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 unaudited condensed consolidated financial
statements and the notes to the accompanying unaudited condensed consolidated
financial statements appearing elsewhere in this Form 10-Q and the Risk Factors
included in Part II, Item 1A of this Form 10-Q, as well as other cautionary
statements and risks described elsewhere in this Form 10-Q.
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 2,100 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,Banco de Crédito e Inversiones, 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 independent software vendors ("ISVs"), eCommerce, and business-to-business ("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 ("DCC"), 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. OurEurope segment is comprised ofWestern Europe (Spain ,United Kingdom ,Ireland ,Germany ,Gibraltar , andMalta ) and Central andEastern Europe (Poland and theCzech Republic ). OurAmericas segment is comprised ofthe United States ,Canada ,Mexico , andChile . 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 40 Table of Contents 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 ourEurope segment, we also provide ATM acquiring and processing services to financial institutions and third-party ATM providers. Our Tech-enabled division includes our ISV, 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 independent sales organizations 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
The Company delivered solid financial performance in the three and six months
ended
Revenue for the three months ended
increase of 29.6% compared to the three months ended
? the six months ended
compared to the six months ended
to an increase in transactions resulting from the easing of governmental restrictions due to COVID-19 and increased card adoption.
million, 65.6% higher than the three months ended
segment profit for the six months ended
higher than the six months ended
? segment profit was due to the increase in revenue and effective cost management
initiatives implemented at the onset of the pandemic. A portion of the cost
management initiatives implemented in the second quarter of 2020 included the
reduction in base salaries and employee furloughs. By the end of 2020, base
salaries were returned to pre-pandemic levels and no employees remained on
furlough.Europe segment profit for the three months endedJune 30, 2021 was$17.1 million , 151.0% higher than the three months endedJune 30, 2020 .Europe
segment profit for the six months ended
higher than the six months ended
? profit was due to the increase in revenue and effective cost management
initiatives implemented at the onset of the pandemic. A portion of the cost
management initiatives implemented in the second quarter of 2020 included the
reduction in base salaries and employee furloughs. By the end of 2020, base
salaries were returned to pre-pandemic levels and no employees remained on
furlough.
The Company processed approximately 1.1 billion transactions in the three
months ended
?
the six months endedJune 30, 2021 , an increase of 14.1% from the six months endedJune 30, 2020 . 41 Table of Contents COVID-19 At the onset of the COVID-19 pandemic, year-over-year volumes declined across our markets and most industry verticals, reaching a low point inmid-April 2020 . Since then, we have experienced volatility in our payment volumes, primarily driven by the extent of government restrictions in various jurisdictions. Our year-over-year volumes demonstrated significant improvement beginning inMarch 2021 , which reflects the initial impact of the pandemic inMarch 2020 coupled with increased consumer spending in certain of our markets at the end of the first quarter 2021 stemming from the relaxation of government restrictions and increased vaccination distribution. Monthly volumes throughout the second quarter were significantly above 2020 levels due to the easing of government restrictions.
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, including significantly reducing SG&A expenses. While we have reintroduced certain expenses as our business and operations have started to normalize, we will continue to actively manage our expenses and cash flows based on our revenues and the economic activity in our markets. The ongoing impact of the pandemic on our business will largely depend on the progression of the vaccine rollout, the emergence of, and response to, virus variants and the extent of the government restrictions across our markets. However, we are confident in our continued ability to manage through this challenge. Longer term, we believe the pandemic will serve as a catalyst for greater utilization of digital payments, a trend we are 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 unaudited condensed 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. 42 Table of Contents
Financial institution partners
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 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. At the end of the second quarter, the Company's joint venture with BCI commenced operations inChile following receipt of regulatory operational authorization and the acquisition of Pago Fácil in earlyJune 2021 . 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 due primarily to reduced merchant referrals following the acquisition and the bank's failure to perform certain of its other 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 pursue the contractual and legal remedies available to us to resolve these and other matters. In furtherance of those efforts, inDecember 2020 we filed a claim in theCourt of First Instance inMadrid, Spain , seeking various remedies, including monetary damages, in connection with Santander's breach of certain of its exclusivity, non-compete and merchant referral obligations under the commercial agreements between the parties. The litigation is at a preliminary stage and we cannot at this time determine the likelihood of any outcome or any damages that may be awarded to us. There can be no assurance as to when or if we will recover the amounts to which we believe we are entitled or the other remedies sought in connection with our claims.
