EVO PAYMENTS, INC. Introduction
This "Management's Discussion and Analysis of Financial Condition and Results of
Operations" ("MD&A") is intended to provide an understanding of our financial
condition, cash flow, liquidity and results of operations. This MD&A should be
read in conjunction with our consolidated financial statements and the notes to
the accompanying consolidated financial statements appearing elsewhere in this
Form 10-K and the Risk Factors included in Part I, Item 1A of this Form 10-K, as
well as other cautionary statements and risks described elsewhere in this Form
10-K.
The comparison of results for the years ended December 31, 2021 and 2020 that
are not included in this Form 10-K are included in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of
our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 .Company background
We are a leading payments technology and services provider offering an array of payment solutions to merchants ranging from small and mid-size enterprises to multinational companies and organizations across theAmericas andEurope . As a fully integrated merchant acquirer and payment processor across more than 50 markets and 150 currencies worldwide, we provide competitive solutions that promote business growth, increase customer loyalty, and enhance data security in the markets we serve. Founded in 1989 as an individually owned, independent sales organization inthe United States , we have transformed into a publicly traded company that today derives approximately 65% of its revenues from markets outside ofthe United States . Our revenue consists primarily of transaction and volume based fees, as well as fixed fees for certain services we perform. We classify our business into two segments: theAmericas andEurope . The alignment of our segments is designed to establish lines of business that support the various geographical markets we operate in and allow us to further globalize our solutions while working seamlessly with our teams across these markets. In both of our segments, we provide our customers with merchant acquiring solutions, including integrated solutions for retail transactions at the physical and virtual POS, as well as B2B transactions. Refer to Part I, Item 1 "Business" contained in Part I of this Annual Report for information related to our operating segments and sales distribution channels. We plan to continue to grow our business and improve our operations by expanding market share in our existing markets and entering new markets. In our current markets, we seek to grow our business through broadening our distribution network, leveraging our innovative payment technology solutions and direct sales force, and acquiring additional merchant portfolios and tech-enabled businesses. We seek to enter new markets through acquisitions and partnerships inLatin America ,Europe , and certain other markets.
Executive overview
We delivered solid financial performance in the year ended
Revenue for the year ended
9.4% compared to the year ended
due to the growth in our merchant portfolio, processing volumes and
? transactions, increased card adoption, sales-related activity, including the
expansion of our tech-enabled partners, and the increase in economic activity
from the abatement of COVID-19 related restrictions, especially in
strengthening of the
this growth rate by approximately 4.5%.
? million, 6.1% higher than the year ended
primarily due to the increase in revenue driven by growth in our
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merchant portfolio, processing volumes and transactions, and sales-related
activity, including the expansion of tech-enabled partners.
27.4% higher than the year ended
due to the recognition of a gain related to our investment in Visa Series A
preferred stock, operating income from the termination of the marketing
? alliance agreement with
revenue driven by growth in our merchant portfolio, processing volumes and
transactions, increased card adoption, sales-related activity, including the
expansion of tech-enabled partners, and the increase in economic activity from
the abatement of COVID-19 related restrictions.
? We processed approximately 4.9 billion transactions in the year ended
Merger with Global Payments Inc.
OnAugust 1, 2022 , we entered into the Merger Agreement with Global Payments and Merger Sub. Subject to the terms and conditions of the Merger Agreement, Global Payments has agreed to acquireEVO, Inc. in an all-cash transaction for$34.00 per share of Class A common stock. Upon the consummation of the Merger, we will cease to be a publicly traded company. We have agreed to various customary covenants and agreements, including, among others, agreements to conduct our business in the ordinary course during the period between the execution of the Merger Agreement and the effective time of the Merger. We do not believe these restrictions will prevent us from meeting our debt service obligations, ongoing costs of operations, working capital needs, or capital expenditure requirements. The Merger is expected to close in the first quarter in 2023, subject to customary closing conditions.
Business trends and challenges
Economic conditions and uncertainties
Global economic challenges, including the impact of the crisis inRussia andUkraine , the COVID-19 pandemic, severe and sustained inflation, rising interest rates, supply chain disruptions, and foreign exchange fluctuations could cause economic uncertainty and volatility. The impact of these issues on our business will vary by geographic market. We closely monitor economic conditions and the impact to our revenue. In response to potential reductions in revenue, we can take actions to align our cost structure and manage our working capital. However, there can be no assurance as to the effectiveness of our efforts to mitigate any impact of potential future adverse economic conditions and reductions in our revenue.
COVID-19
We have seen increased economic activity resulting from the abatement of COVID-19 related restrictions; however, the COVID-19 pandemic continues to evolve, and may continue to impact global economic conditions and our business. We continue to monitor the COVID-19 pandemic to assess and mitigate potential adverse impacts to our business. Longer term, we believe the pandemic will serve as a catalyst for greater utilization of digital payments, a trend we are continuing to see in our markets.
