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.
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 the Americas and Europe . 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 60% of its revenues from markets outside ofthe United States . We are one of only a few global, omni-channel merchant acquirers and payment processors, with approximately 2,000 employees on four continents, servicing over 550,000 merchants in theAmericas andEurope . We differentiate ourselves from our competitors through (1) a highly productive and scaled sales distribution network, including exclusive global financial institution referral partnerships, (2) our three proprietary, in-market processing platforms that are connected through a single point of integration and (3) a comprehensive suite of payment and commerce solutions. 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, Raiffeisenbank, Moneta, Citibanamex, Sabadell, and Liberbank, among others. In several markets, we operate with more than one financial institution partner. In addition to establishing key bank partnerships, we are actively expanding our tech-enabled capabilities, including ISV, eCommerce, and B2B solutions. We are focused on delivering products and services that provide value and convenience to our merchants. Our tech-enabled solutions consist of our own products, as well as other services that we enable through technical integrations with third-party providers, all of which are available to merchants through a single integration to EVO. Our value-added solutions include gateway solutions, online fraud prevention and management solutions, online hosted payments page capabilities, cellphone-based SMS integrated payment collection services, security tokenization and encryption solutions at the POS, dynamic currency conversion, ACH, Level 2 and Level 3 data processing, loyalty offers, and other ancillary solutions. We offer processing capabilities tailored to specific industries and provide merchants with recurring billing, multi-currency authorization and settlement, and cross-border processing. Our global footprint and ease of integration attract new partner relationships, allowing us to develop a robust integrated solutions partner network and positioning us to address major trends in each of our markets. Our business operations are organized across two segments: theAmericas andEurope ; and are comprised of three sales distribution channels: the Tech-enabled division, the Direct division, and the Traditional division. Our European segment is comprised ofWestern Europe (Spain ,United Kingdom ,Ireland ,Germany andMalta ) andEastern Europe (Poland and theCzech Republic ). OurAmericas segment is comprised ofthe United States ,Canada , andMexico . In bothEurope and theAmericas , our payment technology solutions enable our customers to accept all forms of digital payments, including credit and debit card, gift card, and ACH, among other forms of electronic payments, such as market-specific payment solutions. In both segments, we distribute our products and services through a combination of bank referral partnerships, a direct sales force, and specialized integrated solution companies. Our distribution in theAmericas segment also leverages independent sales agents inthe United States in our Traditional division. In our European segment, we also provide ATM acquiring and processing services to financial institutions and third-party ATM providers. 52 Table of Contents Our Tech-enabled division includes our integrated B2B and eCommerce businesses. Our Direct division includes long-term, exclusive referral relationships with leading financial institutions as well as our direct sales force, such as our direct salespersons and call center representatives, and independent merchant referral relationships. Our Traditional division, unlike our Direct and Tech-enabled divisions, represents a merchant portfolio which is not actively managed by the Company. This division only exists inthe United States , as it represents our heritage ISO relationships, and its profits are used to invest in our growth opportunities, such as tech-enabled capabilities and M&A.
The majority of our revenue is generated from transaction-based fees, calculated as a percentage of transaction value or as a standard fee per transaction.
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 and technology solutions, 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
Although this year's performance has been adversely impacted by the COVID-19
pandemic and ensuing government restrictions, we delivered solid financial
performance in the year ended
Revenue for the year ended
? 9.6% compared to the year ended
due to the unfavorable impact of COVID-19, as well as changes in foreign
exchange rates.
? million, 9.8% higher than the year ended
cost reductions that we implemented in the second quarter.
18.3% higher than the year ended
? segment profit was due to the decrease in expenses, primarily due to cost
reduction initiatives that we implemented in the second quarter, and the
recognition of a
preferred stock.
