ITEM 1A. RISK FACTORS
The risks summarized and detailed below are not the only risks facing us. Please be aware that additional risks and uncertainties not currently known to us or that we currently deem to be immaterial could also materially and adversely affect our business, results of operations, financial condition, cash flows, or prospects. You should also refer to the other information contained in our periodic reports, including the Cautionary Note Regarding Forward-Looking Statements, our consolidated financial statements and the related notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations for a further discussion of the risks, uncertainties, and assumptions relating to our business.
Risk Factors Summary
Material risks that may affect our business, operating results and financial condition include, but are not necessarily limited to, those relating to:
Risks related to our business and industry
Our ability to anticipate and respond to changing industry trends, changes in the competitive landscape, and the needs and preferences of our merchants and consumers;
The effect of global economic, political, market, health and other conditions, including the impact of the COVID-19 pandemic, on our merchants and on consumer, business, and government spending;
Our ability to protect our systems and data from continually evolving cybersecurity risks or other technological risks;
Failures in our processing systems due to software defects, undetected errors, computer viruses, and development delays;
Degradation of the quality of the products and services we offer, including support services;
Our ability to recruit, retain, and develop qualified personnel;
Risks created by acquisitions;
Continued consolidation and other transactions in the banking industry;
Increased customer, referral partner, or sales partner attrition;
Any increase in chargebacks not paid by our merchants;
Failure to maintain or collect reimbursements from our financial institution referral partners;
Fraud by merchants or other counterparties or partners;
Failures by third-party vendors that we rely on to provide products and services;
Our ability to maintain our merchant relationships and strategic relationships with various financial institutions and referral partners;
Seasonality and volatility resulting in fluctuations in our quarterly revenues and operating results;
Geopolitical and other risks associated with operations outside of the United States;
A decline in the use of cards as a payment mechanism for consumers or other adverse developments with respect to the card industry in general;
Increases in card network fees and other changes to fee arrangements;
Failure by us, our merchants or our sales partners to comply with the applicable requirements of card networks resulting in fines or penalties;
Risks related to the Merger
Disruption to our business caused by the pending acquisition of us by Global Payments;
Our ability to consummate the transaction with Global Payments within the contemplated timeframe, or at all;
Any failure to consummate the Merger will adversely affect the market price of our common stock and could adversely affect our business, results of operations and financial condition;
The impact on our stock price, business, financial condition and results of operations if the proposed transaction with Global Payments is not consummated;
Costs, charges and expenses relating to the proposed transaction with Global Payments;
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Risks related to our financial results and indebtedness
The effect of foreign currency exchange rates;
The possibility of impairment of a significant portion of the goodwill and intangible assets on our balance sheet;
The impact on our results of operations if we were required to establish a valuation allowance against our deferred tax assets;
The effect of our indebtedness on our ability to raise capital, react to changes in the economy or our industry, or meet our debt obligations;
The risk that we could be required to purchase the remainder of our eService subsidiary in Poland;
Restrictions imposed by our Senior Secured Credit Facilities and our other outstanding indebtedness;
Accelerated funding programs, which increase our working capital requirements and expose us to incremental credit risk;
Risks related to legal and regulatory requirements
Failure to comply with, or changes in, laws and regulations, including those specific to the payments industry and those relating to anti-corruption, anti-money laundering, privacy, data protection, financial reporting, and information security, and consumer protection;
Failure to enforce and defend our intellectual property rights;
Risks associated with new or revised tax regulations or their interpretations, or becoming subject to additional foreign or U.S. federal, state, or local taxes;
Various legal proceedings in the course of our business;
Risks related to our organizational structure
The fact that our principal asset is our interest in EVO, LLC;
Risks related to the TRA (as defined below), including substantial cash payments to the Continuing LLC Owners;
Benefits conferred upon the Continuing LLC Owners as a result of our organizational structure that do not benefit holders of our Class A common stock to the same extent that they benefit the Continuing LLC Owners;
Risks related to our Series A Convertible Preferred Stock and the ownership interest of our Continuing LLC Owners
Our Series A Preferred Stock could adversely affect our liquidity and financial condition, and could in the future substantially dilute the ownership interest of holders of our common stock;
Continuing LLC Owners and holders of the Series A Preferred Stock may exercise influence over us;
General risks
The long-term macroeconomic effects of the global COVID-19 pandemic;
Certain provisions of Delaware law and antitakeover provisions in our organizational documents could delay or prevent a change of control.