The ongoing crisis inRussia andUkraine is also contributing to economic and geopolitical uncertainty. While we do not have operations or merchants inRussia orUkraine , we are unable to predict the future impact of this evolving situation, including on the political and economic environment inEurope . We will continue to monitor the conflict and assess any potential impact to our operations. 54 Table of Contents
Other factors impacting our business and results of operations
In general, our revenue is impacted by factors such as global consumer spending trends, foreign exchange rates, the pace of adoption of commerce-enablement and payment solutions, acquisitions and dispositions, types and quantities of products and services provided to merchants, timing and length of contract renewals, new merchant wins, retention rates, mix of payment solution types employed by consumers, and changes in card network fees, including interchange rates and size of merchants served. In addition, we may pursue acquisitions from time to time. These acquisitions could result in redundant costs, such as increased interest expense resulting from indebtedness incurred to finance such acquisitions, or could require us to incur additional costs as we restructure or reorganize our operations following these acquisitions.
Seasonality
We have experienced in the past, and expect to continue to experience, seasonality in our revenues as a result of consumer spending patterns. Historically, in both theAmericas andEurope , our revenue has been strongest in the fourth quarter and weakest in the first quarter as many of our merchants experience a seasonal lift during the traditional vacation and holiday months. Operating expenses do not typically fluctuate seasonally.
Foreign currency translation impact on our operations
We present our financial statements inU.S. dollars and have approximately 65% of our revenues in non-U.S. dollar currencies. The primary non-U.S. dollar currencies are the Euro, Polish Zloty, and Mexican Peso. Accordingly, we are exposed to foreign currency exchange rate risk arising from transactions in the normal course of business. It is difficult to predict the future fluctuations of foreign currency exchange rates and how those fluctuations will impact our consolidated statements of operations and comprehensive income (loss) in the future. As a result of the relative size of our international operations, these fluctuations may be material on individual balances. Our revenues and expenses from our international operations are generally denominated in the local currency of the country in which they are derived or incurred. Therefore, the impact of currency fluctuations on our operating results and margins is partially mitigated.
Financial institution partners
We maintain referral partnerships with a number of leading financial institutions, includingDeutsche Bank USA ,Deutsche Bank Group , Grupo Santander, PKO Bank Polski, Bank of Ireland, Raiffeisen Bank, Moneta, Citibanamex, Sabadell, BCI, and the National Bank of Greece among others. We commenced operations inChile through our joint venture with BCI ("BCI Pagos") at the end of the second quarter in 2021. InDecember 2022 , we commenced operations inGreece through our joint venture and exclusive referral relationship with the National Bank of Greece. These long-term relationships are structured in various ways, such as commercial alliance relationships and joint ventures, and our bank partners typically provide exclusive merchant referrals and credit facilities to support the settlement process. Our relationships with our financial institution partners may be impacted by, among other things, consolidations and other transactions in the banking and payments industries. InJanuary 2022 , Citigroup Inc. announced its decision to exit the consumer, small-business and middle-market banking operations of Citibanamex, our financial institution partner inMexico . The details of the proposed transaction are unknown, including the identity of the purchaser and anticipated timing of the consummation of their transaction. While our long term, exclusive commercial agreement with Citibanamex remains in place, at this time, we cannot estimate the potential impact of this development to our referral relationship with Citibanamex or our Mexican business. Following the merger of Unicaja Banco, S.A. andLiberbank , and pursuant to the procedures set forth in the marketing alliance agreement related to a change of control ofLiberbank , the parties elected to terminate the marketing alliance agreement in the third quarter of 2022. Income from liquidated damages of €7.0 million ($6.9 million , based on the foreign exchange rate as of the date presented) was recognized in other operating income on the consolidated statements of operations. The termination of theLiberbank marketing alliance agreement will not have a material impact to our financial position, results of operations, or cash flows. 55 Table of Contents
One of our Spanish financial institution referral partners, Banco Popular, was acquired by Santander inJune 2017 . As reported previously and reflected in our previous years' financial statements, Santander's acquisition of Banco Popular has adversely impacted our business inSpain . Revenues from this channel have declined significantly primarily due to reduced merchant referrals following the acquisition and the bank's failure to perform certain of its other obligations under our agreements. See Note 19, "Commitments and Contingencies," in the notes to the accompanying consolidated financial statements for additional information.
Increased regulations and compliance
We, our partners, and our merchants are subject to various laws and regulations that affect the electronic payments industry in the many countries in which our services are used, including numerous laws and regulations applicable to banks, financial institutions, and card issuers. A number of our subsidiaries in ourEurope segment hold a PI license, allowing them to operate in the EU member states in which such subsidiaries do business. As a PI, we are subject to regulation and oversight, which include, among other obligations, a requirement to maintain specific regulatory capital and adhere to certain rules regarding the conduct of our business, including PSD2. PSD2 contains a number of additional regulatory mandates, such as provisions relating to SCA, which aim to increase the security of electronic payments by requiring multi-factor user authentication. Failure to comply with SCA requirements may result in fines from card networks as well as declined payments from card issuers.The EU has also enacted legislation relating to the offering of DCC services, which went into effect inApril 2020 . These new rules require additional disclosures of foreign exchange margins in connection with our DCC product offerings. We are currently operating in theUnited Kingdom within the scope of its temporary permissions regime pending approval of our application for a stand alone PI license. In addition, we continue to closely monitor the impact of Brexit on our operations as further details emerge regarding the post-Brexit regulatory landscape.
