EVO Payments, Inc. - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2019

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

For the transition period from ___________ to ___________

Commission file number: 001-38504

EVO Payments, Inc.

(Exact Name of Registrant as Specified in its Charter)


Delaware		82-1304484
State or Other Jurisdiction of Incorporation or Organization		I.R.S. Employer Identification No.

Ten Glenlake Parkway South Tower, Suite 950 Atlanta, Georgia		30328
Address of Principal Executive Offices		Zip Code

(516) 479-9000

Registrant’s Telephone Number, Including Area Code

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

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

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

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


Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☐
Emerging growth company ☒

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

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

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A common stock, par value $0.0001 per share	EVOP	NASDAQ

As of October 30, 2019, the number of shares outstanding of the registrant was 36,701,277 shares of the Class A common stock, par value $0.0001 per share, 34,663,538 shares of the Class B Common Stock, par value $0.0001 per share, 2,329,955 shares of the Class C Common Stock, par value $0.0001 per share, and 8,354,978 shares of the Class D Common Stock, par value $0.0001 per share.

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EVO PAYMENTS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS


		Page
PART I. FINANCIAL INFORMATION		4
Item 1.	Unaudited Condensed Consolidated Financial Statements	5
	Unaudited Condensed Consolidated Balance Sheets	5
	Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income	6
	Unaudited Condensed Consolidated Statements of Changes in Equity	7
	Unaudited Condensed Consolidated Statements of Cash Flows	12
	Notes to Unaudited Condensed Consolidated Financial Statements	13
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4.	Controls and Procedures	54
PART II. OTHER INFORMATION		55
Item 1.	Legal Proceedings	55
Item 1A.	Risk Factors	55
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3.	Defaults Upon Senior Securities	55
Item 4.	Mine Safety Disclosures	56
Item 5.	Other Information	56
Item 6.	Exhibits	56
	Signatures	56

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Forward-Looking Statements

This quarterly report on Form 10-Q contains statements about future events and expectations that constitute forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are based on our current beliefs, assumptions, estimates and expectations, taking into account the information currently available to us and are not guarantees of future results or performance. None of the forward-looking statements in this quarterly report on Form 10-Q are statements of historical fact. Forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from the expectations of future results we express or imply in any forward-looking statements, and you should not place undue reliance on such statements. Factors that could contribute to these differences include the following: (1) our ability to anticipate and respond to changing industry trends and the needs and preferences of our customers and consumers; (2) the impact of substantial and increasingly intense competition; (3) the impact of changes in the competitive landscape, including disintermediation from other participants in the payments chain; (4) the effects of global economic, political and other conditions; (5) our compliance with governmental regulations and other legal obligations, particularly related to privacy, data protection and information security, and consumer protection laws; (6) our ability to protect our systems and data from continually evolving cybersecurity risks or other technological risks; (7) failures in our processing systems, software defects, computer viruses and development delays; (8) degradation of the quality of the products and services we offer, including support services; (9) risks associated with our ability to successfully complete, integrate and realize the expected benefits of acquisitions; (10) continued consolidation in the banking and payment services industries, including the impact of the combination of Banco Popular and Grupo Santander and the related bank branch consolidations, (11) increased customer, referral partner, or sales partner attrition; (12) the incurrence of chargebacks; (13) failure to maintain or collect reimbursements; (14) fraud by merchants or others; (15) the failure of our third-party vendors to fulfill their obligations; (16) failure to maintain merchant and sales relationships and financial institution alliances; (17) ineffective risk management policies and procedures; (18) our inability to retain smaller-sized merchants and the impact of economic fluctuations on such merchants, (19) damage to our reputation, or the reputation of our partners; (20) seasonality and volatility; (21) our inability to recruit, retain and develop qualified personnel; (22) geopolitical and other risks associated with our operations outside of the United States; (23) any decline in the use of cards as a payment mechanism or other adverse developments with respect to the card industry in general; (24) increases in card network fees; (25) failure to comply with card networks requirements; (26) a requirement to purchase our eService subsidiary in Poland; (27) changes in foreign currency exchange rates; (28) future impairment charges; (29) risks relating to our indebtedness, including our ability to raise additional capital to fund our operations on economized terms or at all and exposure to interest rate risks; (30) changes to, or the potential phasing out of, LIBOR; (31) restrictions imposed by our credit facilities and outstanding indebtedness; (32) participation in accelerated funding programs; (33) failure to enforce and protect our intellectual property rights; (34) failure to comply with, or changes in, laws, regulations and enforcement activities, including those relating to corruption, anti-money laundering, data privacy and financial institutions; (35) impact of new or revised tax regulations; (36) legal proceedings; (37) our dependence on distributions from EVO, LLC (as defined in Part I – Financial Information—“Financial Statements Introductory Note”) to pay our taxes and expenses, including certain payments to the Continuing LLC Owners (as defined in Note 18, “Shareholders’ Equity,” in the notes to the accompanying unaudited condensed consolidated financial statements) and, in the event that any tax benefits are disallowed, our inability to be reimbursed for payments made to the Continuing LLC Owners; (38) our organizational structure, including benefits available to the Continuing LLC Owners that are not available to holders of our Class A common stock to the same extent; (39) the risk that we could be deemed an investment company under the Investment Company Act of 1940, as amended; (40) the significant influence the Continuing LLC Owners continue to have over us, including control over decisions that require the approval of stockholders; (41) certain provisions of Delaware law and antitakeover provisions in our organizational documents could delay or prevent a change of control; (42) the effect of the Jumpstart our Business Startups Act of 2012 (the “JOBS Act”) which allows us to reduce our SEC disclosure and postpone compliance with certain laws and regulations intended to protect investors; (43) the impact of no longer qualifying as an “emerging growth company” under the JOBS Act after December 31, 2019; (44) certain provision in our organizational documents, including those that provide Delaware as the exclusive forum for litigation matters and that renounce the doctrine of corporate opportunity; (45) our ability to establish and maintain effective internal control over financial reporting and disclosure controls and procedures; (46) changes in our stock price, including relating to downgrades, analyst reports, and future sales by us or by existing stockholders; and (47) the other risks and uncertainties listed under “Risk Factors” contained in Part II of this quarterly report on Form 10-Q or in Part I of our Annual Report on Form 10-K for the year ended December 31, 2018.

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

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PART I - FINANCIAL INFORMATION

Financial Statements Introductory Note

The unaudited condensed consolidated financial statements and other disclosures contained in this quarterly report on Form 10-Q include those of EVO Payments, Inc. (“we,” “us,” “our,” the “Company” or “EVO, Inc.”), which is the registrant, and those of EVO Investco, LLC, a Delaware limited liability company (“EVO, LLC”), which became the principal operating subsidiary of the Company in a series of reorganization transactions completed on May 25, 2018 (the “Reorganization Transactions”) in connection with the initial public offering of EVO, Inc.’s Class A common stock (the “IPO”). For more information regarding these transactions, see Note 18, “Shareholders’ Equity,” to the unaudited condensed consolidated financial statements contained in this quarterly report on Form 10-Q.

EVO, Inc. is the managing member of EVO, LLC and, as of September 30, 2019, was the owner of approximately 44.7% of the outstanding common membership interests of EVO, LLC (“LLC Interests”).

On September 25, 2018, EVO, Inc. completed a secondary offering (the “September 2018 Secondary Offering”) of an aggregate 8,075,558 shares of Class A common stock, which consisted of 7,000,000 shares of Class A common stock offered and sold by us, with the net proceeds used to purchase an equivalent number of LLC Interests and shares of Class D common stock (which shares were then canceled) from affiliates of Madison Dearborn Partners, LLC (“MDP”), and 22,225 shares of Class A common stock offered and sold by certain individual selling stockholders. The September 2018 Secondary Offering also included a full exercise of the underwriters’ option to purchase 1,053,333 additional shares of Class A common stock from the Company.

On April 8, 2019, EVO, Inc. completed a secondary offering (the “April 2019 Secondary Offering”) of an aggregate 5,750,000 shares of its Class A common stock, which consisted of 4,500,000 shares of Class A common stock offered and sold by us, with the net proceeds used to purchase an equivalent number of LLC Interests and shares of Class D common stock (which shares were then cancelled) from affiliates of MDP, and 500,000 shares of Class A common stock offered and sold by us, with the net proceeds used to purchase an equivalent number of LLC Interests and Class B common stock (which shares were then cancelled) from Blueapple, Inc. (“Blueapple”). The April 2019 Secondary Offering also included a full exercise of the underwriters’ option to purchase 750,000 additional shares of Class A common stock from the Company.

On August 15, 2019, EVO, Inc. completed a secondary offering (the “August 2019 Secondary Offering”) of an aggregate 4,000,000 shares of its Class A common stock, which consisted of 3,250,000 shares of Class A common stock offered and sold by us, with the net proceeds used to purchase an equivalent number of LLC Interests and shares of Class D common stock (which shares were then cancelled) from affiliates of MDP, and 750,000 shares of Class A common stock offered and sold by us, with the net proceeds used to purchase an equivalent number of LLC Interests and Class B common stock (which shares were then cancelled) from Blueapple.

The unaudited condensed consolidated financial statements contained in this quarterly report on Form 10-Q reflect the historical results of operations and the financial position of the Company, including consolidation of its investment in EVO, LLC, commencing May 23, 2018. Prior to May 23, 2018, the unaudited condensed consolidated financial statements represent the financial statements of EVO, LLC and its subsidiaries (the “Group”). The historical unaudited condensed consolidated financial statements do not reflect the financial position, results of operations or cash flows of the Company or the Group had these companies been stand-alone public companies for the periods presented. Specifically, the historical unaudited condensed consolidated financial statements of the Group prior to May 23, 2018 do not give effect to the following matters:

Reorganization Transactions or the IPO;

U.S. corporate federal income taxes;

Non-controlling interests held by other members of EVO, LLC;

The September 2018 Secondary Offering;

The April 2019 Secondary Offering; and

The August 2019 Secondary Offering

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except share and interest data)


	September 30,		December 31,
	2019		2018
Assets
Current assets:
Cash and cash equivalents	$	311,809	$	350,697
Accounts receivable, net		16,149		13,248
Other receivables		18,530		56,518
Due from related parties		34		1,871
Inventory		9,899		8,867
Settlement processing assets		310,206		248,330
Other current assets		14,807		11,817
Total current assets		681,434		691,348
Equipment and improvements, net		91,712		103,046
Goodwill		371,523		353,011
Intangible assets, net		261,825		290,139
Investment in unconsolidated investees		2,034		1,753
Due from related parties		—		915
Deferred tax asset		171,016		72,296
Other assets		20,105		21,879
Total assets	$	1,599,649	$	1,534,387

Liabilities and Shareholders' Deficit
Current liabilities:
Settlement lines of credit	$	17,610	$	41,819
Current portion of long-term debt		5,618		7,191
Accounts payable		10,551		48,935
Accrued expenses		102,837		112,281
Settlement processing obligations		467,776		428,328
Due to related parties		4,596		4,824
Total current liabilities		608,988		643,378
Long-term debt, net of current portion		702,053		676,865
Due to related parties		385		385
Deferred tax liability		17,364		13,519
Tax receivable agreement obligations, inclusive of related party liability of $111.5 million and $40.7 million at September 30, 2019 and December 31, 2018, respectively		120,912		47,221
ISO reserves		2,751		2,684
Other long-term liabilities		1,758		2,924
Total liabilities		1,454,211		1,386,976
Commitments and contingencies
Redeemable non-controlling interests		1,108,644		1,010,093
Shareholders' deficit:
Shareholders' deficit:
Class A common stock (par value, $0.0001 per share), Authorized - 200,000,000 shares, Issued and Outstanding - 36,711,625 and 26,025,189 shares at September 30, 2019 and December 31, 2018, respectively		4		3
Class B common stock (par value, $0.0001 per share), Authorized - 40,000,000 shares, Issued and Outstanding - 34,663,538 and 35,913,538 shares at September 30, 2019 and December 31, 2018, respectively		3		4
Class C common stock (par value, $0.0001 per share), Authorized - 4,000,000 shares, Issued and Outstanding - 2,333,955 and 2,461,055 shares at September 30, 2019 and December 31, 2018, respectively		—		—
Class D common stock (par value, $0.0001 per share), Authorized - 32,000,000 shares, Issued and Outstanding - 8,354,978 and 16,785,552 shares at September 30, 2019 and December 31, 2018, respectively		1		1
Additional paid-in capital		—		178,176
Accumulated deficit attributable to Class A common stock		(471,603)		(223,799)
Accumulated other comprehensive loss		(8,855)		(2,993)
Total EVO Payments, Inc. shareholders' deficit		(480,450)		(48,608)
Nonredeemable non-controlling interests		(482,756)		(814,074)
Total deficit		(963,206)		(862,682)
Total liabilities and deficit	$	1,599,649	$	1,534,387

See accompanying notes to unaudited condensed consolidated financial statements.

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EVO PAYMENTS, INC. AND SUBSIDIARIES

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

(In thousands, except share and per share data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Revenue	$	122,363	$	144,758	$	356,398	$	413,931
Operating expenses:
Cost of services and products, exclusive of depreciation and amortization shown separately below		24,065		46,949		72,900		141,826
Selling, general and administrative		63,864		67,802		196,592		242,982
Depreciation and amortization		22,804		20,488		68,412		61,308
Impairment of intangible assets		3,872		—		10,504		—
Total operating expenses		114,605		135,239		348,408		446,116
Income (loss) from operations		7,758		9,519		7,990		(32,185)
Other (expense) income:
Interest income		858		507		2,268		1,622
Interest expense		(11,085)		(10,583)		(34,006)		(47,453)
Income (loss) from investment in unconsolidated investees		167		(36)		436		725
Gain on acquisition of unconsolidated investee				8,659				8,659
Other income (expense), net		888		211		2,498		(2,963)
Total other expense		(9,172)		(1,242)		(28,804)		(39,410)
(Loss) income before income taxes		(1,414)		8,277		(20,814)		(71,595)
Income tax (expense) benefit		(3,590)		(32,155)		618		(7,974)
Net loss		(5,004)		(23,878)		(20,196)		(79,569)
Less: Net income attributable to non-controlling interests in consolidated entities		(2,220)		(2,433)		(4,798)		(4,434)
Net income (loss) attributable to non-controlling interests of EVO Investco, LLC		5,380		(1,078)		18,323		73,328
Net loss attributable to EVO Payments, Inc.	$	(1,844)	$	(27,389)	$	(6,671)	$	(10,675)

Earnings per share
Basic	$	(0.05)	$	(1.51)	$	(0.22)	$	(0.60)
Diluted	$	(0.05)	$	(1.51)	$	(0.22)	$	(0.60)

Weighted average Class A common stock outstanding
Basic		34,634,567		18,163,344		30,996,506		17,901,484
Diluted		34,634,567		18,163,344		30,996,506		17,901,484

Comprehensive income (loss):
Net loss	$	(5,004)	$	(23,878)	$	(20,196)	$	(79,569)
Unrealized loss on defined benefit plan, net of tax (1)		(21)		—		(7)		—
Unrealized gain (loss) on foreign currency translation adjustment, net of tax (2)		(16,922)		9,494		(13,523)		334
Other comprehensive income (loss)		(16,943)		9,494		(13,530)		334
Comprehensive loss		(21,947)		(14,384)		(33,726)		(79,235)
Less: Comprehensive (income) loss attributable to non-controlling interests in consolidated entities		691		(5,272)		(2,013)		(3,120)
Other comprehensive (income) loss attributable to non-controlling interests of EVO Investco, LLC		13,486		(1,078)		24,562		76,704
Comprehensive loss attributable to EVO Payments, Inc.	$	(7,770)	$	(20,734)	$	(11,177)	$	(5,651)

⁽¹⁾

Net of tax expense of less than $0.1 million for each of the three and nine months ended September 30, 2019.

⁽²⁾

Net of tax benefit of $5.1 million and $4.1 million for three and nine months ended September 30, 2019.

See accompanying notes to unaudited condensed consolidated financial statements.

