UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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EVO PAYMENTS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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 | $ | | $ | | ||
Accounts receivable, net |
| |
| | ||
Other receivables |
| |
| | ||
Inventory |
| |
| | ||
Settlement processing assets |
| |
| | ||
Other current assets |
| |
| | ||
Total current assets |
| |
| | ||
Equipment and improvements, net |
| |
| | ||
Goodwill, net |
| |
| | ||
Intangible assets, net |
| |
| | ||
Deferred tax assets |
| |
| | ||
Operating lease right-of-use assets | | | ||||
Investment in equity securities, at fair value | | | ||||
Other assets |
| |
| | ||
Total assets | $ | | $ | | ||
Liabilities and Shareholders' Equity (Deficit) | ||||||
Current liabilities: | ||||||
Settlement lines of credit | $ | | $ | | ||
Current portion of long-term debt | | | ||||
Accounts payable |
| |
| | ||
Accrued expenses and other current liabilities |
| |
| | ||
Settlement processing obligations |
| |
| | ||
Current portion of operating lease liabilities, inclusive of related party liability of $ | | | ||||
Total current liabilities |
| |
| | ||
Long-term debt, net of current portion |
| |
| | ||
Deferred tax liabilities |
| |
| | ||
Tax receivable agreement obligations, inclusive of related party liability of $ |
| |
| | ||
Operating lease liabilities, net of current portion, inclusive of related party liability of $ | | | ||||
Other long-term liabilities | | | ||||
Total liabilities |
| |
| | ||
Commitments and contingencies | ||||||
Redeemable non-controlling interests |
| |
| | ||
Redeemable preferred stock (par value, $ | | | ||||
Shareholders' equity (deficit): | ||||||
Class A common stock (par value, $ | | | ||||
Class D common stock (par value, $ | — | — | ||||
Additional paid-in capital | | — | ||||
Accumulated deficit attributable to Class A common stock |
| ( |
| ( | ||
Accumulated other comprehensive loss |
| ( |
| ( | ||
Total EVO Payments, Inc. shareholders' deficit |
| ( |
| ( | ||
Nonredeemable non-controlling interests |
| ( |
| ( | ||
Total deficit |
| ( |
| ( | ||
Total liabilities, redeemable non-controlling interests, redeemable preferred stock, and shareholders’ deficit | $ | | $ | | ||
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 | $ | | $ | | ||
Operating expenses: | ||||||
Cost of services and products |
| |
| | ||
Selling, general, and administrative |
| |
| | ||
Depreciation and amortization |
| |
| | ||
Total operating expenses |
| |
| | ||
Income from operations |
| |
| | ||
Other expense: | ||||||
Interest income |
| |
| | ||
Interest expense |
| ( |
| ( | ||
Gain (loss) on investment in equity securities | | ( | ||||
Other (expense) income, net |
| ( |
| | ||
Total other expense |
| ( |
| ( | ||
Income before income taxes |
| |
| | ||
Income tax expense |
| ( |
| ( | ||
Net income (loss) |
| |
| ( | ||
Less: Net income attributable to non-controlling interests in consolidated entities |
| |
| | ||
Less: Net income (loss) attributable to non-controlling interests of EVO Investco, LLC | | ( | ||||
Net income (loss) attributable to EVO Payments, Inc. | | ( | ||||
Less: Accrual of redeemable preferred stock paid-in-kind dividends | | | ||||
Net income (loss) attributable to Class A common stock | $ | | $ | ( | ||
Earnings per share | ||||||
Basic | $ | | $ | ( | ||
Diluted | $ | | $ | ( | ||
Weighted-average Class A common stock outstanding | ||||||
Basic | | | ||||
Diluted | | | ||||
Comprehensive income (loss): | ||||||
Net income (loss) | $ | | $ | ( | ||
Change in fair value of interest rate swap, net of tax(1) |
| |
| | ||
Unrealized gain (loss) on foreign currency translation adjustment, net of tax (2) |
| |
| ( | ||
Other comprehensive income (loss) |
| |
| ( | ||
Comprehensive income (loss) |
| |
| ( | ||
Less: Comprehensive income (loss) attributable to non-controlling interests in consolidated entities | | ( | ||||
Less: Comprehensive income (loss) attributable to non-controlling interests of EVO Investco, LLC | | ( | ||||