Key performance indicators
Transactions Processed
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 and/or value of transactions we process. In addition, transactions processed provides a valuable measure of the level of economic activity across our merchant base. In ourAmericas segment, transactions include acquiredVisa and Mastercard credit and signature debit, American Express, Discover,UnionPay , JCB, PIN-debit, electronic benefit transactions, and gift card transactions. In ourEurope segment, transactions include acquiredVisa and Mastercard credit and signature debit, other card network merchant acquiring transactions, and ATM transactions. For the year endedDecember 31, 2022 , we processed approximately 4.9 billion transactions, which included approximately 1.1 billion transactions in theAmericas and approximately 3.8 billion transactions inEurope . This represents an increase of 3.2% in theAmericas and an increase of 22.3% inEurope for an aggregate increase of 17.4% compared to the year endedDecember 31, 2021 . Transactions processed in theAmericas andEurope accounted for 22.3% and 77.7%, respectively, of the total transactions we processed for the year endedDecember 31, 2022 . The changes in the transactions processed during the year endedDecember 31, 2022 compared to the prior year was primarily driven by the growth in our merchant portfolio, increased card adoption, sales-related activity, including the expansion of our tech-enabled partners, and the increase in economic activity from the abatement of COVID-19 related restrictions especially inEurope . For the year endedDecember 31, 2021 , we processed approximately 4.2 billion transactions, which included approximately 1.1 billion transactions in theAmericas and approximately 3.1 billion transactions inEurope . This represents an increase of 9.5% in theAmericas and an increase of 21.1% inEurope for
an
aggregate increase of 17.9%
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compared to the year ended
Comparison of results for the years ended
The following table sets forth the consolidated statements of operations in dollars and as a percentage of revenue for the period presented.
Year Ended Year Ended
(dollar amounts in
thousands) December 31, 2022 % of revenue December 31, 2021 % of revenue $ change % change
Segment revenue:
Americas $ 320,925 59.1% $ 307,183 61.9% $ 13,742 4.5%
Europe 222,157 40.9% 189,462 38.1% 32,695 17.3%
Revenue $ 543,082 100.0% $ 496,645 100.0% $ 46,437 9.4%
Operating expenses:
Cost of services and
products $ 89,370 16.5% $ 75,765 15.3% $ 13,605 18.0%
Selling, general, and
administrative 309,539 57.0% 266,117 53.6% 43,422 16.3%
Depreciation and
amortization 84,143 15.5% 83,389 16.8% 754 0.9%Total operating expenses 483,052 88.9%
425,271 85.6% 57,781 13.6%
Other operating income 6,939 1.3% - 0.0% 6,939 100.0%
Income from operations $ 66,969 12.3% $ 71,374 14.4% $ (4,405) (6.2%)
Segment profit:
Americas $ 143,297 26.4% $ 135,081 27.2% $ 8,216 6.1%
Europe $ 80,992 14.9% $ 63,588 12.8% $ 17,404 27.4%
Revenue
Revenue was $543.1 million for the year ended December 31, 2022 , an increase of
$46.4 million , or 9.4% compared to the year ended December 31, 2021 . The
strengthening of the U.S. dollar on foreign exchange rates adversely impacted
this growth rate by approximately 4.5%.
The increase in bothAmericas andEurope segment revenue for the year endedDecember 31, 2022 was primarily due to the growth in our merchant portfolio, processing volumes and transactions, increased card adoption, and sales-related activity, including the expansion of our tech-enabled partners.
Operating expenses
Cost of services and products
Cost of services and products was$89.4 million for the year endedDecember 31, 2022 , an increase of$13.6 million , or 18.0%, compared to the year endedDecember 31, 2021 primarily due to the increase of 17.4% in transactions processed. 57 Table of Contents
Selling, general, and administrative expenses
Selling, general, and administrative expenses were$309.5 million for the year endedDecember 31, 2022 , an increase of$43.4 million , or 16.3%, compared to the year endedDecember 31, 2021 . The increase was primarily due to higher professional fees related to the Merger, acquisitions, and litigation as well as personnel costs due to growth in headcount, and incentive compensation expenses based on business performance.