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Changes in Equity

(In thousands)


	Class A LLC Units			Class B LLC Units			Class C LLC Units			Class D LLC Units			Class E LLC Units			Class A Common Stock			Class B Common Stock
	Interests	Amounts		Interests	Amounts		Interests	Amounts		Interests	Amounts		Interests	Amounts		Shares	Amounts		Shares	Amounts
Balance, January 1, 2018	6,374	$	54,453	3,506	$	—	375	$	9,463	1,107	$	—	1,012	$	71,250	—	$	—	—	$	—

Net income prior to Reorganization Transactions	—		—	—		—	—		—	—		—	—		—	—		—	—		—
Cumulative translation adjustment prior to Reorganization Transactions	—		—	—		—	—		—	—		—	—		—	—		—	—		—
Distributions prior to Reorganization Transactions	—		—	—		—	—		—	—		—	—		—	—		—	—		—
Acquisition of additional shares in a consolidated subsidiary	—		—	—		—	—		—	—		—	—		—	—		—	—		—
Legacy deficit / accumulated comprehensive loss allocation (Class C&D)	—		—	—		—	—		—	—		—	—		—	—		—	—		—
Legacy deficit / accumulated comprehensive loss allocation (Class B)	—		—	—		—	—		—	—		—	—		—	—		—	—		—
Equity issued in connection with acquisition prior to Reorganization Transactions	(6,374)		(54,453)	(3,506)		—	(375)		(9,463)	(1,107)		—	(1,012)		(71,250)	1,319		—	35,914		4
Share-based compensation prior to Reorganization Transactions, net of share settlement	—		—	—		—	—		—	—		—	—		—	494		—	—		—
Class B redeemable non-controlling interests fair value adjustment in connection to Reorganization Transactions	—		—	—		—	—		—	—		—	—		—	—		—	—		—

Effect of Reorganization Transactions	—		—	—		—	—		—	—		—	—		—	1,813		—	35,914		4

Sale of Class A common stock in initial public offering, net	—		—	—		—	—		—	—		—	—		—	15,434		2	—		—
Contingent consideration settled in Class A common stock	—		—	—		—	—		—	—		—	—		—	48		—	—		—
Deferred taxes in connection with the Reorganization Transactions	—		—	—		—	—		—	—		—	—		—	—		—	—		—
Tax receivable agreement obligations in connection with the Reorganization Transactions	—		—	—		—	—		—	—		—	—		—	—		—	—		—
Net income subsequent to the Reorganization Transactions	—		—	—		—	—		—	—		—	—		—	—		—	—		—
Cumulative translation adjustment subsequent to the Reorganization Transactions	—		—	—		—	—		—	—		—	—		—	—		—	—		—
Distributions subsequent to the Reorganization Transactions	—		—	—		—	—		—	—		—	—		—	—		—	—		—
Legacy redeemable non-controlling interests fair value adjustment	—		—	—		—	—		—	—		—	—		—	—		—	—		—
Sale of Employee Ownership	—		—	—		—	—		—	—		—	—		—	22		—	—		—
Sale of Class A common stock in September 2018 Secondary Offering, net of underwriter fees	—		—	—		—	—		—	—		—	—		—	8,054		1	—		—
Sale of MDP Class D Shares	—		—	—		—	—		—	—		—	—		—	—		—	—		—
Net deferred tax asset realized in September 2018 Secondary Offering	—		—	—		—	—		—	—		—	—		—	—		—	—		—
Tax receivable agreement in connection with the September 2018 Secondary Offering	—		—	—		—	—		—	—		—	—		—	—		—	—		—
Share-based compensation	—		—	—		—	—		—	—		—	—		—	—		—	—		—
Additional redeemable non-controlling interest subsequent to the Reorganization Transactions	—		—	—		—	—		—	—		—	—		—	—		—	—		—
Balance, September 30, 2018	—	$	—	—	$	—	—	$	—	—	$	—	—	$	—	25,371	$	3	35,914	$	4

See accompanying notes to unaudited condensed consolidated financial statements.

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									Accumulated		Accumulated				Total
									deficit		deficit		Accumulated		EVO
							Additional		attributable to		attributable to		other		Payments,		Nonredeemable				Redeemable
	Class C Common Stock			Class D Common Stock			paid-in		Class A		members of		comprehensive		Inc. (deficit)		non-controlling		Total		non-controlling
	Shares	Amounts		Shares	Amounts		capital		common stock		EVO Investco, LLC		loss		/equity		interests		deficit		interests		Total
Balance, January 1, 2018	—	$	—	—	$	—	$	—	$	—	$	(237,330)	$	(67,679)	$	(169,843)	$	3,312	$	(166,531)	$	148,266	$	(18,265)

Net income prior to Reorganization Transactions	—		—	—		—		—		—		(24,412)		—		(24,412)		—		(24,412)		1,291		(23,121)
Cumulative translation adjustment prior to Reorganization Transactions	—		—	—		—		—		—		—		(6,337)		(6,337)		—		(6,337)		(2,104)		(8,441)
Distributions prior to Reorganization Transactions	—		—	—		—		—		—		—		—		—		(1,334)		(1,334)		(3,770)		(5,104)
Acquisition of additional shares in a consolidated subsidiary	—		—	—		—		—		—		(20,924)		—		(20,924)		(1,141)		(22,065)		—		(22,065)
Legacy deficit / accumulated comprehensive loss allocation (Class C&D)	—		—	—		—		—		—		132,181		34,612		166,793		(166,793)		—		—		—
Legacy deficit / accumulated comprehensive loss allocation (Class B)	—		—	—		—		—		—		150,485		39,404		189,889		—		189,889		(189,889)		—
Equity issued in connection with acquisition prior to Reorganization Transactions	2,561		—	24,305		2		135,160		—		—		—		—		—		—		—		—
Share-based compensation prior to Reorganization Transactions, net of share settlement	—		—	—		—		51,339		—		—		—		51,339		—		51,339		—		51,339
Class B redeemable non-controlling interests fair value adjustment in connection to Reorganization Transactions	—		—	—		—		—		—		—		—		—		(735,775)		(735,775)		735,775		—

Effect of Reorganization Transactions	2,561		—	24,305		2		186,499		—		—		—		186,505		(901,731)		(715,226)		689,569		(25,657)

Sale of Class A common stock in initial public offering, net of underwriter fees	—		—	—		—		219,167		—		—		—		219,169		—		219,169		—		219,169
Contingent consideration settled in Class A common stock	—		—	—		—		771		—		—		—		771		—		771		—		771
Deferred taxes in connection with the Reorganization Transactions	—		—	—		—		4,590		—		—		—		4,590		—		4,590		—		4,590
Tax receivable agreement obligations in connection with the Reorganization Transactions	—		—	—		—		389		—		—		—		389		—		389		—		389
Net income subsequent to the Reorganization Transactions	—		—	—		—		—		(10,675)		—		—		(10,675)		(20,714)		(31,389)		(25,059)		(56,448)
Cumulative translation adjustment subsequent to the Reorganization Transactions	—		—	—		—		—		—		—		293		293		852		1,145		(811)		334
Distributions subsequent to the Reorganization Transactions	—		—	—		—		—		—		—		—		—		(29)		(29)		—		(29)
Legacy redeemable non-controlling interests fair value adjustment	—		—	—		—		—		(3,824)		—		—		(3,824)		(5,918)		(9,742)		(1,004)		(10,746)
Sale of Employee Ownership	—		—	(22)		—		(857)	—	—	—	—		—		(857)		857		—		—		—
Sale of Class A common stock in September 2018 Secondary Offering, net of underwriter fees	—		—	—		—		190,161		—		—		—		190,161		—		190,161		—		190,161
Purchase of MDP Class D Shares	—		—	(7,000)		(1)		(435,850)		—		—		—		(435,850)		269,924		(165,926)		—		(165,926)
Net deferred tax asset realized in September 2018 Secondary Offering	—		—	—		—		2,045		—		—		26		2,071		—		2,071		—		2,071
Tax receivable agreement in connection with the September 2018 Secondary Offering	—		—	—		—		7,170		—		—		—		7,170		—		7,170		—		7,170
Share-based compensation	—		—	—		—		1,758		—		—		—		1,758		—		1,758		—		1,758
Additional redeemable non-controlling interest subsequent to the Reorganization Transactions	—		—	—		—		—		(116,559)		—		—		(116,559)		(180,280)		(296,839)		306,581		9,742
Balance, September 30, 2018	2,561	$	—	17,283	$	1	$	175,843	$	(131,058)	$	—	$	319	$	45,112	$	(837,039)	$	(791,927)	$	969,276	$	177,349

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents


																			Accumulated				Total
																			deficit		Accumulated		EVO
																	Additional		attributable to		other		Payments,		Nonredeemable				Redeemable
	Class A Common Stock			Class B Common Stock			Class C Common Stock					Class D Common Stock					paid-in		Class A		comprehensive		Inc. (deficit)		non-controlling		Total		non-controlling
	Shares	Amounts		Shares	Amounts		Shares		Amounts			Shares		Amounts			capital		common stock		loss		/equity		interests		deficit		interests		Total
Balance, July 1, 2018	17,295		2	35,914	$	4	2,561	35,914	$	—	4	24,305	2,561	$	2	—		412,845	$	(55,076)	$	(1,631)	$	356,146	$	(1,035,973)	$	(679,827)	$	838,789	$	158,962

Net income (loss)	—		—	—		—	—			—		—			—			—		(27,388)		—		(27,388)		582		(26,806)		2,928		(23,878)
Cumulative translation adjustment	—		—	—		—	—			—		—			—			—		—		1,924		1,924		2,841		4,765		4,728		9,493
Distributions	—		—	—		—	—			—		—			—			—		—		—		—		(29)		(29)		(1,004)		(1,033)
Sale of Employee Ownership	22		—	—		—	—			—		(22)			—			(857)	—	—		—		(857)		857		—		—		—
September 2018 Secondary Offering	8,054		1	—		—	—			—		—			—			190,161		—		—		190,162		—		190,162		—		190,162
Purchase of MDP Class D Shares	—		—	—		—	—			—		(7,000)			(1)			(435,850)		—		—		(435,851)		269,924		(165,927)		—		(165,927)
Net deferred tax asset realized in September 2018 Secondary Offering	—		—	—		—	—			—		—			—			2,045		—		26		2,071		—		2,071		—		2,071
Tax receivable agreement in connection with the September 2018 Secondary Offering	—		—	—		—	—			—		—			—			7,170		—		—		7,170		—		7,170		—		7,170
Share-based compensation	—		—	—		—	—			—		—			—			1,758		—		—		1,758		—		1,758		—		1,758
eService redeemable non-controlling interest fair value adjustment	—		—	—		—	—			—		—			—			—		(5,928)		—		(5,928)		(9,170)		(15,098)		15,098		—
Blueapple redeemable non-controlling interest	—		—	—		—	—			—		—			—			—		(42,666)		—		(42,666)		(66,071)		(108,737)		108,737		—
Other	—		—	—		—	—			—		—			—			(1,429)		—		—		(1,429)		—		(1,429)		—		(1,429)
Balance, September 30, 2018	25,371		3	35,914	$	4	2,561		$	—		17,283		$	1		$	175,843	$	(131,058)	$	319	$	45,112	$	(837,039)	$	(791,927)		969,276		177,349

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents


															Accumulated				Total
															deficit		Accumulated		EVO
													Additional		attributable to		other		Payments,		Nonredeemable				Redeemable
	Class A Common Stock			Class B Common Stock			Class C Common Stock			Class D Common Stock			paid-in		Class A		comprehensive		Inc. (deficit)		non-controlling		Total		non-controlling
	Shares	Amounts		Shares	Amounts		Shares	Amounts		Shares	Amounts		capital		common stock		loss		/equity		interests		deficit		interests		Total
Balance, January 1, 2019	26,025	$	3	35,914	$	4	2,461	$	—	16,786	$	1	$	178,176	$	(223,799)	$	(2,993)	$	(48,608)	$	(814,074)	$	(862,682)	$	1,010,093	$	147,411

Prior period adjustment*	—		—	—		—	—		—	—		—		(20,629)		—		—		(20,629)		20,629		—		—		—
Net loss	—		—	—		—	—		—	—		—		—		(6,671)		—		(6,671)		(6,048)		(12,719)		(7,477)		(20,196)
Cumulative translation adjustment	—		—	—		—	—		—	—		—		—		—		(5,862)		(5,862)		(2,125)		(7,987)		(9,616)		(17,603)
Distributions	—		—	—		—	—		—	—		—		—		—		—		—		(284)		(284)		(6,209)		(6,493)
April 2019 Secondary Offering and August 2019 Secondary Offering	9,750		1	(1,250)		(1)	—		—	(7,750)		—		(303,400)		—		—		(303,400)		357,152		53,752		(34,768)		18,984
Fair value adjustment in connection with purchase of Blueapple Class B shares	—		—	—		—	—		—	—		—		—		1,721		—		1,721		739		2,460		(2,460)		—
Share-based compensation expense	—		—	—		—	—		—	—		—		7,841		—		—		7,841		—		7,841		—		7,841
Vesting of equity awards	80		—	—		—	—		—	—		—		(1,716)		—		—		(1,716)		—		(1,716)		—		(1,716)
Exercise of stock options	49		—	—		—	—		—	—		—		810		—		—		810		—		810		—		810
Exchange of Class C and Class D common stock for Class A common stock	808		—	—		—	(127)		—	(681)		—		(37,385)		—		—		(37,385)		37,385		—		—		—
Deferred taxes in connection with share exchanges	—		—	—		—	—		—	—		—		3,395		—		—		3,395		—		3,395		—		3,395
Tax receivable agreement in connection with share exchanges	—		—	—		—	—		—	—		—		13,005		—		—		13,005		—		13,005		—		13,005
eService redeemable non-controlling interest fair value adjustment	—		—	—		—	—		—	—		—		—		(5,817)		—		(5,817)		(2,563)		(8,380)		8,380		—
Blueapple redeemable non-controlling interest fair value adjustment	—		—	—		—	—		—	—		—		—		(77,134)		—		(77,134)		(73,567)		(150,701)		150,701		—
Reclassification of additional paid-in capital to accumulated deficit	—		—	—		—	—		—	—		—		159,903		(159,903)		—		—		—		—		—		—
Balance, September 30, 2019	36,712	$	4	34,664	$	3	2,334	$	—	8,355	$	1	$	—	$	(471,603)	$	(8,855)	$	(480,450)	$	(482,756)	$	(963,206)	$	1,108,644	$	145,438

See accompanying notes to unaudited condensed consolidated financial statements

Accumulated

Total

Table of Contents

															deficit		Accumulated		EVO
													Additional		attributable to		other		Payments,		Nonredeemable				Redeemable
	Class A Common Stock			Class B Common Stock			Class C Common Stock			Class D Common Stock			paid-in		Class A		comprehensive		Inc. (deficit)		non-controlling		Total		non-controlling
	Shares	Amounts		Shares	Amounts		Shares	Amounts		Shares	Amounts		capital		common stock		loss		/equity		interests		deficit		interests		Total
Balance, July 1, 2019	32,490	$	3	35,414	$	4	2,370	$	—	11,765	$	1	$	—	$	(419,722)	$	(1,153)	$	(420,867)	$	(665,891)	$	(1,086,758)	$	1,248,448	$	161,690

Net loss	—		—	—		—	—		—	—		—		—		(1,844)		—		(1,844)		(2,036)		(3,880)		(1,124)		(5,004)
Cumulative translation adjustment	—		—	—		—	—		—	—		—		—		—		(7,702)		(7,702)		(2,752)		(10,454)		(11,589)		(22,043)
Distributions	—		—	—		—	—		—	—		—		—		—		—		—		(53)		(53)		—		(53)
August 2019 Secondary Offering	4,000		1	(750)		(1)	—		—	(3,250)		—		(132,100)		—		—		(132,100)		153,288		21,188		(21,188)		—
Fair value adjustment in connection with purchase of Blueapple Class B shares	—		—	—		—	—		—	—		—		—		1,721		—		1,721		739		2,460		(2,460)		—
Share-based compensation expense	—		—	—		—	—		—	—		—		3,019		—		—		3,019		—		3,019		—		3,019
Vesting of equity awards	5		—	—		—	—		—	—		—		(78)		—		—		(78)		—		(78)		—		(78)
Exercise of stock options	21		—	—		—	—		—	—		—		519		—		—		519		—		519		—		519
Exchange of Class C and Class D common stock for Class A common stock	196		—	—		—	(36)		—	(160)		—		(10,615)		—		—		(10,615)		10,615		—		—		—
Deferred taxes in connection with share exchanges	—		—	—		—	—		—	—		—		1,323		—		—		1,323		—		1,323		—		1,323
Tax receivable agreement in connection with share exchanges	—		—	—		—	—		—	—		—		6,065		—		—		6,065		—		6,065		—		6,065
eService redeemable non-controlling interest fair value adjustment	—		—	—		—	—		—	—		—		—		(1,524)		—		(1,524)		(444)		(1,968)		1,968		—
Blueapple redeemable non-controlling interest fair value adjustment	—		—	—		—	—		—	—		—		—		81,633		—		81,633		23,778		105,411		(105,411)		—
Reclassification of additional paid-in capital to accumulated deficit	—		—	—		—	—		—	—		—		131,867		(131,867)		—		—		—		—		—		—
Balance, September 30, 2019	36,712	$	4	34,664	$	3	2,334	$	—	8,355	$	1	$	—	$	(471,603)	$	(8,855)	$	(480,450)	$	(482,756)	$	(963,206)	$	1,108,644	$	145,438