Comprehensive income (loss) attributable to EVO Payments, Inc. | $ | | $ | ( | ||
| (1) | Net of tax expense of $( |
| (2) | Net of tax benefit (expense) of $ |
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 |
| | $ | | | $ | | | $ | | | $ | — |
| | $ | — |
| $ | — |
| $ | ( |
| $ | |
| $ | ( |
| $ | ( |
| $ | ( |
| $ | | ||||||||
Net loss | — | — | — | — | — | — | — | — | — | — | — | ( | — | ( | ( | ( | ( | |||||||||||||||||||||||||||||
Cumulative translation adjustment | — | — | — | — | — | — | — | — | — | — | — | — | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||
Contributions | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | | |||||||||||||||||||||||||||||
Distributions | — | — | — | — | — | — | — | — | — | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | — | — | — | — | — | | — | — | | — | | — | |||||||||||||||||||||||||||||
Vesting of equity awards | — | — | | — | — | — | — | — | — | — | ( | — | — | ( | — | ( | — | |||||||||||||||||||||||||||||
Exercise of stock options | — | — | | — | — | — | — | — | — | — | | — | — | | — | | — | |||||||||||||||||||||||||||||
Exchanges of Class C and Class D common stock for Class A common stock | — | — | | — | — | — | ( | — | ( | — | ( | — | — | ( | | — | — | |||||||||||||||||||||||||||||
Deferred taxes in connection with increase in ownership of EVO Investco, LLC | — | — | — | — | — | — | — | — | — | — | | — | — | | — | | — | |||||||||||||||||||||||||||||
Tax receivable agreement in connection with share exchanges | — | — | — | — | — | — | — | — | — | — | | — | — | | — | | — | |||||||||||||||||||||||||||||
Accrual of redeemable preferred stock paid-in-kind dividends | — | | — | — | — | — | — | — | — | — | ( | — | — | ( | — | ( | — | |||||||||||||||||||||||||||||
Change in fair value of interest rate swap | — | — | — | — | — | — | — | — | — | — | — | — | | | | | | |||||||||||||||||||||||||||||
eService redeemable non-controlling interest fair value adjustment | — | — | — | — | — | — | — | — | — | — | — | | — | | | | ( | |||||||||||||||||||||||||||||
Blueapple redeemable non-controlling interest fair value adjustment | — | — | — | — | — | — | — | — | — | — | — | ( | — | ( | ( | ( | | |||||||||||||||||||||||||||||
Reclassification of additional paid-in capital to accumulated deficit | — | — | — | — | — | — | — | — | — | — | | ( | — | — | — | — | — | |||||||||||||||||||||||||||||
Balance, March 31, 2021 |
| | $ | | | $ | | | $ | | | $ | — |
| | $ | — | $ | — | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | | |||||||||||||||
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 |
| | $ | | | $ | | | $ | — |
| $ | — |
| $ | ( |
| $ | ( |
| $ | ( |
| $ | ( |
| $ | ( |
| $ | | |||||
Net income | — | — | — | — | — | — | — | | — | | ( | | | |||||||||||||||||||||||
Cumulative translation adjustment | — | — | — | — | — | — | — | — | | | | | ( | |||||||||||||||||||||||
Distributions | — | — | — | — | — | — | — | — | — | — | ( | ( | — | |||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | — | | — | — | | — | | — | |||||||||||||||||||||||
Vesting of equity awards | — | — | | — | — | — | ( | — | — | ( | — | ( | — | |||||||||||||||||||||||
Exercise of stock options | — | — | | — | — | — | | — | — | | — | | — | |||||||||||||||||||||||
Deferred taxes in connection with increase in ownership of EVO Investco, LLC | — | — | — | — | — | — | | — | — | | — | | — | |||||||||||||||||||||||
Accrual of redeemable preferred stock paid-in-kind dividends | — | | — | — | — | — | ( | — | — | ( | — | ( | — | |||||||||||||||||||||||
Change in fair value of interest rate swap | — | — | — | — | — | — | — | — | | | | | | |||||||||||||||||||||||
eService redeemable non-controlling interest fair value adjustment | — | — | — | — | — | — | — | ( | — | ( | ( | ( | | |||||||||||||||||||||||
Blueapple redeemable non-controlling interest fair value adjustment | — | — | — | — | — | — | — | | — | | | | ( | |||||||||||||||||||||||
Balance, March 31, 2022 | | $ | | | $ |
| ||||||||||||||||||||||||||||||