? The Company processed approximately 3.6 billion transactions in the year ended
COVID-19 The COVID-19 pandemic and related government actions to control its spread impacted our operating results beginning inMarch 2020 . At the onset of the pandemic, year-over-year volumes declined in most of our markets and across most industry verticals, reaching a low point in mid-April. Since then, we have experienced periods of improvement and decline in volumes, primarily relating to the status of government restrictions in various jurisdictions. Volumes remained depressed in the fourth quarter, however, there was some improvement inDecember 2020 attributable largely to increased consumer holiday spending and the temporary loosening of government restrictions in certain markets inEurope . InJanuary 2021 , COVID-19 related restrictions were reinstated or extended in parts ofEurope in response to an increase in infection rates, resulting in an additional decline in volume, particularly in ourEurope segment. February volumes to date remain depressed but showed a slight improvement as the vaccine deployment is now underway and certain governments have begun easing restrictions. It is likely that our volumes will continue to be under pressure as the effects of the pandemic extend into 2021. 53 Table of Contents In the first quarter of 2020, we implemented a number of business continuity plans and formed a crisis management team to address challenges arising from the COVID-19 pandemic, including those related to the health and safety of our employees and partners, and to minimize disruption to our merchants. Beginning in earlyApril 2020 , we took a number of steps to align our cost structure and cash flows with the expected near-term revenue impact from the pandemic. These actions included a series of initiatives to reduce fixed costs, including significant reductions in payroll expenses through a combination of furloughs, terminations, and temporary salary reductions, and certain non-payroll related costs. Employee salaries were reinstated during the fourth quarter of 2020. Based on these actions, we estimate that we have reduced our cost structure on a go forward basis by approximately 10% of our core selling, general and administrative expenses. In addition, we reduced our capital expenditures for 2020 through the deferral of non-critical projects and a reduction in terminal purchases. We will continue to actively manage our expenses and cash flows based on our revenues and the economic activity in our markets. The actions we have taken allowed us to realign our cost structure resulting in the financial capacity to invest in our business and support our customers while also increasing our margins. We expect that the COVID-19 pandemic will continue to negatively impact our business and results of operations in the upcoming months. The extent of the impact on our future financial condition and operating results remains highly uncertain; however, we are confident in our ability to manage through this period. Longer term, we believe the pandemic will serve as a catalyst for greater utilization of digital payments, a trend we are already seeing in our markets.
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 enterprises, timing and length of contract renewals, new enterprise wins, retention rates, mix of payment solution types employed by consumers, and changes in card network fees, including interchange rates and size of enterprises 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 our fourth quarter and weakest in our 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. The government restrictions and changes in consumer spending resulting from the COVID-19 pandemic have disrupted these typical seasonal patterns.
Foreign currency translation impact on our operations
Our consolidated revenues and expenses are subject to variations caused by the net effect of foreign currency translation on revenues recognized and expenses incurred by our non-U.S. operations. 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.
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Since 2012, we have established partnerships with leading financial institutions around the world. We rely on our various financial institution relationships to grow and maintain our business. These relationships are structured in various ways, such as commercial alliance relationships, equity method investments, and joint ventures. We enter into long-term relationships with our bank partners where these 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 in the banking and payments industries. One of our financial institution referral partners, Grupo Banco Popular, was acquired by Santander inJune 2017 , which has adversely impacted our business inSpain . Revenues from this channel have declined significantly due primarily to reduced merchant referrals following Santander's consolidation of Grupo Banco Popular branches and the bank's lack of performance of certain of its obligations under our agreements. We believe our agreements with Santander, including the bank's referral obligations, remain in full force and effect and we continue to utilize the contractual and legal remedies available to us as we work to resolve these and other matters. However, there can be no assurance that we will be able to successfully resolve this matter or that the bank will comply with its obligations under the agreements.