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

EVO PAYMENTS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)


	Nine Months Ended September 30,
	2019		2018
Cash flows from operating activities:
Net loss	$	(20,196)	$	(79,569)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		68,412		61,308
Amortization of deferred financing costs		2,006		7,856
Change in fair value of contingent consideration		2,362		—
Loss on extinguishment of debt		—		2,055
Gain on sale of investment		(250)		—
Share-based compensation expense		7,841		53,893
Impairment of intangible assets		10,504		—
Deferred taxes, net		(7,880)		504
Other		233		(8,053)
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable, net		(2,546)		5,822
Other receivables		32,739		3,993
Inventory		(1,487)		3,555
Other current assets		(2,816)		(5,165)
Other assets		(666)		53
Related parties, net		2,288		(3,001)
Accounts payable		(38,973)		(16,744)
Accrued expenses		(7,234)		28,900
Settlement processing funds, net		(15,579)		10,899
Other		67		42
Net cash provided by operating activities		28,825		66,348
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired		(38,832)		(48,547)
Purchase of equipment and improvements		(24,639)		(38,963)
Acquisition of intangible assets		(4,759)		(19,893)
Net proceeds from sale of investments		250		—
Issuance of notes receivable		—		(20)
Collections of notes receivable		1,812		91
Collection of deferred cash consideration		4,882		—
Net cash used in investing activities		(61,286)		(107,332)
Cash flows from financing activities:
Proceeds from long-term debt		316,479		655,732
Repayments of long-term debt		(318,919)		(743,342)
Deferred financing costs paid		(2)		(3,899)
Contingent consideration paid		(5,919)		(1,621)
Deferred cash consideration paid		—		(65,000)
Acquisition of additional non-controlling interest		—		(16,916)
IPO proceeds, net of underwriter fees		—		231,500
Proceeds from the secondary offerings		258,522		24,967
Purchase of LLC Interests, Class B common stock, and Class D common stock in connection with the secondary offerings		(239,538)		—
Repurchases of shares to satisfy minimum tax withholding		(1,716)		—
Proceeds from exercise of common stock options		810		—
Distribution to non-controlling interests holders		(6,493)		(6,136)
Net cash provided by financing activities		3,224		75,285
Effect of exchange rate changes on cash and cash equivalents		(9,651)		(3,959)
Net (decrease) increase in cash and cash equivalents		(38,888)		30,342
Cash and cash equivalents, beginning of period		350,697		205,142
Cash and cash equivalents, end of period	$	311,809	$	235,484

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(1)Description of Business and Summary of Significant Accounting Policies

(a)Description of Business

EVO Payments, Inc. (“EVO, Inc.” or the “Company”) is a Delaware corporation whose primary asset is its ownership of approximately 44.7% of the membership interests of EVO Investco, LLC (“EVO, LLC”) as of September 30, 2019. EVO, Inc. was incorporated on April 20, 2017 for the purpose of completing a series of reorganization transactions (the “Reorganization Transactions”), in order to consummate the initial public offering of EVO, Inc.’s Class A common stock (“IPO”), and to carry on the business of EVO, LLC. EVO, Inc. is the sole managing member of EVO, LLC and operates and controls all of the businesses and affairs conducted by EVO, LLC and its subsidiaries.

The Company is a leading payment technology and services provider, offering an array of innovative, reliable and secure payment solutions to merchants across North America and Europe and servicing over 550,000 merchants across 50 markets. The Company supports all major card types in the markets it serves.

The Company provides card-based payment processing services to small and middle market merchants, multinational corporations, government agencies, and other business and nonprofit enterprises located throughout North America and Europe. These services enable merchants to accept credit and debit cards and other electronic payment methods as payment for their products and services by providing terminal devices, card authorization, data capture, funds settlement, risk management, fraud detection and chargeback services. The Company operates two reportable segments: North America and Europe.

(b)Basis of Presentation and Use of Estimates

The accompanying unaudited condensed consolidated balance sheet as of September 30, 2019 and audited consolidated balance sheet as of December 31, 2018, the unaudited condensed consolidated statements of operations and comprehensive (loss) income for the three and nine months ended September 30, 2019 and 2018, the unaudited condensed consolidated statements of changes in equity for the three and nine months ended September 30, 2019 and 2018, and the unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018, reflect all adjustments that are of a normal, recurring nature and that are considered necessary for a fair presentation of the results for the periods shown in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial reporting periods. Accordingly, certain information and footnote disclosures have been condensed or omitted in accordance with SEC rules that would ordinarily be required under U.S. GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported assets and liabilities, as of the date of the unaudited condensed consolidated financial statements, and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Estimates used for accounting purposes include, but are not limited to, valuation of redeemable non-controlling interests (“RNCI”), calculation of income taxes, and determination of the fair value of long-lived assets.

Table of Contents

EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

Presentation of Consolidated Balance Sheet and Consolidated Statement of Changes in Equity at December 31, 2018:

The previously presented nonredeemable non-controlling interests, which relate to the portion of equity in a consolidated subsidiary not attributable, directly or indirectly, to the Company as of December 31, 2018, were retrospectively adjusted to reflect the exchange of certain Class C and D shares to Class A shares. The Company has deemed the correction to be immaterial as there is no impact to the Company’s results of operations, cash flows from operating, investing, or financing activities, or consolidated shareholders’ deficit. This immaterial adjustment decreased the previously reported amounts of $178.2 million and ($814.1) million of additional paid-in capital and nonredeemable non-controlling interests, as reported in the consolidated balance sheet and consolidated statement of changes in equity as of December 31, 2018, to $157.5 million and ($793.4) million, respectively.

(c)Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company. As the sole managing member of EVO, LLC, the Company exerts control over the Group. In accordance with Accounting Standards Codification (“ASC”) 810, Consolidation, EVO, Inc. consolidates the Group’s consolidated financial statements and records the interests in EVO, LLC that it does not own as non-controlling interests. All intercompany accounts and transactions have been eliminated in consolidation. The Company accounts for investments over which it has significant influence but not a controlling financial interest using the equity method of accounting.

(d)Cash and Cash Equivalents and Merchant Reserves

Cash and cash equivalents include all cash balances and highly liquid securities with original maturities of three months or less when acquired. Cash equivalents consist primarily of overnight money market funds. Cash balances often exceed federally insured limits; however, concentration of credit risk is limited due to the payment of funds on the day following receipt in satisfaction of the settlement process. Included in cash and cash equivalents are merchant reserve cash balances, which represent funds collected from the Company’s merchants that serve as collateral to minimize the liabilities associated with any losses that may occur under the respective merchant agreements (“Merchant Reserves”). While this cash is not restricted in its use, the Company believes that maintaining the Merchant Reserves to collateralize merchant losses strengthens its fiduciary standings with its card network sponsors (“Member Banks”) and is in accordance with the guidelines set by the card networks. As of September 30, 2019 and December 31, 2018, Merchant Reserves were $92.2 million and $107.8 million, respectively.

(e)Recent Accounting Pronouncements

New accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that are adopted by the Company are adopted as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s unaudited condensed consolidated financial statements upon adoption. As the Company is considered an emerging growth company under the Jumpstart our Business Startups Act of 2012 (the “JOBS Act”), adoption of new accounting standards will be consistent with private company effective dates. The Company expects to become a large accelerated filer effective December 31, 2019, at which point the Company will follow the public company timeline for adoption of new accounting pronouncements.

Table of Contents

EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

Recently Adopted Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue From Contracts With Customers (“ASC 606”), with amendments in 2015, 2016 and 2017. This ASU supersedes the revenue recognition requirements in ASC 605, Revenue Recognition (“ASC 605”). The new standard provides a five-step analysis of transactions to determine when and how revenue is recognized, based upon the core principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also requires additional disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

The Company adopted ASC 606 on January 1, 2019, using the modified retrospective method and applying the standard to all contracts not completed on the date of adoption. Results for the reporting period beginning January 1, 2019 are presented under ASC 606, while prior period amounts continue to be reported in accordance with the Company's historic accounting practices under previous guidance.

The primary impact to the Company’s unaudited condensed consolidated financial statements as a result of the adoption of ASC 606 is a change in total net revenue attributable to the presentation of network processing fees on a net basis, driven by changes in principal and agent considerations, as compared to previously being presented on a gross basis. Under the modified retrospective method, the Company has not restated its comparative unaudited condensed consolidated financial statements for these effects.

The following table presents the impact of adopting ASC 606 on the Company’s unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2019:


	Three Months Ended September 30, 2019						Nine Months Ended September 30, 2019
	As reported		Adjustment		Presented without adoption of ASC 606		As reported		Adjustment		Presented without adoption of ASC 606
	(In thousands)						(In thousands)
Revenue	$	122,363	$	30,234	$	152,597	$	356,398	$	81,608	$	438,006
Operating expenses
Cost of services and products, exclusive of depreciation and amortization	$	24,065	$	30,234	$	54,299	$	72,900	$	81,608	$	154,508

The adoption of ASC 606 did not have a material impact on the Company’s unaudited condensed consolidated balance sheets and statements of cash flows as of and for the three and nine months ended September 30, 2019. The Company has expanded its unaudited condensed consolidated financial statement disclosures as required by this new standard. See Note 2, “Revenue” for additional disclosures provided as a result of the adoption of ASC 606.

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

Recently Issued Accounting Pronouncements Not Yet Adopted

Leases

In February 2016, the FASB issued ASU 2016-02, Leases, with amendments in 2018 and 2019. This update aims to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new standard is effective for public companies for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years; however, the Company has elected to take advantage of the extended transition period as provided for under the JOBS Act. The new standard is therefore effective for the Company for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, provided that the Company maintains its emerging growth company status through December 31, 2019. The Company expects to become a large accelerated filer effective December 31, 2019, at which point the Company will follow the timeline for adoption of new accounting pronouncements for public companies, and will be required to retroactively adopt this standard effective January 1, 2019.

The Company is currently in the process of evaluating its leasing arrangements and assessing the impact of adopting the new guidance on its consolidated financial statements, disclosures, accounting policies, and controls over financial reporting. The Company is also in process of implementing a new lease accounting software solution to comply with the requirements of the standard.

The Company’s existing leases consist primarily of real estate and personal property leases throughout the markets in which the Company operates. As disclosed in Note 16, “Commitments and Contingencies” to the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, minimum annual lease payments for the years subsequent to December 31, 2018 amounted to $42.4 million on an undiscounted basis. The Company expects that substantially all of these lease commitments will be subject to the new standard and will be recognized, on a discounted basis, as operating lease liabilities and right-of-use assets upon adoption.

The Company plans to elect the package of practical expedients intended to ease transition whereby the Company will not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases and (3) initial direct costs for any existing leases. The Company also intends to elect the practical expedient allowing to not separate lease and non-lease components. Furthermore, the Company will apply the provisions of ASU 2018-11, Leases (Topic 842)- Targeted Improvements, with the initial application of the new guidance at the adoption date with a cumulative effect adjustment in the opening balance of retained earnings. Under this method, the Company would not adjust its comparative period financial statements for the effects of the new standard or make the new required lease disclosures for periods prior to the effective date.

The Company expects the evaluation and implementation activities to continue throughout the remainder of 2019.

Credit Losses

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, with amendments in 2019. This update requires the companies to immediately recognize the estimate for credit losses expected to occur over the remaining life of the financial assets that are in the scope of the standard. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. The Company will adopt this ASU, prospectively, effective January 1, 2020. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

Fair Value Measurement

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This update provides clarification and modifies the disclosure requirements on fair value measurement in Topic 820, Fair Value Measurement. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019 with early adoption permitted. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

Internal Use Software

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The update aligns the requirements for capitalizing certain implementation costs incurred in a cloud computing hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. Entities are permitted to apply either a retrospective or prospective transition approach to adopt the guidance. The Company is currently evaluating the effect of ASU 2018-15 on its consolidated financial statements.

(2)Revenue

The Company primarily earns revenue from payment processing services, and has contractual agreements with its customers that set forth the general terms and conditions of the service relationship, including line item pricing, payment terms and contract duration. Payment processing service revenue is based on a percentage of transaction value and on specified amounts per transaction or service, and is measured as the amount of consideration to which the Company expects to be entitled in exchange for providing services. The Company’s core performance obligation is to stand ready to provide continuous access to the Company’s processing services in order to be able to process as many transactions as its customers require on a daily basis over the contract term as the timing and quantity of transactions to be processed is not determinable. Under a stand-ready obligation, the Company’s performance obligation is defined by each time increment rather than by the underlying activities satisfied over time based on days elapsed. Because the service of standing ready is substantially the same each day and has the same pattern of transfer to the customer, the Company has determined that its stand-ready performance obligation comprises a series of distinct days of service.

The Company also earns revenue from the sale and rental of electronic point-of-sale (“POS”) equipment. The sale of equipment to a customer represents the transfer of a promised good that has a benefit to the customer in conjunction with the payment processing services provided by the Company and, therefore, is accounted for as a separate performance obligation.

The Company’s contractual agreements outline the pricing related to payment processing services and pricing related to the sale or rental of POS equipment. The Company allocates the variable fees charged for payment processing services to the day in which it has the contractual right to bill under the contract. Revenue from the sale of POS equipment is recognized at a point in time when the POS equipment is shipped and title passes to the customer. Revenue from the rental of electronic POS equipment is recognized monthly as earned. The revenue recognized from the sale and rental of POS equipment totaled $12.2 million and $10.8 million for the three months ended September 30, 2019 and 2018, respectively. The revenue recognized from the sale and rental of POS equipment totaled $32.4 million and $32.1 million for the nine months ended September 30, 2019 and 2018, respectively.

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

Commissions payable to referral and reseller partners are recognized as incurred. The Company does not capitalize costs to obtain contracts with customers or costs incurred to fulfill contracts with customers as such amounts are considered immaterial.

The Company follows the requirements of ASC 606-10, Principal Agent Considerations, which states that the determination of whether a company should recognize revenue based on the gross amount billed to a customer or the net amount retained is a matter of judgment that depends on the facts and circumstances of the arrangement and that certain factors should be considered in determining payment processing service revenue reporting.

The determination of gross versus net recognition for interchange, card network fees, commissions and other fees requires judgment that depends on whether the Company controls the good or service before it is transferred to the merchant or whether the Company is acting as an agent of a third party.

The Company frequently enters into agreements with third parties under which the third party engages the Company to provide payment processing services to all of their customers. Under these agreements the third party acts as supplier of products or services by achieving most of the shared risks and rewards of customer contracts; the Company passes the third party’s share of merchant receipts to them as commissions. The Company incurs interchange and card network pass-through charges from the card issuers and payment networks respectively, and does not have the ability to direct the use of or receive the benefits from the services provided by the card issuers or the payment networks. The Company has no discretion over which card issuing bank will be used to process a transaction and is unable to direct the activity of the merchant to another card issuing bank. Interchange and card network rates are pre-established by the card networks, and the Company has no latitude in determining these fees.

Based on these factors, the Company has determined that it is acting as an agent with respect to these services. Revenue generated from payment processing is presented net of interchange and card network fees paid to the card issuing banks and card networks respectively.

The table below presents a disaggregation of the Company’s revenue from contracts with customers by division. The Company’s divisions are defined as follows:

Direct – Includes long-term, exclusive referral relationships with leading financial institutions. In the aggregate, these banks represent more than 12,000 branch locations which actively pursue new merchant relationships on the Company’s behalf. These financial institutions provide the Company with access to their brands, significantly enhancing the Company’s credibility and recognition. The Company also utilizes a direct sales force to build and maintain direct relationships with its merchants and other referral partners in order to control sales, price negotiation, underwriting, boarding, and support processes.

Tech-enabled – Includes partnerships with independent software vendors, integrated software dealers, enterprise resource planning (“ERP”) software dealers and eCommerce gateway providers. These partnerships function by way of a technical integration between the Company and the third party in which the third party seamlessly passes information to the Company’s systems in order to streamline the merchant boarding process. The Company also drives growth through its own ERP integrations, which support its B2B offering, and its proprietary eCommerce gateway.

Traditional – Represents the Company’s heritage U.S. portfolio composed primarily of independent sales organization (“ISO”) relationships. The Company is not focused on this sales model, and it will represent an increasingly smaller portion of the business over time.