Depreciation and amortization
Depreciation and amortization was
Other operating income
Other operating income was
Interest expense
Interest expense was
Income tax expense
Income tax expense represents federal, state, local and foreign taxes based on income in multiple domestic and foreign jurisdictions. Historically, as a limited liability company treated as a partnership forU.S. federal income tax purposes,EVO, LLC's income was not subject to corporate tax inthe United States , but only on income earned in foreign jurisdictions. Inthe United States , our members were taxed on their proportionate share of income ofEVO, LLC . However, following the Reorganization Transactions, we incur corporate tax on our share of taxable income ofEVO, LLC . Our income tax expense reflects suchU.S. federal, state and local income tax as well as taxes payable in foreign jurisdictions by certain of our subsidiaries. For the year endedDecember 31, 2022 , we recorded a tax expense of$36.2 million , which included a net discrete tax expense of$2.6 million primarily related to changes in uncertain tax positions offset by the true up of the deferred taxes due to an increase in the state effective tax rate. For the year endedDecember 31, 2021 , we recorded a tax expense of$22.0 million , which included a tax benefit of$1.5 million primarily related to the true up of the deferred taxes due to an increase in the state effective tax rate offset by a valuation allowance recorded to reduce the deferred tax assets not expected to be realized inSpain .
Segment performance
Americas segment profit for the year endedDecember 31, 2022 was$143.3 million , compared to$135.1 million for the year endedDecember 31, 2021 , an increase of 6.1%. The increase was primarily due to the increase in revenue driven by growth in our merchant portfolio, processing volumes and transactions, and sales-related activity, including the expansion of tech-enabled partners, partially offset by an increase of employee compensation, as a result of headcount growth.Americas segment profit margin was 44.7% for the year endedDecember 31, 2022 , compared to 44.0% for the year endedDecember 31, 2021 .Europe segment profit was$81.0 million for the year endedDecember 31, 2022 , compared to$63.6 million for the year endedDecember 31, 2021 , an increase of 27.4%. The increase was primarily due to the recognition of a gain related to our investment in Visa Series A preferred stock, operating income from the termination of the marketing alliance agreement withLiberbank , and an increase in revenue driven by growth in our merchant portfolio, processing volumes and transactions, increased card adoption, sales-related activity, including the expansion of tech-enabled partners, and the increase in economic activity from the abatement of COVID-19 related restrictions. This was partially offset by the impact of the strongU.S. dollar on foreign exchange rates and higher professional fees related to litigation.Europe segment profit margin was 36.5% for the year endedDecember 31, 2022 , compared to 33.6% for the year ended
December 31, 2021 . 58 Table of Contents Corporate expenses not allocated to a segment were$51.5 million for the year endedDecember 31, 2022 , compared to$35.6 million for the year endedDecember 31, 2021 . The increase was primarily due to the higher professional fees related to the Merger, acquisitions, and litigation.
Comparison of results for the years ended
The comparison of results for the years endedDecember 31, 2021 and 2020 that are not included in this Form 10-K are included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 .
Liquidity and capital resources for the years ended
Overview
We have historically funded our operations primarily with cash flow from operations and, when needed, with borrowings, including under our Senior Secured Credit Facilities. Our principal uses for liquidity have been debt service, capital expenditures, working capital, and funds required to finance acquisitions. However, the Merger Agreement with Global Payments imposes certain limitations on how we conduct our business during the period between the execution of the Merger Agreement and the effective time of the Merger, including limitations on our ability to, among other things, engage in certain acquisitions, incur indebtedness or issue or sell new debt securities. We expect to continue to use capital to innovate and advance our products as new technologies emerge and to accommodate new regulatory requirements in the markets in which we operate. We expect these strategies to be funded primarily through cash flow from operations and borrowings from our Senior Secured Credit Facilities. Short-term liquidity needs will primarily be funded through the revolving credit facility portion of our Senior Secured Credit Facilities.
To the extent that additional funds are necessary to finance future acquisitions, and to meet our long-term liquidity needs as we continue to execute on our strategy, we anticipate that they will be obtained through additional indebtedness, equity, or debt issuances, or both.
As of
We have structured our operations in a manner to allow for cash to be repatriated through tax-efficient methods using dividends or long-term loans from foreign jurisdictions as our main source of repatriation. We follow local government regulations and contractual restrictions on cash as well as how much and when dividends can be repatriated. As ofDecember 31, 2022 , cash and cash equivalents of$356.5 million includes cash inthe United States of$110.0 million and$246.5 million in foreign jurisdictions, respectively. Ofthe United States cash balances,$2.9 million is available for general purposes, and the remaining$107.1 million is considered merchant reserves and settlement-related cash and is therefore unavailable for our general use. Of the foreign cash balances,$100.1 million is available for general purposes, and the remaining$146.4 million is considered merchant reserves and settlement-related cash and is therefore unable to be repatriated. Refer to Note 1, "Description of Business and Summary of Significant Accounting Policies," in the notes to the accompanying consolidated financial statements for additional information on our cash and cash equivalents. We do not intend to pay cash dividends on our Class A common stock in the foreseeable future.EVO, Inc. is a holding company that does not conduct any business operations of its own. As a result,EVO, Inc.'s ability to pay cash dividends on its common stock, if any, is dependent upon cash dividends and distributions and other transfers fromEVO, LLC . The amounts available toEVO, Inc. to pay cash dividends are subject to the covenants and distribution restrictions in our Senior Secured Credit Facilities. Further,EVO, Inc. may not pay cash dividends to holders of Class A common stock unless it concurrently pays full participating dividends to holders of the Preferred Stock on an "as converted" basis. Pursuant to the terms of the Merger Agreement, the Company has agreed to suspend any regular cash dividends during the term of the Merger
Agreement.