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 our European 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 in the applicable EU member states, which includes, 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. SCA regulations required industry-wide systems upgrades. In the second half of 2019, we began updating our systems in preparation for the new SCA compliance requirements. Many new SCA requirements became fully enforced in certain countries inEurope at the end of 2020 while other countries inEurope have adopted staggered timelines and have delayed full enforcement until later in 2021. From an operations perspective, we remain focused on developing, coordinating and implementing necessary SCA updates with our merchants and third party providers, including hardware vendors, card issuers and the card networks. 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 certain legislation relating to the offering of DCC services, which went into effect inApril 2020 . These new rules require additional disclosures to consumers in connection with our DCC product offerings. As a result of the COVID-19 pandemic, theEU Commission and other national regulators have indicated that enforcement of these regulations will be delayed in order to allow providers additional time to fully implement changes necessary to meet these regulations. Compliance with current and upcoming regulations and compliance deadlines remains a focus for 2021. In addition, we continue to closely monitor the impact of Brexit on our operations as further details emerge regarding the post-Brexit regulatory landscape. Commencing inJanuary 2021 , we availed ourselves of theUnited Kingdom's temporary permissions regime, which allows us to continue to operate in that market under our current regulatory permissions for a period of up to three years.
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 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 , 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. 55 Table of Contents For the year endedDecember 31, 2020 , we processed approximately 3.6 billion transactions, which included approximately 1.0 billion transactions in theAmericas and approximately 2.6 billion transactions inEurope . This represents a decrease of 9.5% in theAmericas and an increase of 1.8% inEurope for an aggregate decrease of 1.6% compared to the year endedDecember 31, 2019 . Transactions processed in theAmericas andEurope accounted for 27% and 73%, respectively, of the total transactions we processed for the year endedDecember 31, 2020 . For the year endedDecember 31, 2019 , we processed approximately 3.6 billion transactions, which included more than 1.0 billion transactions in theAmericas and approximately 2.5 billion transactions inEurope . This represents an increase of 12.4% in theAmericas and an increase of 18.8% inEurope for an aggregate increase of 16.8% compared to the year endedDecember 31, 2018 . Transactions processed in theAmericas andEurope accounted for 30% and 70%, respectively of the total transactions we processed for the year endedDecember 31, 2019 . The changes in the transactions processed year in the year endedDecember 31, 2020 were primarily driven by government restrictions related to COVID-19 in many of our markets, changes in consumer spending, and an increase in debit card and ATM usage particularly inEurope .
Comparison of results for the year 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, 2020 % of revenue December 31, 2019 % of revenue $ change % change
Segment revenue:
Americas $ 275,233 62.7% $ 303,840 62.5% $ (28,607) (9.4%)
Europe 163,868 37.3% 181,938 37.5% (18,070) (9.9%)
Revenue $ 439,101 100.0% $ 485,778 100.0% $ (46,677) (9.6%)
Operating expenses:
Cost of services and
products $ 84,336 19.2% $ 96,365 19.8% $ (12,029) (12.5%)
Selling, general and
administrative 250,676 57.1% 267,926 55.2% (17,250) (6.4%)
Depreciation and
amortization 85,924 19.6% 92,059 19.0% (6,135) (6.7%)
Impairment of intangible
assets 802 0.2% 13,101 2.7% (12,299) (93.9%)
Total operating expenses 421,738 96.1%
469,451 96.6% (47,713) (10.2%)
Income from operations $ 17,363 4.0% $ 16,327 3.4% $ 1,036 6.3%
Segment profit:
Americas $ 106,052 24.2% $ 96,587 19.9% $ 9,465 9.8%
Europe $ 65,448 14.9% $ 55,319 11.4% $ 10,129 18.3%
Revenue
Revenue was
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The decrease in bothAmericas andEurope segment revenue for the year endedDecember 31, 2020 is primarily due to the unfavorable impact of the COVID-19 pandemic, a shift in customer mix toward larger, lower-margin merchants, and a decline in economic activity, including cross-border activity inEurope . Operating expenses
Cost of services and products
Cost of services and products was$84.3 million for the year endedDecember 31, 2020 , a decrease of$12.0 million , or 12.5%, compared to the year endedDecember 31, 2019 , primarily due to lower processing costs related to declines in volumes during the period. Our cost of services and products includes both fixed and variable components, with variable components dependent upon the number and/or volume of transactions processed. The decrease in cost was due to the variable component from the decrease in transactions processed.