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements


	Three Months Ended September 30, 2019						Nine Months Ended September 30, 2019
	North America		Europe		Total		North America		Europe		Total
	(In thousands)						(In thousands)
Divisions:
Direct	$	38,025	$	36,383	$	74,408	$	113,246	$	105,248	$	218,494
Tech-enabled		28,914		10,958		39,872		84,912		28,507		113,419
Traditional		8,083		—		8,083		24,485		—		24,485
	$	75,022	$	47,341	$	122,363	$	222,643	$	133,755	$	356,398


	Three Months Ended September 30, 2018						Nine Months Ended September 30, 2018
	North America		Europe		Total		North America		Europe		Total
	(In thousands)						(In thousands)
Divisions:
Direct	$	40,946	$	51,385	$	92,331	$	117,738	$	141,733	$	259,471
Tech-enabled		28,855		13,886		42,741		84,757		39,511		124,268
Traditional		9,686		—		9,686		30,192		—		30,192
	$	79,487	$	65,271	$	144,758	$	232,687	$	181,244	$	413,931

(3)Settlement Processing Assets and Liabilities

In certain markets, the Company is a member of various card networks, allowing it to process and fund transactions without third-party sponsorship. In other markets, the Company has Member Banks for whom the Company facilitates payment transactions. These arrangements allow the Company to route transactions under the Member Banks’ control and identification numbers to clear card transactions through card networks.

Funds settlement refers to the process of transferring funds for sales and credits between card issuers and merchants. The standards of the card networks restrict non-members from performing funds settlement or accessing merchant settlement funds and, instead, require that these funds be in the possession of the Member Banks until the merchant is funded. However, in certain markets and in accordance with the terms of the Company’s Bank Sponsorship Agreements with its Member Banks, funds settlement generally follows a net settlement process.

Timing differences, interchange expense, Merchant Reserves and exception items cause differences between the amount the Member Banks receive from the card networks and the amount funded to the merchants. Settlement processing assets and obligations represent intermediary balances arising in the settlement process.

A summary of these amounts is as follows:


	September 30,		December 31,
	2019		2018
	(In thousands)
Settlement processing assets:
Receivable from card networks	$	219,654	$	195,817
Receivable from merchants		90,552		52,513
Totals	$	310,206	$	248,330

Settlement processing obligations:
Settlement liabilities	$	(375,552)	$	(320,492)
Merchant reserves		(92,224)		(107,836)
Totals	$	(467,776)	$	(428,328)

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(4)Earnings Per Share

On May 22, 2018, EVO, LLC’s limited liability company agreement (the “EVO LLC Agreement”) was amended and restated effective as of May 25, 2018, to, among other things, reclassify all of the then existing membership interests of EVO, LLC into a new single class of common membership interests. Additionally, the Company entered into a series of transactions that resulted in the issuance of Class A common stock, Class B common stock, Class C common stock and Class D common stock to the holders of LLC Interests and commenced the IPO, resulting in the public issuance of additional shares of the Company’s Class A common stock. Earnings per share information prior to May 23, 2018 is not presented since the ownership structure of EVO, LLC is not a common unit of ownership of the Company.

The following table sets forth the computation of the Company's basic and diluted net loss per Class A common share (in thousands, except share and per share data):


	Three Months Ended September 30,		Nine Months Ended September 30,		Three Months Ended September 30,		May 23 - September 30
	2019				2018

Numerator:
Net loss attributable to EVO Payments, Inc.	$	(1,844)	$	(6,671)	$	(27,389)	$	(10,675)

Denominator:
Weighted average Class A common stock outstanding		34,634,567		30,996,506		18,163,344		17,901,484
Effect of dilutive securities		—		—		—		—
Total dilutive securities		34,634,567		30,996,506		18,163,344		17,901,484

Earnings per share:
Basic	$	(0.05)	$	(0.22)	$	(1.51)	$	(0.60)
Diluted	$	(0.05)	$	(0.22)	$	(1.51)	$	(0.60)

Antidilutive securities:
Stock options		3,307,082		3,002,231		2,097,054		2,097,054
RSUs		844,616		790,719		499,510		499,510
RSAs		14,672		22,359		58,809		58,809
Convertible Class C common stock		2,327,511		2,399,326		2,560,955		2,560,955
Convertible Class D common stock		10,019,169		12,829,719		17,282,930		17,282,930

Earnings per share information is not separately presented for Class B common stock, Class C common stock and Class D common stock since they have no economic rights to the income or loss of the Company. Class B common stock is not considered when calculating dilutive EPS as this class of common stock may not be exchanged for Class A common stock. Class C common stock and Class D common stock are considered in the calculation of dilutive EPS on an if-converted basis as these classes, together with the related LLC Interests, have exchange rights into Class A common stock that could result in additional Class A common stock being issued. All other potentially dilutive securities are determined based on the treasury stock method. Refer to Note 18, “Shareholders’ Equity,” for further information on the rights of each class of stock.

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(5)Tax Receivable Agreement

In connection with the IPO, the Company entered into a Tax Receivable Agreement (the “TRA”) that requires the Company to make payments to the Continuing LLC Owners, as defined in Note 18, “Shareholders’ Equity,” that are generally equal to 85% of the applicable cash tax savings, if any, realized as a result of favorable tax attributes that will be available to the Company as a result of the Reorganization Transactions, exchanges of LLC Interests for Class A common stock, and payments made under the TRA. Payments will occur only after the filing of U.S. federal and state income tax returns and realization of cash tax savings from the favorable tax attributes. Due to net losses attributable to the Company in 2018, there were no realized tax savings attributable to the TRA, therefore no payments have been made related to the TRA obligation.

As a result of the exchange of LLC Interests and shares of Class C common stock and Class D common stock for shares of Class A common stock sold in connection with the IPO, the September 2018 Secondary Offering, the April 2019 Secondary Offering, the August 2019 Secondary Offering and other member exchanges, through September 30, 2019, the Company’s deferred tax asset and payment liability pursuant to the TRA were approximately $142.2 million and $120.9 million, respectively. The Company recorded a corresponding increase to paid-in capital for the difference between the TRA liability and the related deferred tax asset. The amounts recorded as of September 30, 2019, approximate the current estimate of expected tax savings and are subject to change after the filing of the Company’s U.S. federal and state income tax returns for the year ended December 31, 2019. Future payments under the TRA with respect to subsequent exchanges would be in addition to these amounts.

For the TRA, the cash savings realized by the Company are computed by comparing the actual income tax liability of the Company to the amount of such taxes the Company would have been required to pay had there been no increase to the tax basis of the assets from member exchanges of LLC Interests, and no tax benefit as a result of the Net Operating Losses (“NOLs”) generated by the increase in the Company’s tax basis of the assets in LLC. Subsequent adjustments of the TRA obligations due to certain events (e.g., changes to the expected realization of NOLs or changes in tax rates) will be recognized within other (expense) income in the unaudited condensed consolidated statements of operations and comprehensive (loss) income.

(6)Acquisitions

The Company determined the pro forma impact of the acquisitions below was not material to the Company’s historical consolidated operating results and is, therefore, not separately presented.

2019 Acquisitions

(a)

Delego Software ULC

In September 2019, a subsidiary of EVO, Inc. acquired 100% of the outstanding shares of Delego Software ULC (“Delego”), an unlimited liability company governed by the laws of the Province of British Columbia, Canada, for CAD 42.6 million ($32.4 million, based on the foreign exchange rate at the time of the acquisition), funded with cash drawn from the Company’s debt facilities and fully paid at closing. The acquisition of Delego expands the Company’s integrated payment solutions business as Delego is a provider of SAP integrated payments for business to business customers. The results of operations of Delego are included in the Company’s consolidated results of operations from the date of the acquisition in the North America segment through the end of the period.

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

The provisional estimated acquisition-date fair values of major classes of assets acquired and liabilities assumed are as follows:


	As of the
	acquisition date
	(In thousands )		Estimated Useful Life
Finite-lived intangible assets
Purchased software	$	8,513	7 years
Customer relationships		2,964	15 years
Tradename		836	2 years
Deferred tax liabilities		(3,116)
Other assets (liabilities), net		590
Goodwill		22,628
Total purchase price	$	32,415

Goodwill in the amount of $22.6 million represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. Goodwill generated from the Delego acquisition is deductible for U.S. income tax purposes. Pro forma information for Delego acquisition is not presented, as the effect of this acquisition is not material to the Company’s consolidated operating results or North America segment. As of September 30, 2019, the Company considers the purchase price allocation to be preliminary and continues to gather the information to support the valuation of assets acquired and liabilities assumed.

(b)

SF Systems

In July 2019, a subsidiary of EVO, Inc. completed the acquisition of 100% of SF Systems, S.A.P.I. (“SF Systems”) for total consideration of $5.0 million, which includes an upfront payment of $4.0 million and a holdback liability of $1.0 million payable 18 months after the closing date. Net assets acquired in the SF Systems acquisition included purchased software of $2.6 million with a useful life of 5 years and goodwill of $2.4 million. Goodwill generated from the SF Systems acquisition is deductible for U.S. income tax purposes. SF Systems is presented in the Company’s North America segment.

(c)

Way2Pay Ltd

In March 2019, a subsidiary of EVO, Inc. completed the acquisition of 100% of the outstanding shares of Way2Pay Ltd (“Way2Pay”) for total consideration of €3.0 million ($3.4 million, based on the foreign exchange rate at the time of the acquisition), which includes an upfront payment of €2.7 million and a holdback liability of €0.3 million payable 18 months after the date of the agreement. Net assets acquired in the Way2Pay acquisition included purchased software of $4.0 million with a useful life of 5 years. Way2Pay is presented in the Company’s Europe segment.

2018 Acquisitions

(a)

ClearONE, S.L.

In October 2018, a subsidiary of EVO, Inc. acquired 100% of the outstanding shares of ClearONE for €5.4 million ($6.3 million based on the foreign exchange rate at the time of the acquisition). The total consideration includes a holdback liability of €0.5 million. ClearONE is presented in the Company’s Europe segment. Equipment and intangible assets consist of card processing equipment, merchant contract

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

portfolios, trademarks, internally developed software, and non-competition agreements with useful lives of 3 to 5 years, 5 years, 5 years, 5 years, and 2 to 3 years, respectively.

(b)

Federated Payment Systems, LLC/Federated Payment Canada Corp.

In September 2018, a subsidiary of EVO, Inc. acquired the remaining 67% of the outstanding membership interests of Federated Payment Systems, LLC (“Federated US”) and 100% of the outstanding shares of Federated Payment Canada Corporation (“Federated Canada,” together with Federated US, “Federated”) for $38.2 million. The total consideration includes an aggregate holdback liability of $0.5 million. Certain acquisition-related expenses were incurred in conjunction with the Federated acquisition in the amount of $0.4 million. Federated maintains diverse sales channels which complement the Company’s strategic distribution relationships. As a result of this acquisition, the Company recognized goodwill. Federated is presented in the Company’s North America segment.

The purchase price allocation is as follows:

c
	As of the
	acquisition date
	(in thousands)
Tangible assets acquired	$	1,702
Deferred tax liability		(1,357)
Amortizable intangible assets
Trademarks		1,200
Merchant contract portfolios		11,400
Goodwill		33,677
Total net assets acquired	$	46,622

Intangible assets of $12.6 million have been allocated to amortizable intangible assets consisting of trademarks and merchant contract portfolios, with estimated useful lives of 5 years and 10 years, respectively. The change in the estimated values of amortizable intangible assets is primarily due to obtaining information related to the merchant portfolio acquired from Federated and therefore, revising certain estimates in determining fair value.

On the date of acquisition, the book value of the investment in Federated US was zero. The Company recorded a gain on the acquisition of the unconsolidated investee of $8.4 million to step-up carrying value of the investment to fair value as of the acquisition date. The gain on acquisition of unconsolidated investee was recorded on the consolidated statements of operations and comprehensive (loss) income for the year ended December 31, 2018.

Goodwill, totaling $33.7 million, represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. Goodwill generated from the Federated acquisition is deductible for U.S. income tax purposes.

(c)

Nodus Technologies, Inc.

In May 2018, a subsidiary of EVO, Inc. acquired 100% of the outstanding shares of Nodus Technologies, Inc. (“Nodus”) for $18.0 million. The total consideration includes a holdback liability of $0.8 million. Nodus is presented in the Company’s North America segment. Equipment and intangible assets consist of office equipment, computer software, merchant contract portfolios, trademarks, internally developed software, and non-competition agreements with useful lives of 5 to 7 years, 3 years, 15 years, 20 years, 10 years and 3 years, respectively.

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(d)

Liberbank, S.A.

In April 2018, a subsidiary of EVO, Inc. acquired a portion of the merchant acquiring assets of Liberbank, S.A. and Banco de Castilla la Mancha, S.A. for €7.9 million ($9.5 million, based on the foreign exchange rate at the time of the acquisition). This asset acquisition is presented in the Company’s Europe segment. Equipment and intangible assets acquired consist of card processing equipment, merchant contract portfolios, marketing alliance agreements, and trademarks with useful lives of 3 years, 5 years, 15 years, and 15 years, respectively.

(e)

Nationwide Payment Solutions, LLC

In March 2018, a subsidiary of EVO, Inc. acquired the remaining 38% membership interest in Nationwide Payment Solutions, LLC (“NPS”) for an upfront payment of $16.9 million and contingent consideration of $3.8 million paid on April 1, 2019. This transaction resulted in a reduction to members’ deficit and nonredeemable non-controlling interests of $20.1 million and $0.6 million, respectively. NPS is presented in the Company’s North America segment.

(f)

EVO Payments International Corp. - Canada

In February 2018, a subsidiary of EVO, Inc. acquired the remaining 30% membership interest in EVO Payments International Corp. - Canada (“EVO Canada”) from 7097794 Canada, Inc. for $0.9 million of contingent consideration. This transaction resulted in a reduction to members’ deficit and nonredeemable non-controlling interests of $0.4 million and $0.5 million, respectively. EVO Canada is presented in the Company’s North America segment.

(7)Equipment and Improvements

Equipment and improvements consist of the following:


	Estimated
	Useful
	Lives in	September 30,		December 31,
	Years	2019		2018
		(In thousands)
Card processing	3-5	$	136,384	$	128,244
Office equipment	3-5		44,311		41,771
Computer software	3		47,266		44,373
Leasehold improvements	various		16,594		16,234
Furniture and fixtures	5-7		6,549		5,673
Totals			251,104		236,295
Less accumulated depreciation			(158,794)		(136,947)
Foreign currency translation adjustment			(598)		3,698
Totals		$	91,712	$	103,046

Depreciation expense related to equipment and improvements was $10.0 million and $9.1 million for the three months ended September 30, 2019 and 2018, respectively. Depreciation expense related to equipment and

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

improvements was $31.5 million and $27.6 million for the nine months ended September 30, 2019 and 2018, respectively.

In the nine months ended September 30, 2019, equipment and improvements and accumulated depreciation were each reduced by $10.8 million and $10.7 million, respectively, and in the nine months ended September 30, 2018 by $8.5 million and $7.6 million, respectively, primarily related to asset retirements. The Company infrequently sells or disposes of assets that are not fully depreciated, and this activity represents an insignificant portion of the total reduction.

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(8)Goodwill and Intangible Assets

Intangible assets, net consist of the following:


	September 30,		December 31,
	2019		2018
	(In thousands)
Intangible assets with finite lives:
Merchant contract portfolios and customer relationships:
Gross carrying value	$	296,033	$	293,069
Accumulated amortization		(157,394)		(139,159)
Accumulated impairment losses		(7,089)		(5,658)
Foreign currency translation adjustment		(29,441)		(27,975)
Net		102,109		120,277

Marketing alliance agreements:
Gross carrying value		191,879		191,879
Accumulated amortization		(56,650)		(47,777)
Accumulated impairment losses		(11,920)		(7,585)
Foreign currency translation adjustment		(20,488)		(18,634)
Net		102,821		117,883

Trademarks, finite-lived:
Gross carrying value		29,493		28,657
Accumulated amortization		(12,536)		(10,748)
Foreign currency translation adjustment		(4,639)		(4,446)
Net		12,318		13,463

Internally developed and acquired software:
Gross carrying value		80,881		60,876
Accumulated amortization		(23,375)		(15,794)
Accumulated impairment losses		(10,190)		(9,324)
Foreign currency translation adjustment		(3,417)		(2,260)
Net		43,899		33,498

Non-competition agreements:
Gross carrying value		6,462		6,462
Accumulated amortization		(5,782)		(5,316)
Foreign currency translation adjustment		(2)		—
Net		678		1,146
Total finite-lived, net		261,825		286,267

Trademarks, indefinite-lived:
Gross carrying value		18,499		18,499
Accumulated impairment losses		(18,499)		(14,627)
Net		—		3,872
Total intangible assets, net	$	261,825	$	290,139

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

Amortization expense related to intangible assets was $12.8 million and $11.5 million for the three months ended September 30, 2019 and 2018, respectively. Amortization expense related to intangible assets was $36.9 million and $33.7 million for the nine months ended September 30, 2019 and 2018, respectively. In September 2019 the Company retired the indefinite-lived trademarks due to an internal reorganization. As a result, the Company recorded an impairment of $3.9 million for the nine months ended September 30, 2019. In March 2019 the Company’s marketing alliance agreement with Raiffeisen Bank Polska was terminated. As a result of the termination, the Company recorded an impairment of $4.4 million for the six months ended June 30, 2019. For the nine months ended September 30, 2019 additional impairments of $1.4 million and $0.8 million were recognized, related to merchant contract portfolios and internally developed and acquired software, respectively.