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In connection with our IPO, we entered into the Exchange Agreement with certain
of the Continuing LLC Owners, under which these Continuing LLC Owners have the
right, from time to time, to exchange their units in EVO, LLC and related Class
D common shares of EVO, Inc. for shares of our Class A common stock or, at our
option, cash. If we choose to satisfy the exchange in cash, we anticipate that
we will fund such exchange through cash from operations, funds available under
the revolving portion of our Senior Secured Credit Facilities, equity, or debt
issuances or a combination thereof. In connection with the Merger Agreement,
Blueapple entered into the Common Unit Purchase Agreement with Global Payments
and us, pursuant to which Blueapple agreed to sell all of its common units to us
in exchange for $1,093,560,292 , concurrently with, and contingent and
conditioned upon, the closing of the transactions contemplated by the Merger
Agreement.
In addition, in connection with the IPO, we entered into the TRA with the
Continuing LLC Owners. Payments required under the TRA are generally funded by
taxable income and represent the tax benefit from the step-up in tax basis that
is passed on to the TRA holders. Any payments made by us to non-controlling LLC
owners under the TRA will generally reduce the amount of overall cash flow that
might have otherwise been available to us and, to the extent that we are unable
to make payments under the TRA for any reason, the unpaid amounts generally will
be deferred and will accrue interest in accordance with the terms of the TRA
until paid by us. In connection with the execution of the Merger Agreement, we
entered into the TRA amendment, pursuant to which such parties agreed to
terminate the TRA immediately after the effective time of the Merger on the
terms set forth therein. In connection with the termination, EVO agreed to pay
certain other members of EVO, LLC and their assignees (the "TRA Payment
Recipients") an aggregate termination payment equal to $225 million minus any
payments made under the TRA to the TRA Payment Recipients between August 1, 2022
and the effective time of the Merger. Refer to Note 5, "Tax Receivable
Agreement," in the notes to the accompanying consolidated financial statements
for additional information on the TRA.
The following table sets forth summary cash flow information for the years ended
Year Ended December 31,
(in thousands) 2022 2021 2020
Net cash provided by operating activities
(252,142) (74,704) (25,967)
Net cash provided by (used in) financing
activities 43,837 (24,382) 9,763
Effect of exchange rate changes on cash, cash
equivalents, and restricted cash (8,162) (12,435) 14,634
Net (decrease) increase in cash, cash
equivalents, and restricted cash $ (53,399) $ (7,924) $ 114,450
Operating activities
Net cash provided by operating activities was $163.1 million for the year ended
December 31, 2022 , an increase of $59.5 million compared to net cash provided by
operating activities of $103.6 million for the year ended December 31, 2021 . The
increase was primarily due to higher net income and changes in working capital,
including the timing of settlement-related assets and liabilities.
Investing activities
Net cash used in investing activities was$252.1 million for the year endedDecember 31, 2022 , an increase of$177.4 million compared to net cash used in investing activities of$74.7 million for the year endedDecember 31, 2021 . The increase was primarily due to the acquisitions of NBG Pay Single Member Societe Anonyme ("NBG Pay") andElectronic Data Processing Source S.A. ("EDPS"). 60 Table of Contents Financing activities Net cash provided by financing activities was$43.8 million for the year endedDecember 31, 2022 , an increase of$68.2 million , compared to net cash used in financing activities of$24.4 million for the year endedDecember 31, 2021 . The increase was primarily due to the utilization of revolver to facilitate the acquisitions inGreece .
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash are impacted by the fluctuation of foreign exchange rates upon translation of non-U.S. currencies toU.S. dollars. The foreign exchange rate volatility in the current year impacted the translation during the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 .
Liquidity and capital resources for the years ended
The discussion of cash flow activities for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 that are not included in this Form 10-K are included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 .