Selling, general and administrative expenses
Selling, general and administrative expenses were$250.7 million for the year endedDecember 31, 2020 , a decrease of$17.3 million , or 6.4%, compared to the year endedDecember 31, 2019 . The decrease was due primarily to the employee compensation cost savings resulting from the cost reduction initiatives and lower third party expenses recognized in 2020, offset by an increase in share-based compensation costs, severance costs, and allowance for doubtful accounts recognized during the period.
Depreciation and amortization
Depreciation and amortization was$85.9 million for the year endedDecember 31, 2020 , a decrease of$6.1 million , or 6.7%, compared to the year endedDecember 31, 2019 . This decrease was primarily driven by lower amortization due to the accelerated amortization method of merchant contract portfolios acquired in prior periods, lower depreciation due to fewer purchases of POS terminals in 2020, and the lower value of intangible assets due to impairments recognized in 2019.
Impairment of intangible assets
Impairment of intangibles assets was$0.8 million for the year endedDecember 31, 2020 , a decrease of$12.3 million , or 93.9%, compared to the year endedDecember 31, 2019 . The 2020 impairment charge primarily related to the retirement of certain trademarks driven by an internal reorganization. The 2019 impairment charge primarily related to the termination of the Raiffeisen Bank Polska marketing alliance agreement and the retirement of certain trademarks. Interest expense
Interest expense was$30.2 million for the year endedDecember 31, 2020 , a decrease of$13.9 million , or 31.5%, compared to$44.0 million for the year endedDecember 31, 2019 . The decrease was due to lower variable interest rates as well as the paydown of our revolving credit facility and a portion of the outstanding balance on the First Lien Term Loan.
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. The Company recorded a tax expense of$13.1 million in the year endedDecember 31, 2020 which included a benefit of$2.6 million from a release of theU.S. interest limitation valuation allowance. 57 Table of Contents Segment performanceAmericas segment profit for the year endedDecember 31, 2020 was$106.1 million , compared to$96.6 million for the year endedDecember 31, 2019 , an increase of 9.8%. The increase is primarily due to lower expenses from our system simplification efforts and cost reductions implemented as a result of the pandemic, offset by the previously discussed decline in revenue.Americas segment profit margin was 38.5% for the year endedDecember 31, 2020 , compared to 31.8% for the year endedDecember 31, 2019 .Europe segment profit was$65.4 million for the year endedDecember 31, 2020 , compared to$55.3 million for the year endedDecember 31, 2019 , an increase of 18.3%. The increase is primarily due to the cost reductions implemented in response to the pandemic and the recognition of a$17.6 million gain related to our investment in Visa Series A preferred stock, offset by the previously discussed decline in revenue.Europe segment profit margin was 39.9% for the year endedDecember 31, 2020 , compared to 30.4% for the year endedDecember 31, 2019 . Corporate expenses not allocated to a segment were$34.2 million for the year endedDecember 31, 2020 , compared to$34.5 million for the year endedDecember 31, 2019 . The decrease in corporate expenses is primarily due to the decrease in employee compensation expenses and professional fees, offset by the increase in share-based employee compensation.
Comparison of results for the years ended
The comparison of results for the years endedDecember 31, 2019 and 2018 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, 2019 .
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.