Estimated amortization expense to be recognized during each of the five years, and thereafter, subsequent to September 30, 2019:


	Amount
	(In thousands)
Years ending:
2019 (remainder of the year)	$	12,400
2020		44,833
2021		40,015
2022		34,470
2023		26,951
2024 and thereafter		103,156
Total	$	261,825

The following represents net intangible assets by segment:


	September 30,		December 31,
	2019		2018
	(In thousands)
Intangible assets, net:
North America
Merchant contract portfolios and customer relationships	$	77,197	$	88,141
Marketing alliance agreements		71,975		76,590
Trademarks, finite-lived		3,187		2,585
Internally developed software		29,488		20,167
Non-competition agreements		639		1,089
Trademarks, indefinite-lived		—		3,872
Total		182,486		192,444

Europe
Merchant contract portfolios and customer relationships		24,912		32,136
Marketing alliance agreements		30,846		41,293
Trademarks, finite-lived		9,131		10,878
Internally developed software		14,411		13,331
Non-competition agreements		39		57
Total		79,339		97,695

Total intangible assets, net	$	261,825	$	290,139

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

Changes in goodwill for the nine months ended September 30, 2019, in total and by reportable segment, were as follows:


	Reportable Segment
	North
	America		Europe		Total
	(In thousands)
Goodwill, gross, as of December 31, 2018	$	240,837	$	136,465	$	377,302
Accumulated impairment losses		—		(24,291)		(24,291)
Goodwill, net, as of December 31, 2018		240,837		112,174		353,011
Business combinations		25,030		40		25,070
Foreign currency translation adjustment		35		(6,593)		(6,558)
Goodwill, net as of September 30, 2019	$	265,902	$	105,621	$	371,523

For the nine months ended September 30, 2019 and 2018 there was no goodwill impairment.

(9)Accounts Payable and Accrued Expenses

The Company’s accounts payable and accrued expenses consist of the following:


	September 30,		December 31,
	2019		2018
	(In thousands)
Compensation and related benefits	$	17,679	$	22,280
Third-party processing and payment network fees		37,056		37,702
Trade payables		8,336		44,581
Taxes payable		13,344		16,292
Commissions payable to third parties and agents		14,483		13,141
Unearned revenue		4,198		4,579
Other		18,292		22,641
Total accounts payable and accrued expenses	$	113,388	$	161,216

(10)Related Party Transactions

Related party commission expense incurred with unconsolidated investees of the Company amounted to $5.2 million and $4.3 million for the three months ended September 30, 2019 and 2018, respectively. Related party commission expense incurred with unconsolidated investees of the Company amounted to $15.0 million and $13.8 million for the nine months ended September 30, 2019 and 2018, respectively. The sale of equipment and services to these unconsolidated investees amounted to $0.1 million and less than $0.1 million for the three months ended September 30, 2019 and 2018, respectively. The sale of equipment and services to these unconsolidated investees amounted to $0.3 million and $0.2 million for the nine months ended September 30, 2019 and 2018, respectively.

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

Related party balances consist of the following:


	September 30,		December 31,
	2019		2018
	(In thousands)
Receivables from sale of POS devices and peripherals	$	—	$	303
Receivables from related companies		34		1,568
Due from related parties, current	$	34	$	1,871

Notes receivable, long term		—		915
Due from related parties, long term	$	—	$	915

Liabilities to related companies		4,596		4,824
Due to related parties, current	$	4,596	$	4,824

ISO commission reserve		385		385
Due to related parties, long term	$	385	$	385

Madison Dearborn Partners, LLC (“MDP”), a member of EVO, LLC and shareholder of EVO, Inc., provides the Company with consulting services related to business development, financing matters, and potential acquisition activities on an as-needed basis. In addition, the Company reimburses MDP for certain out of pocket expenses. The Company made payments to MDP of less than $0.1 million for each of the nine months ended September 30, 2019 and 2018 for consulting services and expense reimbursement. The Company made no payments for the three months ended September 30, 2019 and 2018.

Additionally, the Company provides certain professional and other services to Blueapple Inc. (“Blueapple”), a member of EVO, LLC and owner of all outstanding shares of Class B common stock of EVO, Inc. Blueapple is controlled by entities affiliated with the Company’s founder and chairman, Rafik R. Sidhom. The expense related to these services was less than $0.1 million for each of the three months ended September 30, 2019 and 2018. The expense relates to these services was $0.2 million and $0.1 million for the nine months ended September 30, 2019 and 2018, respectively. During 2018, the Company paid Blueapple $2.4 million in satisfaction of the obligation to pay any further commissions associated with processing revenue to Blueapple and all such future revenue will be retained by the Company.

Prior to the Company’s acquisition of the remaining 67% membership interests of Federated US and 100% of the outstanding shares of Federated Canada in September 2018, the Company’s chairman owned one-third of the shares of Federated Canada and an entity wholly owned by relatives of the Company’s chairman owned one-third of the membership interests of Federated US. As a result of the ownership interests, the Company’s founder and chairman and relatives received $15.5 million of the September 2018 Federated acquisition purchase price. In addition, prior to the acquisition, the Company provided card-based processing services and risk assessment services to Federated US in the ordinary course of business for a nominal fee. For the three and nine months ended September 30, 2018, the Company received $0.1 million and $0.4 million, respectively, in revenues in connection with providing services to Federated US. In addition, prior to the acquisition, Federated Canada provided certain marketing services to the Company’s business in Canada. For the three and nine months ended September 30, 2018, the Company paid $1.9 million and $5.8 million, respectively, in fees to Federated Canada for these services.

The Company leases office space located at 515 Broadhollow Road in Melville, New York for $0.1 million per month from 515 Broadhollow, LLC. 515 Broadhollow, LLC is majority owned, directly and indirectly, by the Company’s founder and chairman.

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

Receivables from related companies include amounts receivable from the Company’s founder and chairman, or entities controlled by the Company’s founder and chairman, of less than $0.1 million and $0.7 million as of September 30, 2019 and December 31, 2018, respectively. Liabilities held by related companies include payables to a minority held affiliate of $4.0 million and $3.0 million as of September 30, 2019 and December 31, 2018, respectively.

A portion of the TRA obligation is payable to members of management and current employees. Refer to Note 5, “Tax Receivable Agreement,” for further information on the tax receivable agreement.

The Company, through one wholly owned subsidiary and one unconsolidated investee, conducts business under ISO agreements with a relative of the Company’s founder and chairman pursuant to which the relative of the Company’s founder and chairman provides certain marketing services and equipment in exchange for a commission based on the volume of transactions processed for merchants acquired by the relative of the Company’s founder and chairman. For each of the three months ended September 30, 2019 and 2018, the Company paid commissions of $0.1 million related to this activity. For each of the nine months ended September 30, 2019 and 2018, the Company paid commissions $0.4 million, related to this activity.

NFP, the Company’s benefit broker, is a portfolio company of MDP and one of the Company’s executive officers owns a minority interest in NFP. For the three months ended September 30, 2019 and 2018, the Company paid $0.1 million and less than $0.1 million, respectively, in commissions and other expenses to NFP. For the nine months ended September 30, 2019 and 2018, the Company paid $0.2 million and $0.1 million, respectively, in commissions and other expenses to NFP.

(11)Income Taxes

In accordance with ASC 740, Income Taxes, each interim period is considered integral to the annual period, and tax expense is measured using an estimated annual effective tax rate. An entity is required to record income tax expense each quarter based on its best estimate of the annual effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis, as adjusted for discrete taxable events that occur during the interim periods. If, however, the entity is unable to reliably estimate its annual effective tax rate, then the actual effective tax rate for the year-to-date may be the best estimate of the entity’s annual effective tax rate. For the three and nine months ended September 30, 2019, the Company determined that it was unable to make a reliable estimate of its annual effective tax rate due to the sensitivity of the rate as it relates to its forecasted full year 2019 results. Therefore, the Company recorded a tax expense and tax benefit for the three and nine months ended September 30, 2019, respectively based on its actual effective tax rate.

The Company’s effective tax rate (“ETR”) was (231.6)% and 2.8% for the three and nine months ended September 30, 2019, respectively. The Company’s ETR was 388.5% and (11.1)% for the three and nine months ended September 30, 2018, respectively. The Company recorded a tax benefit in the nine months ended September 30, 2019 of $(8.2) million as a result of a tax free reorganization to consolidate its foreign operation and reversed a deferred tax liability related to foreign tax withholding on unremitted foreign earnings. The variance in the ETR for the three and nine months ended September 30, 2019 primarily relates to the mix of U.S. and non-U.S. earnings and related tax expense. The ETR for the three and nine months ended September 30, 2019 and 2018 differs from the statutory federal rate primarily due to foreign income taxes, the tax treatment of income attributable to non-controlling interests, the exclusion of tax benefits related to losses recorded in certain foreign operations, and the recognition of the tax benefit from a tax free reorganization. The income attributable to the non-controlling interests is taxable to EVO, LLC’s individual owners other than the Company. Income tax liabilities are incurred with respect to foreign operations whereas income of EVO, LLC in the U.S. flows through and is taxable to EVO, LLC’s owners.

The Company’s deferred tax asset increased from December 31, 2018 to September 30, 2019 primarily due to the increase in the tax basis of the assets of EVO, LLC as a result of exchanges of LLC Interests for Class A common stock of the Continuing LLC Owners.

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

Management assesses the available and objectively verifiable evidence to estimate whether sufficient future taxable income will be generated to use existing deferred tax assets. A significant piece of objective, negative evidence evaluated was the cumulative loss incurred in certain jurisdictions over the preceding twelve quarters ended September 30, 2019. Such objective evidence limits the ability to consider other subjective evidence such as the Company’s projections of future growth. On the basis of this assessment, valuation allowances were established in the current and prior periods to reduce the carrying amount of deferred tax assets to an amount that is more likely than not to be realized in certain European jurisdictions. Release of a valuation allowance would result in the realization of all or a portion of the related deferred tax assets and a decrease to income tax expense for the period in which the release is recorded. Based on the Company’s assessment, no significant changes to the Company’s valuation allowances were recorded during the three and nine months ended September 30, 2019 and 2018.

(12)Long-Term Debt and Lines of Credit

The Company has entered into a first lien senior secured credit facility and a second lien senior secured credit facility pursuant to a credit agreement dated December 22, 2016, and amended on October 24, 2017, April 3, 2018, and June 14, 2018 (the “Senior Secured Credit Facilities”). On May 25, 2018, the Company repaid all outstanding amounts under the second lien credit facility using a portion of the proceeds from the IPO. As of September 30, 2019, the Senior Secured Credit Facilities include revolver commitments of $200.0 million and a term loan of $665.0 million that are scheduled to mature in June 2023 and December 2023, respectively.

As of September 30, 2019 and December 31, 2018, the Company’s long-term debt consists of the following:


	September 30,		December 31,
	2019		2018
	(In thousands)
First lien term loan	$	649,794	$	654,775
First lien revolver		68,496		42,266
Less debt issuance costs		(10,619)		(12,985)
Total long-term debt		707,671		684,056
Less current portion of long-term debt		(5,618)		(7,191)
Total long-term debt, net of current portion	$	702,053	$	676,865

Principal payment requirements on the above obligations in each of the years remaining subsequent to September 30, 2019 are as follows:


	Amounts
	(In thousands)
Years ending December 31:
2019 (remainder of the year)	$	2,630
2020		6,593
2021		6,593
2022		6,593
2023		695,881
2024 and thereafter		—
	$	718,290

In addition, the Senior Secured Credit Facilities contain certain customary representations and warranties, affirmative covenants and events of default. If an event of default occurs, the lenders under the Senior Secured Credit Facilities will be entitled to take various actions, including the acceleration of amounts due thereunder and exercise of the remedies on the collateral. As of September 30, 2019, the Company was in compliance with all its financial covenants.

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

The Company maintains intraday and overnight facilities to fund its settlement obligations. These facilities are short-term in nature, have variable interest rates, are subject to annual review and are denominated in local currency but may, in some cases, facilitate borrowings in multiple currencies.

At September 30, 2019 and December 31, 2018, the Company had $17.6 million and $41.8 million outstanding under these lines of credit, respectively, with additional capacity of $175.6 million and $57.9 million, respectively, to fund its settlement obligations. The weighted-average interest rate on these borrowings was 3.02% and 4.52% at September 30, 2019 and December 31, 2018, respectively.

Refer to Note 11, "Long-Term Debt and Lines of Credit" to the audited consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018, for discussion regarding the Company’s long-term debt and lines of credit.

(13)Supplemental Cash Flows Information

Supplemental cash flow disclosures and non-cash financing activities are as follows for the nine months ended September 30, 2019 and 2018:


	2019		2018
	(In thousands)
Supplemental disclosure of cash flow data:
Interest paid	$	31,289	$	37,819
Income taxes paid		14,842		5,672

Supplemental disclosure of non-cash investing and financing activities:
Contingent consideration and acquisition holdback payable		1,337		6,400
Contingent consideration settled with the issuance of Class A common stock		—		771
Exchange of Class C and Class D common stock for Class A common stock		(20,985)		—

(14)Redeemable Non-controlling Interests

The Company owns 66% of eService, the Company’s Polish subsidiary. The eService shareholders’ agreement includes a provision whereby PKO Bank Polski, beginning on January 1, 2018, has the option to compel the Company to purchase 14% of the shares of eService held by PKO Bank Polski, at a price per share based on their fair value. Commencing on January 1, 2020, PKO Bank Polski may exercise an option to sell all of its remaining shares of eService to the Company. Because the exercise of this option is not solely within the Company’s control, the Company has classified this interest as RNCI and presents the redemption value as temporary within the mezzanine equity section of the unaudited condensed consolidated balance sheets. The change in fair value at each measurement date is recorded with a corresponding adjustment to accumulated deficit, nonredeemable non-controlling interests, and redeemable non-controlling interests.

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

As of September 30, 2019, EVO, Inc. owns 44.7% of the outstanding LLC Interests of EVO, LLC. The EVO, LLC operating agreement includes a provision whereby Blueapple may deliver a sale notice to EVO, Inc., upon receipt of which EVO, Inc. will use its commercially reasonable best efforts to pursue a public offering of shares of its Class A common stock and use the net proceeds therefrom to purchase LLC Interests from Blueapple. Upon receipt of such a sale notice, the Company may elect, at the Company’s option (determined solely by its independent directors (within the meaning of the rules of the NASDAQ stock market (“Nasdaq”)) who are disinterested), to cause EVO, LLC to instead redeem the applicable LLC Interests for cash; provided that Blueapple consents to any election by the Company to cause EVO, LLC to redeem the LLC Interests based on the fair value of the Company’s Class A common shares on such date. Because this option is not solely within the Company’s control, the Company has classified this interest as RNCI and reports the redemption value as temporary within the mezzanine equity section of the consolidated balance sheets. The change in fair value at each measurement date is recorded with a corresponding adjustment to accumulated deficit and nonredeemable non-controlling interests.

The following table details the components of RNCI for the nine months ended September 30, 2019 and for the year ended December 31, 2018:


							Post-IPO		Pre-IPO
	September 30, 2019						December 31		May 23,
	Blueapple		eService		Total		2018		2018
	(In thousands)
Beginning balance	$	885,986	$	124,107	$	1,010,093	$	689,569	$	148,266
Net income attributable to RNCI - eService		—		4,891		4,891		4,914		1,291
Net loss attributable to RNCI - Blueapple		(12,368)		—		(12,368)		(39,129)		—
Gain (loss) on OCI - eService		—		(3,621)		(3,621)		(2,368)		(2,104)
Gain (loss) on OCI - Blueapple		(5,999)		—		(5,999)		(3,935)		—
Gain (loss) on defined benefit plan revaluation - Blueapple		4		—		4		(192)		—
Legacy accumulated deficit allocation		—		—		—		—		(150,485)
Legacy AOCI allocation		—		—		—		—		(39,404)
Purchase of Blueapple Class B common stock in connection with secondary offerings		(34,768)		—		(34,768)		—		—
Decrease in maximum redemption amount in connection with purchase of Blueapple Class B common stock		(2,460)		—		(2,460)		—		—
Increase (decrease) in the maximum redemption amount of RNCI:
eService		—		14,749		14,749		(19,741)		—
Blueapple		150,701		—		150,701		374,616		735,775
Allocation of eService fair value RNCI adjustment to Blueapple		(6,369)		—		(6,369)		8,739		—
Distributions - eService		—		(6,209)		(6,209)		(2,380)		(3,770)
Ending balance	$	974,727	$	133,917	$	1,108,644	$	1,010,093	$	689,569

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(15)Fair Value

The table below presents information about items which are carried at fair value on a recurring basis:


	September 30, 2019
	(In thousands)
	Level 1		Level 2		Level 3		Total

Cash equivalents	$	20,997	$	—	$	—	$	20,997
Contingent consideration		—		—		(3,200)		(3,200)
Blueapple RNCI		(974,727)		—		—		(974,727)
eService RNCI		—		—		(133,917)		(133,917)
Total	$	(953,730)	$	—	$	(137,117)	$	(1,090,847)


	December 31, 2018
	(In thousands)
	Level 1		Level 2		Level 3		Total

Cash equivalents	$	106,164	$	—	$	—	$	106,164
Contingent consideration		—		—		(8,189)		(8,189)
Blueapple RNCI		(885,986)		—		—		(885,986)
eService RNCI		—		—		(124,107)		(124,107)
Total	$	(779,822)	$	—	$	(132,296)	$	(912,118)

Cash equivalents consist of a money market fund that is valued using a market price in an active market (Level 1). Level 1 instrument valuations are obtained from real‑time quotes for transactions in active exchange markets involving identical assets.