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 aPayments Institution ("PI") license, allowing them to operate in theEuropean Union (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 the European Payment Services Directive of 2015 ("PSD2"). PSD2 contains a number of additional regulatory mandates, such as provisions relating to Strong Customer Authentication ("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. Most 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 early 2022. 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 theUnited Kingdom's withdrawal from theEuropean Union ("Brexit") on our operations as further details emerge regarding the post-Brexit regulatory landscape. We are currently operating in theUnited Kingdom within the scope of its temporary permissions regime while in parallel seeking a stand alone license in theU.K. to facilitate operating our business long-term within that market. 43 Table of Contents 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. For the three months endedJune 30, 2021 , we processed approximately 1.1 billion transactions, which included approximately 0.3 billion transactions in theAmericas and approximately 0.8 billion transactions inEurope . This represents an increase of 28.5% in theAmericas and an increase of 38.1% inEurope for an aggregate increase of 35.5% compared to the three months endedJune 30, 2020 . Transactions processed in theAmericas andEurope accounted for 26.0% and 74.0%, respectively, of the total transactions we processed for the three months endedJune 30, 2021 . For the six months endedJune 30, 2021 , we processed approximately 1.9 billion transactions, which included approximately 0.5 billion transactions in theAmericas and approximately 1.4 billion transactions inEurope . This represents an increase of 6.6% in theAmericas and an increase of 17.1% inEurope for an aggregate increase of 14.1% compared to the six months endedJune 30, 2020 . Transactions processed in theAmericas andEurope accounted for 27.0% and 73.0%, respectively, of the total transactions we processed for the six months endedJune 30, 2021 .
The changes in the transactions processed in the three and six months ended
Comparison of results for the three months ended
The following table sets forth the unaudited condensed consolidated statements
of operations in dollars and as a percentage of revenue for the period
presented.
Three Months Ended Three Months Ended
(dollar amounts in thousands) June 30, 2021 % of revenue
June 30, 2020 % of revenue $ change % change
Segment revenue:
Americas $ 76,979 63.0% $ 61,952 65.7% $ 15,027 24.3%
Europe 45,256 37.0% 32,331 34.3% 12,925 40.0%
Revenue $ 122,235 100.0% $ 94,283 100.0% $ 27,952 29.6%
Operating expenses:Cost of services and products $ 18,028 14.7% $ 19,212 20.4%$ (1,184) (6.2)% Selling, general and administrative 65,670 53.7% 54,608 57.9% 11,062 20.3% Depreciation and amortization 20,695 16.9% 20,525 21.8% 170 0.8% Impairment of intangible assets - 0.0% 782 0.8% (782) (100.0)% Total operating expenses 104,393 85.4% 95,127 100.9% 9,266 9.7% Income (loss) from operations $ 17,842 14.6%
$ (844) (0.9)%$ 18,686 2214.0% Segment profit: Americas $ 37,781 30.9% $ 22,820 24.2%$ 14,961 65.6% Europe $ 17,055 14.0% $ 6,794 7.2%$ 10,261 151.0% 44 Table of Contents Revenue
Revenue was
The increase in both theAmericas andEurope segment revenue for the three months endedJune 30, 2021 was in line with the increase in transactions noted previously, which was primarily due to the easing of governmental restrictions due to COVID-19 and increased card adoption. Operating expenses
Cost of services and products
Cost of services and products was$18.1 million for the three months endedJune 30, 2021 , a decrease of$1.2 million , or 6.2%, compared to the three months endedJune 30, 2020 , primarily due to the decline in merchant loss reserves and a decline in third-party costs as we work to further leverage our proprietary processing technology.
Selling, general, and administrative expenses
Selling, general, and administrative expenses were$65.7 million for the three months endedJune 30, 2021 , an increase of$11.1 million , or 20.3%, compared to the three months endedJune 30, 2020 . The increase was primarily due to the normalization of employee compensation expenses that were reduced in the second quarter of 2020 in reaction to the onset of the pandemic and overall increase in third party expenses.
Depreciation and amortization
Depreciation and amortization was$20.7 million for the three months endedJune 30, 2021 , an increase of$0.2 million , or 0.8%, compared to the three months endedJune 30, 2020 . The increase was primarily driven by the increased amortization due to the acquired intangible assets for the three months endedJune 30, 2021 .