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Risks related to our business and industry
Our ability to anticipate and respond to changing industry trends, changes in the competitive landscape, and the needs and preferences of our merchants and consumers may adversely affect our competitiveness or the demand for our products and services.
The financial services and payment technology industries are highly competitive and subject to rapid technological advancements, resulting in new products and services, including mobile payment applications and customized integrated software payment solutions, and an evolving competitive landscape, as well as changing industry standards and merchant and consumer needs and preferences. Our payment services and solutions compete against various financial services and payment systems, including cash and checks, and electronic, mobile, eCommerce, integrated, and B2B payment platforms. If we are unable to differentiate ourselves from our competitors and drive value for our merchants, we may not be able to compete effectively.
Furthermore, we are facing increasing competition from nontraditional competitors, including new entrant technology companies who offer certain innovations in payment methods. Some of these competitors utilize proprietary software and service solutions. Some of these nontraditional competitors have significant financial resources and robust networks and are highly regarded by consumers. These competitors may compete in ways that minimize or remove the role of traditional card networks, acquirers, issuers and processors in the electronic payments process. If these nontraditional competitors gain a greater share of total electronic payments transactions, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We expect that new services and technologies applicable to the financial services and payment technology industries will continue to emerge and that our merchants and consumers will continue to adopt new technology for business and personal uses. Our competitive landscape will continue to undergo changes that could adversely impact our current competitive position and prospects for growth, including:
rapid and significant changes in technology, resulting in new and innovative payment methods and programs, that could place us at a competitive disadvantage and reduce the use of our products and services if competitors are able to offer and provide services that we do not;
competitors, merchants and other industry participants may develop products and services that compete with or replace our products and services, including alternative payment systems that enable card networks and banks to transact with consumers directly, eCommerce payment systems, payment systems for mobile devices, peer to peer payment services, real-time and faster payment initiatives, delayed payment offerings such as BNPL or installment solutions, cryptocurrency payments initiatives, and customized integrated software and B2B payment solutions;
increased competition in certain of our markets in which we process “on-us” transactions, whereby we receive fees as a merchant acquirer and for processing services for the issuing bank, may cause the number of transactions in which we receive fees for both of these roles to decrease, which could reduce our revenue and margins in these jurisdictions; and
participants in the financial services and payment technology industries may merge, create joint ventures or form other business combinations that may improve their existing business services, or create new payment services that compete with our services.
In order to remain competitive within our markets, we must anticipate and respond to these changes, which may limit the competitiveness of and demand for our services. It is possible that these changes could ultimately reduce our role in payment transaction processing. Additionally, and in many cases as a result of significant consolidation in the payments industry over recent years, some of our competitors are larger and have greater financial resources than we do, enabling them to maintain a wider range of product offerings, mount extensive promotional campaigns, and be more aggressive in offering products and services at lower rates. Failure to compete effectively against any of these or other competitive threats or to develop value-added services that meet the needs and preferences of our merchants could adversely affect our ability to compete for merchants and financial partners and adversely affect our business, financial condition, or results of
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operations. Furthermore, potential negative reactions to our products and services by merchants or consumers can spread quickly and damage our reputation before we have the opportunity to respond. If we are unable to anticipate or respond to technological or industry changes on a timely basis, our ability to remain competitive and the demand for our products and services could be adversely affected.
Global economic, political, and other conditions may adversely affect trends in consumer, business, and government spending, which may adversely impact the demand for our services, revenue, and profitability.
The financial services and payment technology industries depend heavily upon the overall level of consumer, business, and government spending. A sustained deterioration in general economic conditions, including those caused by inflation, high interest rates, supply chain disruptions, and COVID-19, particularly in the Americas or Europe, may adversely affect our financial performance by reducing the number or average purchase amount of transactions we process. A reduction in consumer or business spending could result in a decrease of our revenue and profits.