Contingent consideration relates to potential payments that the Company may be required to make associated with acquisitions. To the extent that the valuation of these liabilities are based on inputs that are less observable or not observable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for measures categorized in Level 3.

In the determination of the fair value of the RNCI in eService, the Company used an income approach based on internal forecasts of expected future cash flows. Significant unobservable inputs included the Weighted Average Cost of Capital (“WACC”) used to discount the future cash flows, which was 15.0%, based on the markets in which the business operates and growth rate used within the future cash flows, which were between 3.0% and 10.7%, based on historic trends, current and expected market conditions, and management’s forecast assumptions. A future increase in the WACC would result in a decrease in the fair value of RNCI in eService. The fair value of the RNCI in Blueapple is derived from the closing stock price of the Company’s Class A common stock on the last day of the period.

The estimated fair value of receivables, settlement processing assets and liabilities, due to and due from related parties and settlement lines of credit approximate their respective carrying values due to their short term nature. The estimated fair value of total long term debt, which approximates its carrying value, is based on quoted bid-ask spreads within the lender syndicate (Level 2).

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

Visa Series C preferred stock are carried at cost in the amount of $14.7 million as of September 30, 2019 and December 31, 2018, respectively, and are presented in other assets on the consolidated balance sheets. The estimated fair value of the Visa Series C preferred stock of $32.5 million as of September 30, 2019 is based upon inputs classified as Level 3 of the fair value hierarchy. These inputs include the fair value of Visa Class A common stock as of September 30, 2019 and the conversion factor of Visa Series C preferred stock to Visa Class A common stock, inclusive of a discount rate due to the lack of liquidity, which represents a measure of fair value that is unobservable or requires management’s judgment.

(16)Commitments and Contingencies

Litigation

The Company is party to various claims and lawsuits incidental to its business. The Company does not believe the ultimate outcome of such matters, individually or in the aggregate, will have a material adverse effect on the Company’s financial position, results of operations or cash flows.

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(17)Segment Information

Information on segments and reconciliations to net income (loss) attributable to the shareholders of EVO, Inc. and members of EVO, LLC are as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(In thousands)				(In thousands)
Segment revenue:
North America	$	75,022	$	79,487	$	222,643	$	232,687
Europe		47,341		65,271		133,755		181,244
Revenue	$	122,363	$	144,758	$	356,398	$	413,931

Segment profit:
North America	$	23,086	$	30,962	$	65,616	$	73,616
Europe		18,542		15,985		41,858		42,657
Total segment profit		41,628		46,947		107,474		116,273
Corporate		(9,212)		(8,518)		(25,095)		(31,879)
Depreciation and amortization		(22,804)		(20,488)		(68,412)		(61,308)
Net interest expense		(10,227)		(10,076)		(31,738)		(45,831)
Provision for income tax (expense) benefit		(3,590)		(32,155)		618		(7,974)
Share-based compensation expense		(3,019)		(2,021)		(7,841)		(53,284)
Net income (loss) attributable to non-controlling interests of EVO Investco, LLC		5,380		(1,078)		18,323		73,328
Net loss attributable to EVO Payments, Inc.	$	(1,844)	$	(27,389)	$	(6,671)	$	(10,675)

Capital expenditures:
North America	$	5,393	$	7,010	$	12,948	$	19,802
Europe		5,943		5,983		11,691		19,161
Consolidated total capital expenditures	$	11,336	$	12,993	$	24,639	$	38,963

For the purpose of discussing segment operations, the Company refers to “segment profit” which is segment revenue less (1) segment expenses plus (2) segment income from unconsolidated investees plus (3) segment other income, net less (4) segment non-controlling interests of EVO, LLC consolidating entities. The expenses related to certain Company-wide governance functions, depreciation and amortization, share-based compensation expense, and EVO, LLC non-controlling interests are not allocated to segments; they are reported in the captions “Corporate” and “Net income attributable to non-controlling interest of EVO Investco, LLC,” respectively.

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

Information on total assets by segment is as follows:


	September 30,		December 31,
	2019		2018
	(In thousands)
Segment total assets:
North America	$	1,094,614	$	994,952
Europe		505,035		539,435
Total assets	$	1,599,649	$	1,534,387

Revenue from external customers is attributed to individual countries based on the location where the relationship is managed. For the three months ended September 30, 2019, revenue from external customers in the United States, Mexico, and Poland, as a percentage of total revenue, was 40.2%, 18.9%, and 18.2%, respectively. For the three months ended September 30, 2018, revenue from external customers in the United States, Poland, and Mexico, as a percentage of total revenue, was 37.1%, 24.1%, and 19.0%, respectively. For the nine months ended September 30, 2019, revenue from external customers in the United States, Mexico, and Poland, as a percentage of total revenue, was 41.0%, 19.4%, and 18.0%, respectively. For the nine months ended September 30, 2018, revenue from external customers in the United States, Poland and Mexico, as a percentage of total revenue, was 35.7%, 24.2%, and 19.9%, respectively. For the three and nine months ended September 30, 2019 and 2018, there is no one customer that represents more than 10% of total revenue.

(18)Shareholders’ Equity

Organizational structure prior to the Reorganization Transactions

Prior to the completion of the Reorganization Transactions, EVO, LLC had limited liability company interests outstanding in the form of Class A units, Class B Units, Class C units, Class D units and Class E units. EVO, LLC also granted unit appreciation rights (“UARs”) to certain of its officers and certain current and former employees. Immediately prior to the completion of the Reorganization Transactions, the limited liability company interests of EVO, LLC were beneficially owned as set forth below. The percentage of economic interest in EVO, LLC set forth below is based on a hypothetical liquidation of EVO, LLC based on the IPO price per share of $16.00 and the underwriting discounts and commission paid in the IPO.

Blueapple owned 6,374,245 Class A units, representing a 54.0% economic interest in EVO, LLC on a fully-diluted basis.

MDP owned an aggregate of 3,506,087 Class B units, representing a 29.7% economic interest in EVO, LLC on a fully-diluted basis.

Current and former management and employees owned an aggregate of 374,559 Class C units and 1,106,528 Class D units, representing a combined 6.9% economic interest in EVO, LLC on a fully-diluted bases. The Class D units were granted pursuant to the EVO, LLC Incentive Equity Plan and contained certain vesting restrictions, including time-based and performance-based conditions. The Class D units also contained a participation threshold used to determine if a particular grant was eligible to participate in distributions, including distributions made in connection with a sale, liquidation event or public offering.

Blueapple, MDP and certain members of management and current and former employees owned an aggregated of 1,011,931 Class E units, representing a combined 8.6% economic interest in EVO, LLC on a fully-diluted basis.

Management and current and former employees owned 297,121 vested UAR awards. The UAR awards were granted pursuant to the EVO, LLC Unit Appreciation Equity Plan and provided a right to the recipient to receive an amount in cash or other consideration equal to the value of a hypothetical Class D unit in connection with a sale, liquidation event or public offering.

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

Organizational structure subsequent to the Reorganization Transactions

EVO, Inc. is a holding company and its principal asset is the LLC Interests in EVO, LLC held by the Company. As the sole managing member of EVO, LLC, the Company operates and controls all of the business and affairs of EVO, LLC and its subsidiaries. Although EVO, Inc. has a minority economic interest in EVO, LLC, the Company has the sole voting interest in, and controls the management of, EVO, LLC. Therefore, EVO, Inc. has consolidated the financial results of EVO, LLC and its subsidiaries.

The Company has four classes of common stock outstanding: Class A common stock, Class B common stock, Class C common stock and Class D common stock. The voting and economic rights associated with the Company’s classes of common stock are summarized in the following table:


Class of Common Stock	Holders	Voting rights*	Economic rights

Class A common stock	Public, MDP, Executive Officers, and Current and Former Employees	One vote per share	Yes
Class B common stock	Blueapple	15.9%	No
Class C common stock	Executive Officers	3.5 votes per share, subject to aggregate cap	No
Class D common stock	MDP and Current and Former Employees	One vote per share	No

*Subject to certain ownership requirements, on the third anniversary of the consummation of the IPO, the Company’s Class B common stock will cease to be outstanding and each share of the Company’s Class C common stock will automatically convert into a share of the Company’s Class D common stock.

Blueapple has a sale right under the EVO LLC Agreement providing that, upon the receipt of a sale notice from Blueapple, the Company will use its commercially reasonable best efforts to pursue a public offering of shares of Class A common stock and use the net proceeds therefrom to purchase LLC Interests from Blueapple. Upon the Company’s receipt of such a sale notice, the Company may elect, at its option (determined solely by its independent directors (within the meaning of the rules of Nasdaq) who are disinterested), to cause EVO, LLC to instead redeem the applicable LLC Interests for cash; provided that Blueapple consents to any election by the Company to cause EVO, LLC to redeem the LLC Interests.

Continuing LLC Owners (other than Blueapple) have an exchange right providing that, upon receipt of an exchange notice from such Continuing LLC Owners, the Company will exchange the applicable LLC Interests from such Continuing LLC Owners for newly issued shares of its Class A common stock on a one-for-one basis pursuant to an exchange agreement (the “Exchange Agreement”). Upon its receipt of such an exchange notice, the Company may elect, at its option (determined solely by its independent directors (within the meaning of the rules of Nasdaq)) who are disinterested, to cause EVO, LLC to instead redeem the applicable LLC Interests for cash; provided that such Continuing LLC Owners consents to any election by the Company to cause EVO, LLC to redeem the LLC Interests. In the event that Continuing LLC Owners do not consent to an election by the Company to cause EVO, LLC to redeem the LLC Interests, the Company is required to exchange the applicable LLC Interests for newly issued shares of Class A common stock.

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

If the Company elects to cause EVO, LLC to redeem LLC Interests in lieu of exchanging LLC Interests for newly issued shares of its Class A common stock, the Company will offer the other Continuing LLC Owners the right to have their respective LLC Interests redeemed in an amount up to such person’s pro rata share of the aggregate LLC Interests to be redeemed. The Company is not required to redeem any LLC Interests from Blueapple or any other Continuing LLC Owners in response to a sale notice from Blueapple if the Company elects to pursue, but is unable to complete, a public offering of shares of its Class A common stock.

Continuing LLC Owners also hold certain registration rights pursuant to a registration rights agreement. MDP holds demand registration rights that require the Company to register shares of Class A common stock held by it, including any Class A common stock received upon its exchange of Class A common stock for its LLC Interests. All Continuing LLC Owners (other than Blueapple) hold customary piggyback registration rights, which includes the right to participate on a pro rata basis in any public offering the Company conducts in response to its receipt of a sale notice from Blueapple. Blueapple also has the right, in connection with any public offering the Company conducts (including any offering conducted as a result of an exercise by MDP of its registration rights), to request that the Company use its commercially reasonable best efforts to pursue a public offering of shares of its Class A common stock and use the net proceeds therefrom to purchase a like amount of Blueapple’s LLC Interests.

(19)Stock Compensation Plans and Share-Based Compensation Awards

The Company provides share-based compensation awards to its employees under the 2018 Omnibus Equity Incentive Plan (the “2018 Plan”), which the Company adopted in conjunction with its IPO. The 2018 Plan became effective on May 22, 2018. A total of 7,792,162 shares of the Company’s Class A common stock are reserved for issuance under the 2018 Plan. The 2018 Plan provides for accelerated vesting under certain conditions.

The following table summarizes share-based compensation expense, and the related income tax benefit recognized for share-based compensation awards. Share-based compensation expense is presented within selling, general, and administrative expenses within the unaudited condensed consolidated statements of operations.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(In thousands)

Share-based compensation expense	$	3,019	$	1,758	$	7,841	$	53,893
Income tax benefit	$	289	$	68	$	688	$	3,914

Unit appreciation rights/Restricted stock awards

The Company assumed EVO, LLC’s obligations under the EVO, LLC Unit Appreciation Rights Plan (“UAR Plan”) and converted all of the outstanding UARs held by members of management and current and former employees at the consummation of the IPO to restricted Class A common stock (“RSAs”). In connection with the Company’s assumption of EVO, LLC’s obligation under the UAR Plan and the issuance of the RSAs, on the IPO date, the Company recorded share-based compensation expense based on the modification date fair value of the RSAs of $16.00 per share. The Company recognized share-based compensation expense related to RSAs of less than $0.1 million and $0.3 million for the three months ended September 30, 2019 and 2018, respectively. The Company recognized share-based compensation expense related to RSAs of $0.2 million and $9.0 million, respectively, for the nine months ended September 30, 2019 and 2018, respectively. Prior to the consummation of the IPO, no liquidity event was probable and, as such, no share-based compensation expense had been recognized for these awards. On the modification date, there were 35 members of management and current and former employees who held UARs.

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

A summary of RSA activity is as follows (in thousands, except per share data):


	Number of RSAs	Weighted average grant date fair value

Balance at December 31, 2018	42	$	16.00
Granted	—		—
Vested	(25)		16.00
Forfeited	(2)		16.00
Balance at September 30, 2019	15	$	16.00

Restricted stock units

The Company recognized share-based compensation expense for unvested restricted stock units (“RSUs”) of $1.3 million and $0.6 million for the three months ended September 30, 2019 and 2018, respectively. The Company recognized share-based compensation expense for unvested RSUs of $3.4 million and $0.8 million, respectively, for the nine months ended September 30, 2019 and 2018.

A summary of RSU activity is as follows (in thousands, except per share data):


	Number of RSUs	Weighted average grant date fair value

Balance at December 31, 2018	506	$	16.30
Granted	515		26.21
Vested	(139)		16.27
Forfeited	(36)		21.79
Balance at September 30, 2019	846	$	22.11

As of September 30, 2019, total unrecognized share-based compensation expense related to outstanding RSUs was $16.1 million. Each RSU vests in equal annual vesting installments over a period of four years from the grant date and will settle in Class A common stock. The weighted average period outstanding for unvested RSUs is 3.0 years.

Stock options

The Company recognized share-based compensation expense for unvested stock options of $1.7 million and $0.9 million for the three months ended September 30, 2019 and 2018, respectively. The Company recognized share-based compensation expense for unvested stock options of $4.2 million and $1.3 million, respectively, for the nine months ended September 30, 2019 and 2018.

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EVO PAYMENTS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

A summary of stock option activity is as follows (in thousands, except per share data):


	Number of Options	Weighted average grant date fair value		Weighted average exercise price		Weighted average remaining contractual term


Balance at December 31, 2018	2,086	$	6.77	$	16.22
Granted	1,384		9.47		26.19
Exercised	(50)		6.80		16.32
Forfeited	(128)		8.07		20.78
Balance at September 30, 2019	3,292	$	7.85	$	20.24		8.98
Exercisable at September 30, 2019	455	$	6.70	$	16.06		8.65

As of September 30, 2019, total unrecognized share-based compensation expense related to unvested stock options was $19.9 million. The weighted average period outstanding for unvested stock options is 3.3 years. Each stock option vests in equal annual installments over a period of four years from grant date, and stock options expire no later than 10 years from the date of grant. For the purpose of calculating share-based compensation expense, the fair value of the stock option grants was determined through the application of the Black-Scholes model with the following assumptions:


	Nine Months Ended September 30,
	2019		2018

Expected life (in years)		7.00		7.00
Weighted average risk-free interest rate		2.59%		3.04%
Expected volatility		33.35%		34.28%
Dividend yield		0.00%		0.00%
Weighted average fair value at grant date	$	9.46	$	6.84

The risk-free interest rate is based on the yield of a zero coupon U.S. Treasury security with a maturity equal to the expected life of the stock option from the date of the grant. The assumption for expected volatility is based on the historical volatility of a peer group of market participants as the Company has limited historical volatility. It is the Company’s intent to retain all profits for the operations of the business for the foreseeable future, as such the dividend yield assumption is zero. The Company applied the simplified method in determining the expected life of the stock options as the Company has limited historical basis upon which to determine historical exercise periods. The Company based the assumptions of the expected term of the options as the expected term plus half of the remaining life through expiration. All stock options exercised will be settled in Class A common stock.