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 process transactions. We expect these strategies to be funded primarily through cash flow from operations and borrowings from our Senior Secured Credit Facilities, as needed. 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
OnApril 21, 2020 , we completed the offer and sale of 152,250 shares of our Series A Convertible Preferred Stock (the "Preferred Stock") to an affiliate of MDP for an aggregate$149.3 million in net proceeds. We used$69.3 million of the proceeds to repay the balance on our revolving credit facility. OnSeptember 30, 2020 , we repaid$50.0 million of the outstanding balance on our First Lien Term Loan, in addition to the regular quarterly payment. 58 Table of Contents OnMay 5, 2020 , we entered into a Limited Waiver (the "Limited Waiver") with respect to our Senior Secured Credit Facilities. The Limited Waiver effects certain changes applicable to our revolving credit facility, including a waiver of any default or event of default resulting from noncompliance with the consolidated leverage ratio for the period beginningJune 30, 2020 and ended onSeptember 30, 2021 (such period of time, the "Covenant Waiver Period"). During the Covenant Waiver Period we are subject to (1) a consolidated leverage ratio of 6.0x for each fiscal quarter from the quarter endedJune 30, 2020 through and includingMarch 31, 2021 , a consolidated leverage ratio of 5.5x for the fiscal quarter endedJune 30, 2021 , and a consolidated leverage ratio of 5.25x for the fiscal quarter endedSeptember 30, 2021 and (2) increased limitations on restricted payments and the incurrence of indebtedness. Other than the items noted above, the Limited Waiver does not modify the significant terms of the Senior Secured Credit Facilities. We have structured our operations in a manner to allow for cash to be repatriated through tax-efficient methods using dividends 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, 2020 , cash and cash equivalents of$418.4 million includes cash inthe United States of$162.9 million and$255.5 million in foreign jurisdictions. Ofthe United States cash balances,$43.4 million is available for general purposes, and the remaining$119.5 million is considered merchant reserves and settlement-related cash and is therefore unavailable for our general use. Of the foreign cash balances,$101.6 million is available for general purposes, and the remaining$153.9 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 its subsidiaries' loan agreements. 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. 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 inEVO, LLC and related shares ofEVO, 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 addition, in connection with the IPO, we entered into a Tax Receivable Agreement ("TRA") with the Continuing LLC Owners. Although the actual timing and amount of any payments that may be made under the TRA will vary, we expect that the payments that we will be required to make to the Continuing LLC Owners will be significant. 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. Refer to Note 5, "Tax Receivable Agreement," in the notes to the accompanying consolidated financial statements for additional information on the TRA. 59 Table of Contents
The following table sets forth summary cash flow information for the years ended
Year Ended December 31,
(in thousands) 2020 2019 2018
Net cash provided by operating activities $ 116,020 $ 27,889 $ 201,998
Net cash used in investing activities (25,967) (76,643) (125,565)
Net cash provided by financing activities 9,763 3,920 80,643
Effect of exchange rate changes on cash, cash
equivalents, and restricted cash 14,634 (1,774) (11,521)
Net increase (decrease) in cash, cash equivalents,
and restricted cash $ 114,450 $ (46,608) $ 145,555
Operating activities
Net cash provided by operating activities was $116.0 million for the year ended
December 31, 2020 , an increase of $88.1 million compared to net cash provided by
operating activities of $27.9 million for the year ended December 31, 2019 . This
increase was primarily due to a reduction in our net loss and changes in working
capital, including the timing of settlement-related assets and liabilities.Investing activities
Net cash used in investing activities was
During the year endedDecember 31, 2019 , we spent$38.8 million on acquisitions. During the year endedDecember 31, 2020 , we evaluated a number of opportunities but did not enter into any business combinations as we remained disciplined in our deployment of capital to ensure that our acquisitions demonstrate strong strategic fit with accretive financial returns. Capital expenditures were$20.5 million for the year endedDecember 31, 2020 , a decrease of$16.3 million compared to$36.8 million for the year endedDecember 31, 2019 . The decrease was primarily due to fewer POS terminal and technology-related purchases in markets outside ofthe United States as we actively managed our cash flows in response to the pandemic. As is customary in those markets, we provide the POS terminal hardware to merchants and charge associated fees related to this hardware. Additionally, our capital expenditures include hardware and software necessary for our data centers, processing platforms, and information security initiatives. Financing activities Net cash provided by financing activities was$9.8 million for the year endedDecember 31, 2020 , an increase of$5.8 million , compared to net cash provided by financing activities of$3.9 million for the year endedDecember 31, 2019 . This increase was primarily due to proceeds from the issuance of Preferred Stock partially offset by an increase in repayments of long-term debt during the
year endedDecember 31, 2020 .
