest rate swap, net of tax(1)

 

3,157

 

389

Unrealized gain (loss) on foreign currency translation adjustment, net of tax (2)

 

945

 

(21,771)

Other comprehensive income (loss)

 

4,102

 

(21,382)

Comprehensive income (loss)

 

9,258

 

(24,205)

Less: Comprehensive income (loss) attributable to non-controlling interests in consolidated entities

571

(2,748)

Less: Comprehensive income (loss) attributable to non-controlling interests of EVO Investco, LLC

2,608

(10,502)

Comprehensive income (loss) attributable to EVO Payments, Inc.

$

6,079

$

(10,955)

(1)Net of tax expense of $(0.5) million and $(0.1) million for the three months ended March 31, 2022 and 2021, respectively.
(2)Net of tax benefit (expense) of $1.5 million and $(0.5) million for the three months ended March 31, 2022 and 2021, respectively.

See accompanying notes to unaudited condensed consolidated financial statements.

6

EVO PAYMENTS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Changes in Equity (Deficit)

(In thousands)

Shareholders' Equity (Deficit)

Accumulated

Total

deficit

Accumulated

EVO

Redeemable

Additional

attributable to

other

Payments,

Nonredeemable

Redeemable

 

Preferred Stock

 

Class A Common Stock

 

Class B Common Stock

 

Class C Common Stock

 

Class D Common Stock

paid-in

Class A

comprehensive

Inc. equity

non-controlling

Total equity

non-controlling

 

Shares

 

Amounts

Shares

 

Amounts

 

Shares

 

Amounts

 

Shares

 

Amounts

 

Shares

 

Amounts

capital

common stock

income (loss)

(deficit)

interests

(deficit)

interests

Balance, January 1, 2021

    

152

$

154,118

46,402

$

5

32,164

$

3

1,720

$

 

2,391

$

    

$

    

$

(675,209)

    

$

1,045

    

$

(674,156)

    

$

(185,062)

    

$

(859,218)

    

$

1,055,633

Net loss

(842)

(842)

(257)

(1,099)

(1,724)

Cumulative translation adjustment

(10,307)

(10,307)

(859)

(11,166)

(10,605)

Contributions

488

Distributions

(161)

(161)

(8,500)

Share-based compensation expense

5,798

5,798

5,798

Vesting of equity awards

149

(2,383)

(2,383)

(2,383)

Exercise of stock options

136

2,813

2,813

2,813

Exchanges of Class C and Class D common stock for Class A common stock

157

(82)

(75)

(7,193)

(7,193)

7,193

Deferred taxes in connection with increase in ownership of EVO Investco, LLC

113

113

113

Tax receivable agreement in connection with share exchanges

173

173

173

Accrual of redeemable preferred stock paid-in-kind dividends

2,382

(2,382)

(2,382)

(2,382)

Change in fair value of interest rate swap

194

194

22

216

173

eService redeemable non-controlling interest fair value adjustment

9,247

9,247

781

10,028

(10,028)

Blueapple redeemable non-controlling interest fair value adjustment

(17,869)

(17,869)

(1,508)

(19,377)

19,377

Reclassification of additional paid-in capital to accumulated deficit

3,061

(3,061)

Balance, March 31, 2021

 

152

$

156,500

46,844

$

5

32,164

$

3

1,638

$

 

2,316

$

$

$

(687,734)

$

(9,068)

$

(696,794)

$

(179,851)

$

(876,645)

$

1,044,814

See accompanying notes to unaudited condensed consolidated financial statements.

7

EVO PAYMENTS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Changes in Equity (Deficit)

(In thousands)

Shareholders' Equity (Deficit)

Accumulated

Total

deficit

Accumulated

EVO

Redeemable

Additional

attributable to

other

Payments,

Nonredeemable

Redeemable

 

Preferred Stock

 

Class A Common Stock

 

Class D Common Stock

paid-in

Class A

comprehensive

Inc. equity

non-controlling

Total equity

non-controlling

 

Shares

 

Amounts

Shares

 

Amounts

 

Shares

 

Amounts

capital

common stock

loss

(deficit)

interests

(deficit)

interests

Balance, January 1, 2022

    

152

$

164,007

47,446

$

5

3,783

$

    

$

    

$

(652,871)

    

$

(9,154)

    

$

(662,020)

    

$

(170,638)

    

$

(832,658)

    

$

1,029,090

Net income

2,583

2,583

(92)

2,491

2,665

Cumulative translation adjustment

1,901

1,901

35

1,936

(991)

Distributions

(344)

(344)

Share-based compensation expense

7,003

7,003

7,003

Vesting of equity awards

289

(2,659)

(2,659)

(2,659)

Exercise of stock options

41

603

603

603

Deferred taxes in connection with increase in ownership of EVO Investco, LLC

66

66

66

Accrual of redeemable preferred stock paid-in-kind dividends

2,534

(2,534)

(2,534)

(2,534)

Change in fair value of interest rate swap

1,595

1,595

164

1,759

1,398

eService redeemable non-controlling interest fair value adjustment

(5,916)

(5,916)

(469)

(6,385)

6,385

Blueapple redeemable non-controlling interest fair value adjustment

73,278

73,278

5,802

79,080

(79,080)

Balance, March 31, 2022

152

$

166,541

47,776

$