(20)Subsequent Events

Subsequent events have been evaluated from the balance sheet date through the date on which the unaudited condensed consolidated financial statements were available to be issued.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” 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.

The following discussion and analysis reflects the historical results of operations and financial position of EVO, LLC and its consolidated subsidiaries prior to the Reorganization Transactions and that of EVO, Inc. and its consolidated subsidiaries (including EVO, LLC) following the completion of the Reorganization Transactions. The historical results of operations and financial condition of EVO, LLC prior to the completion of the Reorganization Transactions, including the IPO, do not reflect certain items that affected our results of operations and financial condition after giving effect to the Reorganization Transactions and the use of proceeds from the IPO.

In addition to historical information, the following discussion contains forward-looking statements. Our actual results may differ materially from those contained in or implied by any forward-looking statements as a result of various factors, including those set forth under “Forward-Looking Statements.”

Overview

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 globe. As a fully integrated merchant acquirer and payment processor in over 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.

Executive overview

Revenue for the three months ended September 30, 2019, decreased 15.5% to $122.4 million from $144.8 million for the three months ended September 30, 2018. Excluding the $30.2 million impact of the reclassification of network processing fees following the adoption of ASC 606, revenue for the three months ended September 30, 2019 increased $7.8 million to $152.6 million. This increase was driven by a 4.3% increase in Europe segment revenue and a 6.3% increase in North America segment revenue.

Revenue for the nine months ended September 30, 2019 decreased 13.9% to $356.4 million from the nine months ended September 30, 2018. Excluding the $81.6 million impact of the reclassification of network processing fees following the adoption of ASC 606, revenue for the nine months ended September 30, 2019 increased $24.1 million to $438.0 million. This increase was driven by a 4.0% increase in Europe segment revenue and a 7.3% increase in North America segment revenue.

North America segment profit for the three months ended September 30, 2019 was $23.1 million, 25.4% lower than the three months ended September 30, 2018. North America segment profit for the nine months ended September 30, 2019 was $65.6 million, 10.9% lower than the nine months ended September 30, 2018.

Europe segment profit for the three months ended September 30, 2019 was $18.5 million, 16.0% higher than the three months ended September 30, 2018. Europe segment profit for the nine months ended September 30, 2019 was $41.9 million, 1.9% lower than the nine months ended September 30, 2018.

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Recent acquisitions

See Note 6, “Acquisitions” in the notes to the accompanying unaudited condensed consolidated financial statements for information about recent acquisitions.

Our segments

We classify our business into two segments: North America and Europe. The alignment of our segments is designed to establish lines of business that support the geographical markets in which we operate and allow us to further globalize our solutions while working seamlessly with our teams across these markets. Both segments provide businesses with merchant acquiring solutions, including integrated solutions for retail transactions at physical business locations, as well as eCommerce and mobile transactions.

The business segment measurements provided to and evaluated by the segment leaders are computed in accordance with the principles described below:

The accounting policies of the operating segments are the same as those described in the summary of the significant accounting policies.

Segment profit, which is the measure used by our chief operating decision maker to evaluate the performance of and to allocate resources to our segments, is calculated as segment revenue less (1) segment expenses, plus (2) segment income from unconsolidated investees, plus (3) segment other income, net, less (4) segment non-controlling interests. Certain corporate-wide governance functions, as well as depreciation and amortization, and share based compensation expense, are not allocated to our segments.

North America

Our North America segment is comprised of the United States, Canada and Mexico. We distribute our products and services through a combination of bank referrals, a direct sales force, specialized integrated solution companies, sales agents and independent sales organizations (“ISOs”).

Europe

Our Europe segment is comprised of Western Europe (Spain, Germany, Ireland, United Kingdom and Malta) and Eastern Europe (Poland and the Czech Republic). We distribute our products and services through a combination of bank referrals, a direct sales force, specialized integrated solution companies and ISOs. We also provide ATM processing services to a financial institution and third-party ATM providers.

Key financial definitions

Revenue consists primarily of fees derived from the monetary value and number of transactions processed for our merchants, as defined through contractual agreements with the merchants. We also receive revenues related to other fees for certain services and products.

We follow guidance provided in Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), which establishes guidance for whether revenue is recognized based on the gross amount billed to a customer or the net amount retained.

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Following the adoption of ASC 606, revenues are presented net of interchange fees paid to issuers, certain fees and assessments paid to the card networks (e.g., Visa, Mastercard, American Express and Discover), as these costs are controlled by the networks in which we effectively act as a clearing house collecting and remitting fees, and commissions paid to our distribution partners. Revenues earned from processing merchant transactions are recognized at the time merchant transactions are processed. These revenues include a rate charged to the merchant based on the percentage of the value of the transaction processed, a rate per transaction or some combination thereof.

Cost of services and products, exclusive of depreciation and amortization consists primarily of fees paid to card networks, front-end and back-end fees paid to third-party network service providers and hardware vendors (such as vendors selling terminals or mobile devices) and payments to third parties for other product offerings. These expenses exclude any depreciation or amortization, which is described below.

Selling, general and administrative consists primarily of sales, customer support, advertising and other administrative costs. Sales expenses are comprised of salaries, commissions for internal sales personnel, payroll-related benefits and office infrastructure expenses. General and administrative expenses are comprised of compensation, benefits and other expenses associated with corporate management, finance, human resources, shared services, information technology and other activities.

Depreciation and amortization consists of depreciation and amortization expenses related to card processing equipment, office equipment, computer software, leasehold improvements, furniture and fixtures, merchant contract portfolios, marketing alliance agreements, finite-lived trademarks, internally developed software, and non-competition agreements.

Interest income consists of interest earned by investing excess cash balances.

Interest expense consists of interest cost incurred from our borrowings and the amortization of financing costs.

Income from investment in unconsolidated investees consists of income earned from the investment in businesses in which we have a minority ownership stake and under which our share in the investees’ financial results are not consolidated for reporting purposes.

Other income consists primarily of other income items not considered part of the normal course of business operations.

Income tax (expense) benefit represents federal, state, local and foreign taxes based on income in multiple domestic and foreign jurisdictions.

Net income attributable to non-controlling interests arises from net income from the non-owned portion of businesses where we have a controlling interest but less than 100% ownership. This represents both the non-controlling interests that are consolidating entities of EVO, Inc., inclusive of income attributable to the Continuing LLC Owners as a result of their proportional ownership of LLC Interests.

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 any indebtedness incurred to finance any acquisitions, or could require us to incur losses as we restructure or reorganize our operations following these acquisitions.

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Seasonality

We have experienced in the past, and expect to continue to experience, seasonality in our revenue as a result of consumer spending patterns. In North America, our revenue has been strongest in our fourth quarter and weakest in our first quarter as many of our merchant categories experience a seasonal lift during the traditional vacation and holiday months. In Europe, our revenue has been strongest in our third quarter and weakest in our first quarter. Operating expenses do not typically fluctuate seasonally.

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 (loss) income 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.

Key performance indicators

Transactions processed refers to the number of transactions we processed during any given period of time and is a meaningful indicator of our business and financial performance as a significant portion of our revenue is driven by the number of transactions we process. In addition, transactions processed provides a valuable measure of the level of economic activity across our merchant base. In our North America segment, transactions include acquired Visa and Mastercard credit and signature debit, American Express, Discover, UnionPay, PIN-debit, electronic benefit transactions and gift card transactions. In our Europe segment, transactions include acquired Visa and Mastercard credit and signature debit, other card network merchant acquiring transactions, and ATM transactions.

For the three months ended September 30, 2019, we processed 0.3 billion transactions in North America and 0.7 billion transactions in Europe. This represents an increase of 14.2% in North America and an increase of 19.0% in Europe over the three months ended September 30, 2018.

For the nine months ended September 30, 2019, we processed 0.8 billion transactions in North America and 1.9 billion transactions in Europe. This represents an increase of 10.6% in North America and an increase of 18.8% in Europe over the nine months ended September 30, 2018.

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Comparison of results for the three months ended September 30, 2019 and 2018

The following table sets forth the 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)	September 30, 2019		% of revenue	September 30, 2018		% of revenue	$ change		% change
Segment revenue:
North America	$	75,022	61.3%	$	79,487	54.9%	$	(4,465)	(5.6%)
Europe		47,341	38.7%		65,271	45.1%		(17,930)	(27.5%)
Revenue	$	122,363	100.0%	$	144,758	100.0%	$	(22,395)	(15.5%)

Operating expenses:
Cost of services and products, exclusive of depreciation and amortization shown separately below	$	24,065	19.7%	$	46,949	32.4%	$	(22,884)	(48.7%)
Selling, general and administrative		63,864	52.2%		67,802	46.8%		(3,938)	(5.8%)
Depreciation and amortization		22,804	18.6%		20,488	14.2%		2,316	11.3%
Impairment of intangible assets		3,872	3.2%		—	0.0%		3,872	-
Total operating expenses		114,605	93.7%		135,239	93.4%		(20,634)	(15.3%)
Income (loss) from operations	$	7,758	6.3%	$	9,519	6.6%	$	(1,761)	(18.5%)

Segment profit: (1)(2)
North America	$	23,086	30.8%	$	30,962	39.0%	$	(7,876)	(25.4%)
Europe	$	18,542	39.2%	$	15,985	24.5%	$	2,557	16.0%

₍₁₎

_{Beginning in 2019 segment profit margin is calculated as a percentage of segment revenue, which is reflected in both periods presented in this table.}

₍₂₎

_Segmen_{t profit}_{is calculated as segment revenue less (1) segment expenses, plus (2) segment income from unconsolidated investees, plus (3) segment other income, net, less (4) segment non-controlling interests. Certain corporate-wide governance functions, as well as depreciation and amortization, and share based compensation expense, are not allocated to our segments.}

Revenue

Revenue was $122.4 million for the three months ended September 30, 2019, a decrease of $22.4 million, or 15.5%, compared to revenue of $144.8 million for the three months ended September 30, 2018. Excluding the $30.2 million impact of the reclassification of network processing fees following the adoption of ASC 606, revenue for the three months ended September 30, 2019 increased 5.4% to $152.6 million. This increase was driven primarily by the impact of acquisitions, organic growth in Mexico, Poland, Ireland, and the U.S. Tech-enabled division, partially offset by the impact of changes in foreign exchange rates and a decline in transactions in Spain.

North America segment revenue was $75.0 million for the three months ended September 30, 2019, a decrease of $4.5 million, or 5.6%, compared to the three months ended September 30, 2018. Excluding the $9.5 million impact of the reclassification of network processing fees following the adoption of ASC 606, North America segment revenue for the three months ended September 30, 2019 increased 6.3% to $84.5 million. The increase was driven by organic growth in Mexico and the U.S. Tech-enabled division and the acquisition of Federated. North America transactions increased 14.2% for the three months ended September 30, 2019, compared to the three months ended September 30, 2018, primarily driven by organic growth in Mexico and the U.S. Tech-enabled division, partially offset by a decline in transactions in the U.S. Traditional division. Changes in foreign currency exchange rates did not have a significant impact on revenue for the three months ended September 30, 2019.

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Europe segment revenue was $47.3 million for the three months ended September 30, 2019, a decrease of $17.9 million, or 27.5%, compared to the three months ended September 30, 2018. Excluding the $20.8 million impact of the reclassification of network processing fees following the adoption of ASC 606, Europe segment revenue for the three months ended September 30, 2019 increased 4.3% to $68.1 million. The increase was driven by organic growth in Poland, Germany, Ireland and the United Kingdom and an overall 19.0% increase in transactions processed in Europe. These increases were partially offset by changes in foreign currency exchange rates, which decreased reported revenue by $3.3 million for the three months ended September 30, 2019, and a decline in transactions in Spain.

Operating expenses

Cost of services and products, exclusive of depreciation and amortization

Cost of services and products, exclusive of depreciation and amortization, was $24.1 million for the three months ended September 30, 2019, a decrease of $22.9 million, or 48.7%, compared to the three months ended September 30, 2018. Excluding the $30.2 million impact of the reclassification of network processing fees following the adoption of ASC 606, cost of services and products, exclusive of depreciation and amortization for the three months ended September 30, 2019 increased 15.7% to $54.3 million. This increase was due primarily to the increase in transactions processed. Our cost of services and products includes both fixed and variable components, with variable components dependent upon transactions processed, among other secondary measures. The increase in cost was due to the variable component from the increase in transactions processed.

Selling, general and administrative expense

Selling, general and administrative expense was $63.9 million for the three months ended September 30, 2019, a decrease of $3.9 million, or 5.8%, compared to the three months ended September 30, 2018. The decrease was due primarily to integration expenses incurred in the prior period related to our consolidation efforts.

Depreciation and amortization

Depreciation and amortization was $22.8 million for the three months ended September 30, 2019, an increase of $2.3 million, or 11.3%, compared to the three months ended September 30, 2018. This increase was due primarily to purchases of POS terminals to support growth in certain of our international markets and other hardware and software purchases as well as the amortization of intangible assets acquired during the second half of 2018.

Interest expense

Interest expense was $11.1 million for the three months ended September 30, 2019, an increase of $0.5 million, or 4.7%, compared to $10.6 million for the three months ended September 30, 2018. The increase was due to higher outstanding debt balances associated with recent acquisitions, offset by lower average interest rates.

Income tax benefit

The Company’s effective tax rate (“ETR”) was (231.6%) and 388.5% for the three months ended September 30, 2019 and 2018, respectively. The variance in the ETR for the three months ended September 30, 2019 primarily relates to the mix of U.S. and non-U.S. earnings and related tax expense. The ETR for the three months ended September 30, 2019 and 2018 differs from the statutory federal rate primarily due to foreign income taxes, the tax treatment of income attributable to non-controlling interests, and the exclusion of tax benefits related to losses recorded in certain foreign operations. The income attributable to the non-controlling interests is taxable to EVO, LLC’s individual owners other than the Company. Income tax liabilities are incurred with respect to foreign operations whereas income of EVO, LLC in the U.S. flows through and is taxable to EVO, LLC’s owners.

Segment performance

North America segment profit was $23.1 million for the three months ended September 30, 2019, compared to $31.0 million for the three months ended September 30, 2018. The decrease is primarily due to a $3.9 million trademark impairment in the three months ended September 30, 2019, and an $8.4 million gain on acquisition of an unconsolidated in conjunction with the Federated acquisition in the three months ended September 30, 2018, partially offset by organic growth in Mexico and the U.S. tech-enabled division. North America segment profit margin was 30.8% for the three months ended September 30, 2019, compared to 39.0% for the three months ended September 30, 2018. Excluding the impact of the $9.5 million reclassification of network processing fees following the adoption of ASC 606, North America

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segment profit margin for the three months ended September 30, 2019 was 27.3%. The increase in North America segment profit was primarily due to organic growth in Mexico and the U.S. Tech-enabled division, the acquisition of Federated, and ongoing operating efficiencies.

Europe segment profit was $18.5 million for the three months ended September 30, 2019, compared to $16.0 million for the three months ended September 30, 2018. The increase is primarily due to one-time charges in the prior year period related to employee termination and integration costs. The Europe segment profit margin was 39.2% for the three months ended September 30, 2019, compared to 24.5% for the three months ended September 30, 2018. Excluding the impact of the $20.8 million reclassification of network processing fees following the adoption of ASC 606, Europe segment profit margin for the three months ended September 30, 2019 was 27.2%. The increase in Europe profit margin was primarily due to organic growth in Poland, Germany, Ireland and the UK and continuing platform and operational consolidation efforts.

Corporate expenses not allocated to segments were $9.2 million for the three months ended September 30, 2019, compared to $8.5 million for the three months ended September 30, 2018. The increase in expense is due to increased public company costs and additional insurance expenses.

Comparison of results for the nine months ended September 30, 2019 and 2018

The following table sets forth the consolidated statements of operations in dollars and as a percentage of revenue for the period presented.