Liquidity and capital resources for the years ended
The discussion of cash flow activities for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 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, 2019 . 60 Table of Contents
Senior Secured Credit Facilities
The Company (through its subsidiary EPI) entered into the Senior Secured Credit Facilities pursuant to a credit agreement datedDecember 22, 2016 , and amended onOctober 24, 2017 ,April 3, 2018 , andJune 14, 2018 . As ofDecember 31, 2020 , the Senior Secured Credit Facilities include the First Lien Revolver commitment of$200.0 million and the First Lien Term Loan of$665.0 million that are scheduled to mature inJune 2023 andDecember 2023 , respectively. 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.
Borrowings under the First Lien Senior Secured Facility 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 revolving loans ranges from 0.75% to 2.00% per annum and for LIBOR revolving loans ranges from 1.75% to 3.00% per annum, in each case based upon achievement of certain consolidated leverage ratios. The applicable margin for base rate term loans is 2.25% and for LIBOR term loans is 3.25%, subject to a 25 basis point reduction upon an upgrade to the Company's credit rating by both Moody's and S&P. 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 0.5% per annum based upon achievement of certain consolidated leverage ratios. The First Lien Senior Secured Facility requires prepayment of outstanding loans 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, and (2) 50% of the excess cash flow (subject to step-downs to 25% and 0% based on achievement of certain first lien leverage ratios). Upon a change of control, EPI is required to offer to prepay the loans at par.
EPI may voluntarily repay outstanding loans under the First Lien Senior Secured Facility at any time, without premium.
All obligations under the First Lien Senior Secured Facility are unconditionally guaranteed by most of EPI's direct and indirect, wholly-owned material domestic subsidiaries, subject to certain exceptions. All obligations under the First Lien Senior Secured Facility, and the guarantees of such obligations, are secured, subject to permitted liens and other exceptions, by:
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, to 65% of the voting stock and 100% of the
non-voting stock of first tier foreign 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 First Lien Senior Secured Facility contains a number of significant negative covenants. These covenants, among other things, restrict, subject to certain exceptions, EPI's 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 First Lien Senior Secured Facility also contains a springing financial covenant that requires EPI to remain under a maximum consolidated leverage ratio determined on a quarterly basis. The Limited Waiver entered into onMay 5, 2020 included a waiver of any default or event of default resulting from noncompliance with the consolidated leverage ratio for the Covenant Waiver Period. During such Covenant Waiver Period, we are subject to (1) a consolidated leverage ratio of 6.0x for each fiscal quarter from the quarter endedJune 30, 2020 through and includingMarch 31, 2021 , a consolidated leverage ratio of 5.5x for the fiscal quarter endedJune 30, 2021 and a consolidated leverage ratio of 5.25x for the fiscal quarter endedSeptember 30, 2021 , and (2) increased limitations on restricted payments and the incurrence of indebtedness. 61 Table of Contents The First Lien Senior Secured Facility also contains certain customary representations and warranties, affirmative covenants and events of default. If an event of default occurs, the lenders will be entitled to take various actions, including the acceleration of amounts due thereunder and the exercise of the 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.
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
Contractual obligations The following table summarizes our contractual obligations as ofDecember 31, 2020 : Less than More than (in thousands) Total 1 year 1-3 years 3-5 years 5 years Long-term debt$ 591,169 $ 6,593 $ 584,576 $ - $ - Settlement lines of credit 13,878 13,878 - - - Interest payments(1) 67,509 23,001 44,508 - - Operating leases(2) 47,648 10,410 15,840 8,594 12,804 Purchase commitments(3) 21,687 12,276 6,354 3,057 -
Other long-term liabilities(4) 1,999 1,566 433
- -
Total $ 743,890 $ 67,724 $ 651,711 $ 11,651 $ 12,804 Interest on long-term debt and settlement obligations is based on rates
(1) effective and amounts borrowed as of
rates for our long-term debt and settlement obligations are variable, actual
cash payments may differ from the estimates provided.