Adverse economic trends may accelerate the timing, or increase the impact of, risks to our financial performance. These trends could include the following:
declining economies, foreign currency fluctuations, and the pace of economic recovery can change consumer spending behaviors, such as cross-border travel patterns, on which a portion of our revenue and growth is dependent;
low levels of consumer and business confidence typically associated with recessionary environments may result in decreased spending by cardholders;
high unemployment may result in decreased spending by cardholders;
budgetary concerns in the United States and other countries could affect sovereign credit ratings, and impact consumer confidence and spending;
supply chain disruptions may result in decreased spending by cardholders with our merchants whose ability to provide goods and services is materially impacted;
supply chain disruptions could impact our ability to purchase terminals for existing or prospective customers;
current and potential future inflationary pressures may adversely impact spending by cardholders;
emerging market economies tend to be more sensitive to adverse economic trends than the more established markets we serve;
financial institutions may restrict credit lines to cardholders or limit the issuance of new cards to mitigate cardholder credit concerns;
uncertainty and volatility in the performance of our merchants’ businesses;
cardholders may decrease spending for services our merchants market and sell; and
government intervention, including the effect of laws, regulations and government investments in our merchants, may have potential negative effects on our business and our relationships with our merchants or otherwise alter their strategic direction away from our products and services.
Our inability to protect our systems and data from continually evolving cybersecurity risks or other technological risks could affect our reputation among merchants, card issuers, financial institutions, card networks, partners, and cardholders and may expose us to penalties, fines, liabilities, and legal claims.
In order to provide our services, we process, transmit, and store sensitive business information and personal information about our merchants, merchants’ customers, vendors, partners, and other parties. This information may include credit and debit card numbers, bank account numbers, personal identification numbers, names and addresses, and other types of personal information or sensitive business information. Some of this information is also processed and stored by our
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merchants’ third-party service providers to whom we outsource certain functions and other agents (which we refer to collectively as our “associated third parties”).
We have certain responsibilities to the card networks and their member financial institutions for any failure by us or by any of our associated third parties to protect this information. We have been, and expect to continue to be, a potential target of malicious third party attempts to identify and exploit system vulnerabilities and penetrate or bypass our security measures. While plans and procedures are in place to protect this sensitive data, we cannot be certain that these measures will be successful and will be sufficient to counter all current and emerging technology threats that are designed to breach our systems in order to gain access to confidential information.
The techniques used to obtain unauthorized access, disable, or degrade service or sabotage systems change frequently, have become increasingly complex and sophisticated, and are often difficult to detect. Threats to our systems and our associated third parties’ systems can derive from human error, fraud, or malice on the part of employees or third parties, or may result from accidental technological failure. Computer viruses and other malware can be distributed and could infiltrate our systems or those of our associated third parties. In addition, denial of service or other attacks could be launched against us for a variety of purposes, including to interfere with our services or create a diversion for other activities. Our data protection measures may not prevent access or use of sensitive data. While we maintain insurance coverage that may cover certain aspects of cyber risks and , our insurance coverage may be to cover all , and we may not be to renew the insurance on commercially reasonable terms or at all. Further, we do not control the actions of any of the third parties that facilitate our business activities, including vendors, suppliers, customers, service providers, counterparties or financial intermediaries, or their systems. These third parties have experienced security in the past, and any future experienced by these third parties, including those resulting from or other or in services, could affect our ability to conduct our business or us to liability.
In addition, following an acquisition, we take steps to ensure our data and system security protection measures cover the acquired business as part of our integration process. As such, there may be a period of increased cybersecurity risk during the period between closing an acquisition and the completion of our data and system security integration.
We may also be subject to liability for claims relating to misuse of personal information, such as unauthorized marketing and violation of data privacy laws. We cannot provide assurance that the contractual requirements related to security and privacy that we impose on our service providers who have access to merchant and customer data will be followed or will be adequate to prevent the unauthorized use or disclosure of data. In addition, we have agreed in certain agreements to take certain protective measures to ensure the confidentiality of merchant and consumer data. The costs of systems and procedures associated with such protective measures may increase and could adversely affect our ability to compete effectively. Any failure to adequately enforce or provide these protective measures could result in litigation, governmental and card network intervention, and fines, lost revenue, and other liabilities and reputational .
Any type of security breach, attack, or misuse of data described above or otherwise, could harm our reputation and deter existing and prospective merchants and partners from using our services, deter customers from making electronic payments generally, increase our operating expenses in order to contain and remediate the incident, expose us to unexpected or uninsured liability, disrupt our operations (including potential service interruptions), distract our management, increase our risk of regulatory scrutiny, result in the imposition of regulatory or card network fines and other penalties, and adversely affect our continued card network registration and financial institution sponsorship. For example, if we were to be removed from the card networks’ lists of Payment Card Industry Data Security Standard (“PCI DSS”) compliant service providers, our existing merchants, sales, and financial institution partners, or other third parties may their relationship with us or using or referring our services. Also, prospective merchants, sales partners, financial institution partners or other third parties may or choose not to consider us for their processing needs. In addition, card networks could to allow us to process through their networks. Any of the foregoing could impact our business, financial condition, or results of operations.