Impairment of intangible assets
There was no impairment of intangibles assets for the three months ended
Interest expense
Interest expense was$6.1 million for the three months endedJune 30, 2021 , a decrease of$1.2 million , or 16.4%, compared to$7.3 million for the three months endedJune 30, 2020 . 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 in 2020. 45 Table of Contents 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 three months endedJune 30, 2021 , the Company recorded a tax expense of$7.0 million , which included a net discrete tax benefit of$0.3 million . For the three months endedJune 30, 2020 , the Company recorded a tax benefit of$0.5 million , which included a tax benefit of$0.7 million from a release of theU.S. interest limitation valuation allowance. Segment performance
Americas segment profit for the three months endedJune 30, 2021 was$37.8 million , compared to$22.8 million for the three months endedJune 30, 2020 , an increase of 65.6%. The increase was primarily due to the increase in revenue and effective cost management initiatives implemented at the onset of the pandemic. A portion of the cost management initiatives implemented in the second quarter of 2020 included the reduction in base salaries and employee furloughs. By the end of 2020, base salaries were returned to pre-pandemic levels and no employees remained on furlough.Americas segment profit margin was 49.1% for the three months endedJune 30, 2021 , compared to 36.8% for the three months endedJune 30, 2020 .Europe segment profit was$17.1 million for the three months endedJune 30, 2021 , compared to$6.8 million for the three months endedJune 30, 2020 , an increase of 151.0%. The increase was primarily due to the increase in revenue and effective cost management initiatives implemented at the onset of the pandemic. A portion of the cost management initiatives implemented in the second quarter of 2020 included the reduction in base salaries and employee furloughs. By the end of 2020, base salaries were returned to pre-pandemic levels and no employees remained on furlough.Europe segment profit margin was 37.7% for the three months endedJune 30, 2021 , compared to 21.0% for the three months endedJune 30, 2020 . Corporate expenses not allocated to a segment were$10.2 million for the three months endedJune 30, 2021 , compared to$6.7 million for the three months endedJune 30, 2020 . The increase in corporate expenses was primarily due to the normalization of employee compensation expenses that reduced in the second quarter of 2020 in reaction to the onset of the pandemic. 46
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Comparison of results for the six months ended
The following table sets forth the unaudited condensed consolidated statements
of operations in dollars and as a percentage of revenue for the period
presented.
Six Months Ended Six Months Ended
(dollar amounts in thousands) June 30, 2021 % of revenue June 30, 2020 % of revenue $ change % change Segment revenue: Americas $ 147,406 64.5% $ 132,824 64.6%$ 14,582 11.0% Europe 81,009 35.5% 72,628 35.4% 8,381 11.5% Revenue $ 228,415 100.0% $ 205,452 100.0%$ 22,963 11.2% Operating expenses: Cost of services and products $ 35,155 15.4% $ 42,341 20.6%$ (7,186) (17.0)% Selling, general and administrative 126,068 55.2% 126,911 61.8% (843) (0.7)% Depreciation and amortization 41,621 18.2% 41,949 20.4% (328) (0.8)% Impairment of intangible assets - 0.0% 782 0.4% (782) (100.0)% Total operating expenses 202,844 88.8%
211,983 103.2% (9,139) (4.3)% Income (loss) from operations $
25,571 11.2% $ (6,531) (3.2)% $ 32,102 491.5%
Segment profit:
Americas $ 67,757 29.7% $ 42,780 20.8% $ 24,977 58.4%
Europe $ 26,181 11.5% $ 15,617 7.6% $ 10,564 67.6%
Revenue
Revenue was
The increase in both theAmericas andEurope segment revenue for the six months endedJune 30, 2021 was in line with the increase in transactions noted previously, which primarily due to the easing of governmental restrictions due to COVID-19 and increased card adoption. Operating expenses
Cost of services and products
Cost of services and products was$35.2 million for the six months endedJune 30, 2021 , a decrease of$7.2 million , or 17.0%, compared to the six months endedJune 30, 2020 , primarily due to the decline in merchant loss reserves and a decline in third-party costs as we work to further leverage our proprietary processing technology.
Selling, general, and administrative expenses
Selling, general, and administrative expenses were$126.1 million for the six months endedJune 30, 2021 , a decrease of$0.8 million , or 0.7%, compared to the six months endedJune 30, 2020 , primarily reflecting cost savings initiatives implemented at the onset of the pandemic. 47 Table of Contents
Depreciation and amortization
Depreciation and amortization was$41.6 million for the six months endedJune 30, 2021 , a decrease of$0.3 million , or 0.8%, compared to the six months endedJune 30, 2020 . This decrease was primarily driven by lower amortization due to the accelerated amortization method of merchant contract portfolios acquired in prior periods.
Impairment of intangible assets
There was no impairment of intangibles assets for the six months ended
Interest expense Interest expense was$12.2 million for the six months endedJune 30, 2021 , a decrease of$5.0 million , or 29.3%, compared to$17.2 million for the six months endedJune 30, 2020 . 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 in 2020.
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 six months endedJune 30, 2021 , the Company recorded a tax expense of$11.6 million , which included a net discrete tax expense of$3.3 million primarily related to a valuation allowance recorded to reduce the deferred tax assets not expected to be realized inSpain . For the six months endedJune 30, 2020 , the Company recorded a tax benefit of$2.1 million , which included a tax benefit of$2.6 million from a release of theU.S. interest limitation valuation allowance.