Senior Secured Credit Facilities
The Company (through its subsidiary EPI) entered into the Restatement Agreement inNovember 2021 to amend and restate our senior secured credit facilities (as amended and restated by the Restatement Agreement, the "Senior Secured Credit Facilities"). The Senior Secured Credit Facilities are comprised of a$200.0 million revolving credit facility maturing inNovember 2026 , and a$588.0 million term loan maturing inNovember 2026 . In addition, our Senior Secured Credit Facilities also provide us with the option to access incremental credit facilities, refinance the loans with debt incurred outside our Senior Secured Credit Facilities, and extend the maturity date of the revolving loans and term loans, subject to certain limitations and terms. In connection with the Senior Secured Credit Facilities refinanced under the Restatement Agreement, a loss of$5.7 million was presented within other (expense) income in the consolidated statements of operations and comprehensive income (loss) for the year endedDecember 31, 2021 . The total loss of$5.7 million includes a debt extinguishment loss of$2.2 million and a loss of$3.5 million related to unamortized deferred financing costs. Borrowings under the Senior Secured Credit Facilities bear interest at an annual rate equal to, at EPI's option, (a) a base rate, plus an applicable margin or (b) LIBOR, plus an applicable margin. The applicable margin for base rate loans ranges from 0.75% to 1.75% per annum and for LIBOR loans ranges from 1.75% to 2.75% per annum, in each case based upon achievement of certain consolidated leverage ratios. In addition to paying interest on outstanding principal, EPI is required to pay a commitment fee to the lenders in respect of the unutilized revolving commitments thereunder ranging from 0.25% to 0.375% per annum based upon achievement of certain consolidated leverage ratios. The Senior Secured Credit Facilities include provisions that provide for the eventual replacement of LIBOR as a reference rate with the Secured Overnight Financing Rate (as defined in the credit agreement) or otherwise an alternate benchmark rate that has been selected by the administrative agent and EPI and not objected to by a majority of the lenders. The Senior Secured Credit Facilities require prepayment of outstanding loans, subject to certain exceptions, with: (1) 100% of the net cash proceeds of non-ordinary course asset sales or other dispositions of assets (including casualty events) by EPI and its restricted subsidiaries, subject to reinvestment rights and certain other exceptions (subject to step-downs to 50% and 0% based on achievement of certain consolidated leverage ratios), and (2) 50% of the excess cash flow (subject to certain exceptions and step-downs to 25% and 0% based on achievement of certain consolidated leverage ratios).
EPI may voluntarily repay outstanding loans under the Senior Secured Credit Facilities at any time without a premium.
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All obligations under the Senior Secured Credit Facilities are unconditionally guaranteed by most of EPI's direct and indirect, wholly-owned domestic subsidiaries, subject to certain exceptions.
a first-priority lien on the capital stock owned by EPI or by any guarantor in
each of EPI's or their respective subsidiaries (limited, in the case of capital
? stock of foreign subsidiaries and first tier domestic subsidiaries
substantially all the assets of which are the capital stock of foreign
subsidiaries, to 65% of the voting stock and 100% of the non-voting stock of
such subsidiaries); and
a first-priority lien on substantially all of EPI's and each guarantor's
? present and future intangible and tangible assets (subject to customary
exceptions).
The Senior Secured Credit Facilities contain a number of significant negative covenants. These covenants, among other things, restrict, subject to certain exceptions, EPI and its restricted subsidiaries ability to: ? incur indebtedness; ? create liens;
? engage in mergers or consolidations;
? make investments, loans and advances;
? pay dividends and distributions and repurchase capital stock;
? sell assets;
? engage in certain transactions with affiliates;
? enter into sale and leaseback transactions;
? make certain accounting changes; and
? make prepayments on junior indebtedness.
The Senior Secured Credit Facilities also contain a financial covenant that requires EPI to remain under a maximum consolidated leverage ratio determined on a quarterly basis with step-downs over time. The Borrower may elect to increase the maximum consolidated leverage ratio with which it must comply by 0.5x up to two times during the term upon the consummation of a "material acquisition." In addition, the Senior Secured Credit Facilities contain certain customary representations and warranties, affirmative covenants and events of default. If an event of default occurs, the lenders under the Senior Secured Credit Facilities will be entitled to take various actions, including the acceleration of amounts due thereunder and exercise of remedies on the collateral.
Refer to Note 13, "Long-Term Debt and Lines of Credit," in the notes to the accompanying consolidated financial statements for additional information on our long-term debt and settlement lines of credit.
Upon the consummation of the Merger, our Senior Secured Credit Facilities will be paid off in full. However, there can be no assurance that the Merger will be consummated within the anticipated timeline or at all. For additional discussion regarding our risks related to the Merger, see the risks described under the caption "Risks related to the Merger" in Item 1A, Part I of this Annual Report.
Settlement lines of credit
We have specialized lines of credit which are restricted for use in funding
settlement. The settlement lines of credit generally have variable interest
rates and are subject to annual review. As of
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Contractual obligations
Our purchase obligations consists of agreements to purchase goods and services,
including POS terminals, software licenses, and software maintenance support,
entered into in the ordinary course of business.
We lease certain facilities under non-cancellable operating lease arrangements
that expire at various dates in the future. As of December 31, 2022 , the value
of our obligations under operating leases was $50.8 million . Refer to Note 7,
"Leases," in the notes to the accompanying consolidated financial statements for
additional information.
Our tax receivable agreement requires us to make payments to the Continuing LLC
Owners in the amount equal to 85% of the applicable cash tax savings, if any.