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We may experience failures in our processing systems due to software defects, undetected errors, computer viruses, and development delays, which could damage customer relations and expose us to liability.
Our core business depends on the reliability of our processing systems. A system outage or other failure could adversely affect our business, financial condition, or results of operations, including by damaging our reputation or exposing us to third-party liability. Certain laws, regulations, and card network rules allow for penalties if our systems do not meet certain operating standards and may require us to report issues to regulators or the card networks within a specified time period. To successfully operate our business, we must be able to protect our systems from interruption, including from events that may be beyond our control. Events that could cause system interruptions include fire, natural disaster, unauthorized entry, power loss, telecommunications failure, computer viruses, terrorist acts, and war. Although we have taken steps to protect data and system , there is still risk that we may data or experience system . In addition, we utilize select third parties for certain recovery operations, particularly outside of the United States. To the extent we outsource any recovery functions, we could be impacted in the event of the vendor’s unresponsiveness or other . In addition, our insurance may not be adequate to compensate us for all or that may occur.
Our products and services are based on sophisticated software and computing systems that are constantly evolving. We often encounter delays and cost overruns in developing and implementing changes to our systems. In addition, the underlying software may contain undetected errors, viruses, or defects. We may experience processing delays on our systems due to system capacity or configuration issues as well as due to service interruptions or delays by our service providers. Defects in our software products and errors or delays in our processing of electronic transactions could result in additional development costs, diversion of technical and other resources from our other development efforts, loss of credibility with current or potential merchants, harm to our reputation, or other liabilities. In addition, we rely on technologies supplied to us by third parties that may contain , viruses, or that could affect our business, financial condition, or results of operations. Although we attempt to limit our potential liability through in our software documentation and of liability provisions in our licenses and other agreements with our merchants and partners, we cannot that these measures will be in limiting our liability.
Degradation of the quality of the products and services we offer, including support services, could adversely impact our ability to attract and retain merchants and partners.
Our merchants and partners expect a consistent level of quality in the provision of our products and services. If the reliability or functionality of our products and services is compromised or the quality or support of such products and services is otherwise degraded, we could lose existing merchants and partners and find it harder to attract new merchants and partners. If we are unable to scale our support functions to address the growth of our merchant portfolio and partner network, the quality of our support may decrease, which could also adversely affect our ability to attract and retain merchants and partners.
Our ability to recruit, retain, and develop qualified personnel is critical to our success and growth.
For us to successfully compete and grow, we must recruit, retain, and develop personnel who can provide the necessary expertise across a broad spectrum of intellectual capital needs in a rapidly changing technological, social, economic, and regulatory environment. The market for qualified personnel is competitive, and we have experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications, and we may not be able to fill positions in desired geographic areas or at all and may fail to effectively replace current personnel who depart with qualified or effective successors. Our efforts to retain and develop personnel may also result in significant additional expenses, which could adversely affect our profitability. As the economic uncertainty related to the COVID-19 pandemic eases, we have faced, and may continue to face, additional challenges in recruiting and retaining qualified personnel as other companies increase the pace of hiring. We must also continue to retain and motivate existing employees through our compensation practices, company culture, and career development . We cannot that we will be to attract and retain qualified personnel in the future or that key personnel, including our executive officers, will continue to be employed or that our succession planning will mitigate the risk associated with key personnel transitions. If
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we fail to attract new personnel or to retain our current personnel, our business and future growth prospects could be adversely affected.
Acquisitions create certain risks and may adversely affect our business, financial condition, or results of operations.
We have actively acquired businesses and expect to continue to make acquisitions of businesses and assets in the future. The acquisition and integration of businesses and assets involve a number of risks. These risks include valuation (determining a fair price for the business and assets), integration (managing the process of integrating the acquired business’ people, products, technology, and other assets to realize the projected value and synergies), regulation (obtaining any applicable regulatory or other government approvals), and due diligence (identifying risks to the prospects of the business, including undisclosed or unknown liabilities or restrictions).
In addition, acquisitions outside of the United States often involve additional or increased risks including:
managing geographically separated organizations, systems and facilities;
integrating personnel with diverse business backgrounds and organizational cultures;
complying with non-U.S. legal, tax, and regulatory requirements;
addressing financial and other impacts to our business resulting from fluctuations in currency exchange rates;
enforcing intellectual property rights in non-U.S. countries;
difficulty entering new markets due to, among other things, consumer acceptance and business knowledge of these markets; and
general economic and political conditions.