Segment performanceAmericas segment profit for the six months endedJune 30, 2021 was$67.8 million , compared to$42.8 million for the six months endedJune 30, 2020 , an increase of 58.4%. The increase was primarily due to the increase in revenue and effective cost management initiatives implemented at the onset of the pandemic. A portion of the cost management initiatives implemented in the second quarter of 2020 included the reduction in base salaries and employee furloughs. By the end of 2020, base salaries were returned to pre-pandemic levels and no employees remained on furlough.Americas segment profit margin was 46.0% for the six months endedJune 30, 2021 , compared to 32.2% for the six months endedJune 30, 2020 .Europe segment profit was$26.2 million for the six months endedJune 30, 2021 , compared to$15.6 million for the six months endedJune 30, 2020 , an increase of 67.6%. The increase was primarily due to the increase in revenue and effective cost management initiatives implemented at the onset of the pandemic. A portion of the cost management initiatives implemented in the second quarter of 2020 included the reduction in base salaries and employee furloughs. By the end of 2020, base salaries were returned to pre-pandemic levels and no employees remained on furlough.Europe segment profit margin was 32.3% for the six months endedJune 30, 2021 , compared to 21.5% for the six months endedJune 30, 2020 . Corporate expenses not allocated to a segment were$16.1 million for the six months endedJune 30, 2021 , compared to$17.2 million for the six months endedJune 30, 2020 , primarily reflecting cost savings initiatives implemented in
response to the pandemic.
48
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Liquidity and capital resources for the six months 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 both.
As ofJune 30, 2021 , our capacity under the revolving credit facility portion of our Senior Secured Credit Facilities was$200.0 million , with availability of$198.6 million for additional borrowings and utilization of$1.4 million in standby letters of credit. 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 ofJune 30, 2021 , cash and cash equivalents of$376.2 million includes cash inthe United States of$125.7 million and$250.5 million in foreign jurisdictions. Ofthe United States cash balances,$9.3 million is available for general purposes, and the remaining$116.4 million is considered merchant reserves and settlement-related cash and is therefore unavailable for our general use. Of the foreign cash balances,$142.2 million is available for general purposes, and the remaining$108.3 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 unaudited condensed 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 49
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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 unaudited condensed consolidated financial statements for
additional information on the TRA.
The following table sets forth summary cash flow information for the six months
ended
Six Months Ended June 30,
(in thousands) 2021 2020
Net cash provided by operating activities $ 11,586 $ 37,465
Net cash used in investing activities (38,581) (11,571)
Net cash (used in) provided by financing activities (10,844) 69,157 Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(4,285) (8,395)
Net (decrease) increase in cash, cash equivalents, and
restricted cash $ (42,124) $ 86,656
Operating activities
Net cash provided by operating activities was $11.6 million for the six months
ended June 30, 2021 , a decrease of $25.9 million compared to net cash provided
by operating activities of $37.5 million for the six months ended June 30, 2020 .
The decrease was primarily due to the timing of settlement-related assets and
liabilities. Excluding the impact of settlement-related assets and liabilities,
net cash provided by operating activities increased $57.2 million .
Investing activities
Net cash used in investing activities was$38.6 million for the six months endedJune 30, 2021 , a change of$27.0 million compared to net cash used in investing activities of$11.6 million for the six months endedJune 30, 2020 . The increase was primarily due to higher capital expenditures and the Pago Fácil acquisition. Capital expenditures were$20.0 million for the six months endedJune 30, 2021 , an increase of$11.3 million compared to$8.7 million for the six months endedJune 30, 2020 . The increase was primarily due to the higher POS terminal and software purchases related to ACI's Postilion payment processing platform.
Financing activities
Net cash used in financing activities was$10.8 million for the six months endedJune 30, 2021 , a decrease of$80.0 million , compared to net cash provided by financing activities of$69.2 million for the six months endedJune 30, 2020 . The decrease was primarily due to the proceeds from the issuance of Preferred Stock inApril 2020 partially offset by higher net repayments under our long-term debt arrangements.
Senior Secured Credit Facilities
We are party to a borrowing arrangement, referred to as our Senior Secured Credit Facilities, which includes a first lien senior secured credit facility, comprised of a$200.0 million revolving credit facility maturing inJune 2023 , and a$665.0 million term loan maturing inDecember 2023 . In addition, our Senior Secured Credit Facilities also provide us with the 50
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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.
Refer to Note 13, "Long-Term Debt and Lines of Credit," in the notes to the accompanying unaudited condensed 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 Other than changes which occur in the ordinary course of business, as ofJune 30, 2021 , there were no significant changes to the contractual obligations reported as ofDecember 31, 2020 in our Annual Report on Form 10-K for the
year endedDecember 31, 2020 .
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
Our critical accounting policies have not changed from those reported as of
New accounting pronouncements
For information regarding new accounting pronouncements, and the impact of these pronouncements on our unaudited condensed consolidated financial statements, if any, refer to Note 1, "Description of Business and Summary of Significant Accounting Policies," in the notes to the accompanying unaudited condensed 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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