Refer to Note 5, "Tax Receivable Agreement," in the notes to the accompanying
consolidated financial statements for additional information.
Critical accounting policies and estimates
Our discussion and analysis of our financial condition and results of operations for the periods described is based on our consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of these financial statements in conformity withU.S. GAAP requires management to make estimates, assumptions, and judgments in certain circumstances that affect the reported amounts of assets, liabilities, and contingencies as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. We evaluate our assumptions and estimates on an ongoing basis. We base our estimates on historical information and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We have provided a summary of our significant accounting policies, as well as a discussion of our evaluation of the impact of recent accounting pronouncements in Note 1, "Description of Business and Summary of Significant Accounting Policies," in the notes to the accompanying consolidated financial statements. The following discussion pertains to accounting policies management believes are most critical to the portrayal of our historical financial condition and results of operations and that require significant, difficult, subjective, or complex judgments. Other companies in similar businesses may use different estimation policies and methodologies, which may impact the comparability of our financial condition, results of operations, and cash flows to those of other companies. Revenue recognition
Our primary revenue source consists of fees for payment processing services and
revenue from the sale and rental of electronic POS equipment. Payment processing
service revenue is primarily based on a percentage of transaction value or on a
specified amount per transaction or related services.
When third parties are involved in the Company's merchant acquiring arrangements
and processing services, we apply judgment to determine whether we are acting as
a principal or an agent of the third party. We follow the requirements of
Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with
Customers, which states that the determination of whether an entity should
recognize revenue based on the gross amount billed to a customer or the net
amount retained is a matter of judgment that depends on the facts and
circumstances of the arrangement. To determine whether we are acting as a
principal or an agent, we assess indicators including: 1) whether we or the
third party is primarily responsible for fulfillment; 2) which party has
discretion in establishing pricing for the service; and 3) other considerations
deemed to be applicable to the specific situation.
Refer to Note 1, "Description of Business and Summary of Significant Accounting
Policies," and Note 2, "Revenue," in the notes to the accompanying consolidated
financial statements for further information.
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We evaluate our goodwill for impairment annually, or more frequently, if events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable.Goodwill is tested for impairment at the reporting unit level. Our reporting units are consistent with our segments: theAmericas andEurope . Factors we consider in the qualitative assessment include macroeconomic conditions, industry and market considerations, changes in certain costs, overall financial performance of each reporting unit, and other relevant entity-specific events. If we elect to bypass the qualitative assessment or if we determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, a quantitative test would be required. The quantitative impairment test involves a comparison of the estimated fair value of a reporting unit to its carrying amount. We estimate the fair value of our reporting units using both an income approach and a market approach. Under the income approach, we estimate the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on our estimates of revenue growth rates, operating margins, and other factors, such as working capital and capital expenditures. The discount rate is based on the weighted-average cost of capital adjusted for the relevant risks associated with business specific characteristics and the uncertainty related to the reporting unit's ability to execute on the projected cash flows. Under the market approach, we estimate the fair value based on market multiples of revenue and earnings derived from comparable publicly traded companies with characteristics similar to the reporting unit. Determining the fair value of a reporting unit involves judgment and the use of significant estimates and assumptions, which include revenue growth rates and operating margins used to calculate projected future cash flows, risk adjusted discount rates, and the selection of appropriate market multiples. Finite-lived intangible assets include merchant contract portfolios and customer relationships, marketing alliance agreements, trademarks, internally developed and acquired software, and non-competition agreements. The acquired intangible assets were recorded at their estimated fair value at the date of acquisition. Determination of the fair value of our acquired merchant contract portfolios, customer relationships, marketing alliance agreements, and acquired software involves significant estimates and assumptions related to revenue growth rates, discount rates, merchant attrition rates, and expected merchant referrals from our referral partners. Determination of the fair value of our acquired trademarks involves significant estimates and assumptions related to revenue growth rates, royalty rates, and discount rates. We also develop software that is used in providing services to our customers. Capitalization of internal-use software occurs when we have completed the preliminary project stage. Costs incurred during the preliminary project stage are expensed as incurred. Finite-lived intangible assets are amortized over their estimated useful lives ranging from 2 to 21 years using either accelerated or straight-line method. Determination of estimated useful lives of intangible assets requires significant judgment. The useful lives for customer-related intangible assets are based primarily on forecasted cash flows, which include estimates for the revenues, expenses, and customer attrition associated with the assets. The useful lives of contract-based intangible assets are based on the terms of the agreements. The useful lives of trademarks are based on our assumptions regarding the period of time during which a significant portion of the economic value of such assets is expected to be realized. The useful lives of internally developed and acquired software are based on various factors, including analysis of potential obsolescence due to new technology, competition, and other economic factors. We regularly evaluate whether events and circumstances have occurred that indicate the useful lives of finite-lived intangible assets may warrant revision. Finite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated from use of the asset and its eventual disposition. If the total of the undiscounted future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. 64
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Refer to Note 1, "Description of Business and Summary of Significant Accounting Policies," and Note 9, "Goodwill and Intangible Assets," in the notes to the accompanying consolidated financial statements for further information.