	Nine Months Ended			Nine Months Ended
(dollar amounts in thousands)	September 30, 2019		% of revenue	September 30, 2018		% of revenue	$ change		% change
Segment revenue:
North America	$	222,643	62.5%	$	232,687	56.2%	$	(10,044)	(4.3%)
Europe		133,755	37.5%		181,244	43.8%		(47,489)	(26.2%)
Revenue	$	356,398	100.0%	$	413,931	100.0%	$	(57,533)	(13.9%)

Operating expenses:
Cost of services and products, exclusive of depreciation and amortization shown separately below	$	72,900	20.5%	$	141,826	34.3%	$	(68,926)	(48.6%)
Selling, general and administrative		196,592	55.2%		242,982	58.7%		(46,390)	(19.1%)
Depreciation and amortization		68,412	19.2%		61,308	14.8%		7,104	11.6%
Impairment of intangible assets		10,504	2.9%		—	0.0%		10,504	100.0%
Total operating expenses		348,408	97.8%		446,116	107.8%		(97,708)	(21.9%)
Income (loss) from operations	$	7,990	2.2%	$	(32,185)	(7.8%)	$	40,175	(124.8%)

Segment profit: (1)(2)
North America	$	65,616	29.5%	$	73,616	31.6%	$	(8,000)	(10.9%)
Europe	$	41,858	31.3%	$	42,657	23.5%	$	(799)	(1.9%)

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_{Beginning in 2019 segment profit margin is calculated as a percentage of segment revenue, which is reflected in both periods presented in this table.}

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_{Segment profit is calculated as segment revenue less (1) segment expenses, plus (2) segment income from unconsolidated investees, plus (3) segment other income, net, less (4) segment non-controlling interests. Certain corporate-wide governance functions, as well as depreciation and amortization, and share based compensation expense, are not allocated to our segments.}

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Revenue

Revenue was $356.4 million for the nine months ended September 30, 2019, a decrease of $57.5 million, or 13.9%, compared to revenue of $413.9 million for the nine months ended September 30, 2018. Excluding the $81.6 million impact of the reclassification of network processing fees following the adoption of ASC 606, revenue for the nine months ended September 30, 2019 increased 5.8% to $438.0 million. This increase was driven primarily by organic growth in Poland, Ireland, the United Kingdom, Mexico, and the U.S. Tech-enabled division and the acquisition of Federated, partially offset by the impact of changes in foreign exchange rates and a decline in transactions in Spain.

North America segment revenue was $222.6 million for the nine months ended September 30, 2019, a decrease of $10.0 million, or 4.3%, compared to the nine months ended September 30, 2018. Excluding the $27.0 million impact of the reclassification of network processing fees following the adoption of ASC 606, North America segment revenue for the nine months ended September 30, 2019 increased 7.3% to $249.6 million. The increase was driven by organic growth in our Mexico business, the U.S. Tech-enabled division and the acquisition of Federated, partially offset by a decline in the U.S. Traditional division. North America transactions increased 10.6% for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018. Changes in foreign currency exchange rates, which decreased reported revenue by $1.1 million for the nine months ended September 30, 2019.

Europe segment revenue was $133.8 million for the nine months ended September 30, 2019, a decrease of $47.5 million, or 26.2%, compared to the nine months ended September 30, 2018. Excluding the $54.7 million impact of the reclassification of network processing fees following the adoption of ASC 606, Europe segment revenue for the nine months ended September 30, 2019, increased 4.0% to $188.5 million. The increase was driven by organic growth in Poland, Germany, Ireland and the United Kingdom, and an overall 18.8% increase in transactions processed in Europe. These increases were partially offset by changes in foreign currency exchange rates, which decreased reported revenue by $13.1 million for the nine months ended September 30, 2019, and a decline in transactions in Spain.

Operating expenses

Cost of services and products, exclusive of depreciation and amortization

Cost of services and products, exclusive of depreciation and amortization, was $72.9 million for the nine months ended September 30, 2019, a decrease of $68.9 million, or 48.6%, compared to the nine months ended September 30, 2018. Excluding the $81.6 million impact of the reclassification of network processing fees following the adoption of ASC 606, cost of services and products, exclusive of depreciation and amortization for the nine months ended September 30, 2019, increased to $154.5 million. This increase was due primarily to the increase in transactions processed. Our cost of services and products includes both fixed and variable components, with variable components dependent upon transactions processed, among other secondary measures. The increase in cost was due to the variable component from the increase in transactions processed.

Selling, general and administrative expense

Selling, general and administrative expense was $196.6 million for the nine months ended September 30, 2019, a decrease of $46.4 million, or 19.1%, compared to the nine months ended September 30, 2018. The decrease was due primarily to a $46.1 million decrease in share-based compensation expense related to awards which vested upon the IPO.

Depreciation and amortization

Depreciation and amortization was $68.4 million for the nine months ended September 30, 2019, an increase of $7.1 million, or 11.6%, compared to the nine months ended September 30, 2018. This increase was due primarily to purchases of POS terminals to support growth in certain of our international markets and other hardware and software purchases as well as the amortization of intangible assets acquired during the second half of 2018.

Interest expense

Interest expense was $34.0 million for the nine months ended September 30, 2019, a decrease of $13.5 million, or 28.4%, compared to $47.5 million for the nine months ended September 30, 2018. The decrease was due to lower debt balances due to the use of IPO proceeds for debt repayment during Q2 2018 and lower average interest rates, partially offset by use of debt for recent acquisitions.

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Income tax benefit

The Company’s effective tax rate (“ETR”) was 2.8% and (11.1%) for the nine months ended September 30, 2019 and 2018, respectively. The Company recorded a tax benefit in the nine months ended September 30, 2019 of ($8.2) million as a result of a tax free reorganization to consolidate its foreign operation and reversed a deferred tax liability related to foreign tax withholding on unremitted foreign earnings. The variance in the ETR for the nine months ended September 30, 2019 primarily relates to the mix of U.S. and non-U.S. earnings and related tax expense. The ETR for the nine months ended September 30, 2019 and 2018 differs from the statutory federal rate primarily due to foreign income taxes, the tax treatment of income attributable to non-controlling interests, the exclusion of tax benefits related to losses recorded in certain foreign operations, and the recognition of the tax benefit from a tax free reorganization. The income attributable to the non-controlling interests is taxable to EVO, LLC’s individual owners other than the Company. Income tax liabilities are incurred with respect to foreign operations whereas income of EVO, LLC in the U.S. flows through and is taxable to EVO, LLC’s owners.

Segment performance

North America segment profit was $65.6 million for the nine months ended September 30, 2019, compared to $73.6 million for the nine months ended September 30, 2018. For the nine months ended September 30, 2019, the decrease in North America segment profit is primarily due a $3.9 million trademark impairment in the three months ended September 30, 2019 and a $8.4 million gain on acquisition and unconsolidated investee in the three months ended September 30, 2018, partially offset by organic growth in Mexico and the U.S. tech-enabled division. North America segment profit margin was 29.5% for the nine months ended September 30, 2019, compared to 31.6% for the nine months ended September 30, 2018. Excluding the impact of the $27.0 million reclassification of network processing fees following the adoption of ASC 606, North America segment profit margin for the nine months ended September 30, 2019 was 26.3%. The increase in North America segment profit margin was primarily due to organic growth in Mexico and the U.S. Tech-enabled division and on-going operating efficiencies.

Europe segment profit was $41.9 million for the nine months ended September 30, 2019, compared to $42.7 million for the nine months ended September 30, 2018. The decrease is primarily due to an increase in selling, general and administrative expenses in Poland related to restructuring, organic growth and acquisitions. The Europe segment profit margin was 31.3% for the nine months ended September 30, 2019, compared to 23.5% for the nine months ended September 30, 2018. Excluding the impact of the $54.7 million reclassification of network processing fees following the adoption of ASC 606, Europe segment profit margin for the nine months ended September 30, 2019 was 22.2%.

Corporate expenses not allocated to segments were $25.1 million for the nine months ended September 30, 2019, compared to $31.9 million for the nine months ended September 30, 2018. The decrease in expense is due to decrease in share-based compensation expense as well as a decrease in professional fees incurred in connection with the IPO during 2018.

Liquidity and capital resources

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. 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. As of September 30, 2019, our capacity under the revolving credit facility portion of our Senior Secured Credit Facilities was $200.0 million, with availability of $131.5 million for additional borrowings. 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.

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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 which regulate the nature of cash as well as how much and when dividends can be repatriated. As of September 30, 2019, cash and cash equivalents of $311.8 million include cash in the United States of $127.9 million and $183.9 million in foreign jurisdictions. Of the foreign cash balances, $67.7 million is available for general purposes. The remaining $116.2 million is considered settlement and merchant reserves related cash and is therefore unable to be repatriated but not legally restricted.

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 from EVO, LLC. The amounts available to EVO, Inc. to pay cash dividends are subject to the covenants and distribution restrictions in its subsidiaries’ loan agreements.

In connection with our IPO, we entered into an 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 LLC Interests and related shares of EVO, Inc. for shares of our Class A common stock or, at our option, cash. If we choose to satisfy the exchange in cash, we anticipate that we will fund such exchange through cash from operations, funds available under the revolving portion of our Senior Secured Credit Facilities, equity or debt issuances or a combination thereof.

In addition, in connection with the IPO, we entered into a 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 until paid by us.

Under the eService shareholders’ agreement we may be compelled to purchase additional shares at the option of PKO Bank Polski. The execution of this option may adversely affect our liquidity in the future. Refer to Note 14, "Redeemable Non-Controlling Interests," for further discussion on the eService redeemable non-controlling interest.

The following table sets forth summary cash flow information for the nine months ended September 30, 2019 and 2018:


	Nine Months Ended September 30,
(in thousands)	2019		2018
Net cash provided by operating activities	$	28,825	$	66,348
Net cash used in investing activities		(61,286)		(107,332)
Net cash provided by financing activities		3,224		75,285
Effect of exchange rate changes on cash and cash equivalents		(9,651)		(3,959)
Net (decrease) increase in cash and cash equivalents	$	(38,888)	$	30,342

Operating activities

Net cash provided by operating activities was $28.8 million for the nine months ended September 30, 2019, a change of $37.5 million compared to cash provided by operating activities of $66.3 million for the nine months ended September 30, 2018. This decrease was due primarily to the timing of settlement-related assets and liabilities.

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Investing activities

Net cash used in investing activities was $61.3 million for the nine months ended September 30, 2019, a change of $46.0 million, compared to net cash used in investing activities of $107.3 million for the nine months ended September 30, 2018. The decrease is primarily due to a decrease in POS terminal purchases, a decrease in acquisition-related investments during 2019, as compared to the same period in 2018 and receipt of Visa Europe deferred cash consideration during 2019.

We purchased $24.6 million in equipment and improvements during the nine months ended September 30, 2019, a change of $14.4 million, compared to $39.0 million for the nine months ended September 30, 2018. The decrease was due primarily to terminals purchased during the fourth quarter of 2018 to support Poland’s cashless program and growth in Mexico terminal placements. Of the capital expenditures during the nine months ended September 30, 2019 $14.1 million relate to the purchase of POS terminals that are installed at merchant locations outside of the United States. As is customary in those markets, we provide 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 $3.2 million for the nine months ended September 30, 2019, a change of $72.1 million, compared to net cash provided by financing activities of $75.3 million for the nine months ended September 30, 2018. This decrease was primarily due to the IPO proceeds received in the prior year period partially offset by lower net repayments of the long-term debt facility in the current year period.

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 in June 2023, and a $665.0 million term loan maturing in December 2023. 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.

For additional discussion regarding our long-term debt instruments, see Note 12, “Long-Term Debt and Lines of Credit” in the notes to our accompanying unaudited condensed consolidated financial statements.

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 September 30, 2019, we had $17.6 million outstanding under these lines of credit with additional capacity of $175.6 million as of September 30, 2019 to fund settlement. The weighted average interest rate on these borrowings was 3.02% at September 30, 2019.

Contractual obligations

Other than changes which occur in the ordinary course of business, as of September 30, 2019, there were no significant changes to the contractual obligations reported at December 31, 2018 in our Annual Report on Form 10-K for the year ended December 31, 2018.

Off-balance sheet arrangements

As of September 30, 2019 and December 31, 2018, the Company did not have any off-balance sheet arrangements, except for operating leases entered into in the normal course of business.

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Critical accounting policies

The Company’s critical accounting policies have not changed, except as noted below, from those reported as of December 31, 2018 in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2018.

Refer to Note 1, “Description of Business and Summary of Significant Accounting Policies” and Note 2, “Revenue Recognition” in the notes to the accompanying unaudited condensed consolidated financial statements for information on the Company’s revenue recognition policy and the Company’s adoption of ASC 606, Revenue From Contracts With Customers.

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.

JOBS Act

We currently qualify as an “emerging growth company” under the JOBS Act, which enables us to postpone complying with certain reporting and other obligations under securities laws. In addition, Section 102 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. We are electing to delay the adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result, our unaudited condensed consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

Effective December 31, 2019, the Company expects to become a large accelerated filer and will no longer qualify as an “emerging growth company” under the JOBS Act. At such time, the Company will no longer be able to postpone compliance with certain regulations and disclosure requirements and will follow the timeline for adoption of new accounting pronouncements for public companies. In particular, the Company will be required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISKS

Our future income, cash flows and fair values relevant to financial instruments are subject to risks relating to interest rates and foreign currency exchange rates.

Interest rate risk

We are subject to interest rate risk in connection with our long-term debt and settlement facilities, which have variable interest rates. The interest rates on these facilities are based on a fixed margin plus a market interest rate, which can fluctuate accordingly but is subject to a minimum rate. Interest rate changes could impact the amount of our interest payments, and accordingly, our future earnings and cash flows, assuming other factors are held constant.

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As of September 30, 2019, we had approximately $686.9 million of variable rate debt, none of which was subject to an interest rate hedge. In the future, the interest rate may increase and we may be subject to interest rate risk. Based on the amount outstanding on our Senior Secured Credit Facilities on September 30, 2019, an increase of 100 basis points in the applicable interest rate would increase our annual interest expense by approximately $6.9 million. A decrease of 100 basis points in the applicable rate (assuming such reduction would not be below the minimum rate) would reduce our annual interest expense by approximately $6.9 million.

Foreign currency risk

We are exposed to changes in foreign currency rates as a result of our significant foreign operations. Revenue and income generated by international operations will increase or decrease compared to prior periods as a result of changes in foreign currency exchange rates. There has been no significant change in our exposure to market risk during the quarter ended September 30, 2019. For additional detail regarding our exposure to foreign currency risk, refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures of Market Risks” in in our Annual Report on Form 10-K for the year ended December 31, 2018.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, (the “Exchange Act”) as of September 30, 2019. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2019, our disclosure controls and procedures were effective to ensure information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error and mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of controls.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions or because the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected

Changes in internal control over financial reporting

There has been no change in our internal control over financial reporting that occurred during the three months ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are party to a number of claims and lawsuits incidental to our business. In our opinion, the liabilities, if any, which may ultimately result from the outcome of such matters, individually or in the aggregate, are not expected to have a material adverse effect on our financial position, liquidity, results of operations or cash flows.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Recent sales of unregistered securities

There were no unregistered sales of equity during the nine months ended September 30, 2019 or year ended December 31, 2018, except as otherwise previously reported and for shares of Class A common stock issued to the Continuing LLC Owners in satisfaction of the exchange rights granted to them in connection with the IPO.

From time to time following the IPO, the Continuing LLC Owners (other than Blueapple) have the right to require the Company to exchange all or a portion of their LLC Interests and related shares of Class C common stock or Class D common stock for newly-issued shares of Class A common stock on a one-for-one basis, with their shares of Class C common stock or Class D common stock, as applicable, being cancelled upon any such exchange. We may, under certain circumstances, elect to redeem the LLC Interests from any exchanging holder under the EVO LLC Agreement in lieu of any such exchange.

Issuer purchases of equity securities

In connection with the vesting of restricted stock awards, shares of Class A common stock are delivered to the Company by employees to satisfy tax withholding obligations. The following table summarizes such purchases of Class A common stock for the three months ended September 30, 2019:




				Total Number of Shares	Approximate Dollar Value of Shares
	Total Number	Average Price		Purchased as Part of	that May Yet Be Purchased Under
	of Shares	Paid per		Publicly Announced	the Plans or Programs
Period	Purchased (1)	Share		Plans or Programs	(in millions)
July 1, 2019 to July 31, 2019	—	$	—	—	$	—
August 1, 2019 to August 31, 2019	209	$	30.10	—	$	—
September 1, 2019 to September 30, 2019	151	$	28.50	—	$	—

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_{Shares purchased includes s}_{hares surrendered to the Company to satisfy tax withholding obligations in connection with the vesting of restricted stock awards issued to employees}_{and shares acquired by the Company to allow for the satisfaction of tax withholding obligations of non-employee members of management in connection with the vesting of restricted stock units}_.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

List of Exhibits


Exhibit No.	Description
31.1	Certification of Chief Executive Officer required by Rule 13a-14(a).
31.2	Certification of Chief Financial Officer required by Rule 13a-14(a).
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


	EVO Payments, Inc.

Date: November 7, 2019	By:	/s/ James G. Kelly
	Name:	James G. Kelly
	Title:	Chief Executive Officer



Date: November 7, 2019	By:	/s/ Kevin M. Hodges
	Name:	Kevin M. Hodges
	Title:	Chief Financial Officer