Amounts represent undiscounted contractually committed payments under our
operating lease obligations. As of December 31, 2020 , operating leaseobligations recognized on our consolidated balance sheet are measured at the
(2) present value of remaining lease payments, utilizing our incremental
borrowing rate based on the remaining lease term, which includes renewal
options, if the option is reasonably certain to be exercised. Refer to Note
7, "Leases," in the notes to the accompanying consolidated financial
statements for additional information.
Amounts represent our estimate of future payments for noncancelable(3) contractual obligations related to purchase of goods or services with
suppliers for fixed or minimum amounts.
Amounts represent our estimate of future payments related to our
(4) acquisitions. Some of these payments depend on future performance, and
therefore, actual cash payments and the timing of such payments may differ
from the estimates.
The table above excludes the obligations arising from our tax receivable agreement that requires us to make payments to the Continuing LLC Owners in the amount equal to 85% of the applicable cash tax savings, if any, because the timing and amount of such payments is not currently determinable. Refer to Note 5, "Tax Receivable Agreement," in the notes to the accompanying consolidated financial statements for additional information.
Off-balance sheet transactions
We have not entered into any off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Critical accounting policies and estimates
Our discussion and analysis of our historical 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 historical financial statements in conformity withU.S. GAAP requires management to make estimates, assumptions 62
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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 experience and on 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. Payment processing service revenue is primarily based on a percentage of transaction value or on a specified amount per transaction or related services. As described in Note 1, "Description of Business and Summary of Significant Accounting Policies," in the notes to the accompanying consolidated financial statements, we adopted a new revenue accounting standard onJanuary 1, 2019 that resulted in revenue being presented net of certain fees that we pay to third parties. This change in presentation affected our reported revenues and operating expenses during the year endedDecember 31, 2019 by the same amount and had no effect on operating income. 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.
We regularly evaluate whether events and circumstances have occurred that indicate the carrying amounts of goodwill and other intangible assets may not be recoverable.
Goodwill represents the excess of the consideration transferred over the fair value of identifiable net assets acquired through business combinations. 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 . As ofOctober 1, 2020 , we performed a quantitative assessment as prescribed by Accounting Standards Codification ("ASC") 350, Intangibles -Goodwill and Other, to test our goodwill for impairment. 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 an equal weighting of fair values derived from the income approach and the 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. Estimating the fair value of a reporting unit involves the use of significant estimates and assumptions. These estimates and assumptions 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. For each reporting unit, we performed a sensitivity analysis to vary the growth rates, discounts, and multiples in order to provide a range of reasonableness for detecting a potential impairment. Additionally, we compared the sum of the reporting units fair value to our market 63
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capitalization based on the price of our common stock as of the date of the impairment test and evaluated the resulting implied control premium (discount) to determine if the estimated total enterprise value is reasonable compared to external market indicators. In 2020, the results of our annual impairment tests indicated no impairment. As of the date of the impairment test, the fair values of theAmericas andEurope reporting units substantially exceeded their carrying values.
As of
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. 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 64
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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 a reduction 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, 2020 . Additionally, the Company has noted a decline in the volume of transactions processed for the twelve months endedDecember 31, 2020 compared to the prior year period, due to the impact of the COVID-19 pandemic. 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 to reduce the carrying amount of deferred tax assets to an amount that is more likely than not to be realized. Inthe United States jurisdiction, however, 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 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.
Redeemable non-controlling interest in eService
Redeemable non-controlling interest ("RNCI") in eService relates to the portion
of equity in our consolidated subsidiary in Poland , 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.
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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. Inflation
While inflation may impact our revenue and expenses, we believe the effects of inflation, if any, on our results of operations and financial condition have not been significant. However, there can be no assurance that our results of operations and financial condition will not be materially impacted by inflation in the future.
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