Income taxes
EVO, Inc. is subject toU.S. federal, state, and local income taxes with respect to our allocable share of taxable income ofEVO, LLC and is taxed at the prevailing corporate tax rates. In addition to incurring actual tax expense, we also may make payments under the TRA. We account for the income tax effects and corresponding TRA effects resulting from future taxable purchases of LLC Interests of the Continuing LLC Owners or exchanges of LLC Interests for Class A common stock at the date of the purchase or exchange by recognizing an increase in our deferred tax assets based on enacted tax rates at that time. Further, we evaluate the likelihood that we will realize the benefit represented by the deferred tax assets and, to the extent that we estimate that it is more likely than not that we will not realize the benefit, we reduce the carrying amount of the deferred tax assets with a valuation allowance. The amounts to be recorded for both the deferred tax assets and the liability for our obligations under the TRA are estimated at the time of any purchase or exchange and are recorded as an increase to shareholders' equity; the effects of changes in any of our estimates after this date are included in net earnings. Similarly, the effects of subsequent changes in the enacted tax rates are included in net earnings. The Company recognizes deferred tax assets to the extent that it is expected that these assets are more likely than not to be realized. The Company evaluates the realizability of the deferred tax assets, and to the extent that the Company estimates that it is more likely than not that a benefit will not be realized, the carrying amount of the deferred tax assets is reduced with a valuation allowance. As a part of this evaluation, the Company assesses all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations (including cumulative losses in recent years), to determine whether sufficient future taxable income will be generated to realize existing deferred tax assets. The Company has identified objective and verifiable negative evidence in the form of cumulative losses on an unadjusted basis in certain jurisdictions over the preceding twelve quarters endedDecember 31, 2022 . The Company evaluated both its actual forecasts of future taxable income and its historical core earnings by jurisdiction over the prior twelve quarters, adjusted for certain nonrecurring items. On the basis of this assessment, and after considering future reversals of existing taxable temporary differences, and its actual forecasts of future taxable income, the Company determined that valuation allowances are needed in certain European jurisdictions. Inthe United States , with the exception of the interest expense limitation and a stand alone domestic subsidiary, the Company concluded that its indefinite lived deferred tax assets will be realizable and recorded no valuation allowance. In arriving at this determination, the Company considered both (i) historical core earnings, after adjusting for certain nonrecurring items, and (ii) the projected future profitability of its core operations and the impact of enacted changes in the application of the interest expense limitation rules beginning in 2022. Inthe United States jurisdiction, the Company's future taxable income projections are derived from historical core operations adjusted for certain non-recurring items, which indicate that the Company will move out of a period of cumulative losses as taxable loss periods are replaced by taxable income periods. The amount of the deferred tax asset considered realizable, however, could be adjusted if the Company's estimates of the projected future profitability of its core operations are reduced by a level significantly different than the Company's historical revenues and expenses adjusted for certain nonrecurring items. As a secondary measure, the Company compares its adjusted historical core earnings to its actual forecast to ensure that adjusted core earnings are realizable. The Company also evaluates the realizability of the deferred tax assets, and to the extent that the Company estimates that it is more likely than not that a benefit will not be realized, the carrying amount of the deferred tax assets would be offset with a valuation allowance and the related TRA liability would be reduced. The future taxable income projections are subject to a high degree of uncertainty and could be impacted, both positively and negatively, by changes in our business or the markets in which we operate. A change in the assessment of the realizability of its deferred tax assets could materially impact our results of operations.
Refer to Note 5, "Tax Receivable Agreement," and Note 12, "Income Taxes," in the notes to the accompanying consolidated financial statements for further information.
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Redeemable non-controlling interest in eService, BCI Pagos, and NBG Pay
Redeemable non-controlling interest ("RNCI") in eService, BCI Pagos, and NBG Pay
relate to the portion of equity in our consolidated subsidiaries in Poland ,
Chile , and Greece , not attributable, directly or indirectly, to us, which is
realizable upon the occurrence of an event that is not solely within our
control. We adjust the RNCI at each balance sheet date to reflect our estimate
of the maximum redemption amount with changes recognized as an adjustment to our
additional paid-in capital or, in the absence of additional paid-in capital, to
shareholders' deficit. Such estimate is based on projected operating performance
of the subsidiary and the key assumptions used in estimating the fair value
include, but are not limited to, revenue growth rates and weighted-average cost
of capital.
Refer to Note 17, "Redeemable Non-controlling Interests," for further information.
New accounting pronouncements
For information regarding new accounting pronouncements, and the impact of these pronouncements on our consolidated financial statements, if any, refer to Note 1, "Description of Business and Summary of Significant Accounting Policies," in the notes to the accompanying consolidated financial statements.
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