The failure to avoid or mitigate the risks described above or other risks associated with acquisitions could have a material adverse effect on our business, results of operations, and financial condition.
In addition, we may not be able to successfully integrate businesses that we acquire or do so within the intended timeframe. We could face significant challenges in managing and integrating our acquisitions, including diversion of management’s attention, migrating services from third-parties to our own systems and infrastructure, and integrating operations and personnel. In addition, the expected cost synergies or new revenue associated with our acquisitions may not be fully realized in the anticipated amount or within the contemplated timeframe or cost expectations, which could result in increased costs and have an adverse effect on our business, results of operations, and financial condition.
Further, there may be material risks we are unable to identify or quantify through due diligence. If significant liabilities, including those relating to violations of applicable law, arise at one of our joint ventures or acquired subsidiaries, we may be exposed to material liabilities or our business may be materially and adversely affected.
Additional acquisitions may require us to incur additional debt through new or existing credit agreements or issue additional equity securities to fund the purchase price. The purchase price of a pending foreign acquisition will further be impacted by foreign exchange rate; however, we cannot predict whether future foreign currency exchange fluctuations will have a positive or negative impact on the final purchase price. If we are unable to obtain the required funding on acceptable terms, or at all, we may not be able to complete acquisitions, which could have an adverse impact on our growth.
Finally, future acquisition opportunities may not be available on acceptable terms, or at all, and we may not be able to obtain necessary financing or regulatory approvals to complete potential acquisitions. If we are unable to continue to complete successful acquisitions, our growth prospects could be adversely impacted.
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Continued consolidation and other transactions in the banking industry could adversely affect our growth and financial results.
The banking industry continues to experience consolidation regardless of overall economic conditions. In addition, in times of economic distress, various regulators in the markets we serve have acquired, and in the future may acquire, financial institutions, including banks with which we partner. If a current financial institution referral partner of ours is acquired by another bank, the acquiring bank may seek to terminate our agreement and impose its own merchant services program on the acquired bank. If a financial institution referral partner acquires another bank, our financial institution referral partner may take the opportunity to conduct a competitive bidding process to determine whether to maintain our merchant acquiring services or switch to another provider. In either situation, we may be unable to retain the relationship post-acquisition, or may have to offer financial concessions to do so, which could adversely affect our results of operations or growth. In addition, if a current financial institution referral partner of ours is acquired or becomes subject to a consent decree or similar oversight by a regulator, the regulator may seek to alter the terms or terminate our existing agreement with the acquired financial institution. For example, in October of 2018, BNP Paribas Group acquired one of our financial institutional referral partners, Raiffeisen Bank Polska, in Poland. Under the terms of our contract, BNP Paribas Group elected not to continue the relationship with us in Poland and refunded certain fees to us that we had previously paid to the bank. In addition, our financial institution referral partners may sell certain of their business assets, their business, or rebrand. Any such actions could impact our commercial with such financial institution partner.
One of our financial institution referral partners, Grupo Banco Popular, was acquired by Grupo Santander (“Santander”) in June 2017, which has adversely impacted our business in Spain. Revenues from this channel have declined significantly primarily due to reduced merchant referrals following Santander’s consolidation of Grupo Banco Popular branches and the bank’s lack of performance of certain of its obligations under our agreements. See Note 19, “Commitments and Contingencies,” in the notes to the accompanying consolidated financial statements for additional information.
Increased customer attrition could cause our financial results to decline.
We experience attrition in merchant transaction processing volume due to several factors, including business closures, transfers of merchants’ accounts to our competitors, unsuccessful contract renewal negotiations, and account closures that we initiate for various reasons, such as heightened credit risks or contract breaches by merchants. We cannot predict the level of attrition that may occur in the future and it could increase. Higher than expected attrition could adversely affect our business, financial condition, or results of operations.
We incur a chargeback liability when our merchants refuse to or cannot reimburse chargebacks resolved in favor of their customers. Any increase in chargebacks not paid by our merchants may adversely affect our business, financial condition, or results of operations.
In the event that a dispute between a cardholder and a merchant is not resolved in favor of the merchant, the transaction is normally charged back to the merchant and the purchase price is credited or otherwise refunded to the cardholder. If we are unable to collect such amounts from the merchant’s account or reserve account (if applicable), or if the merchant refuses or is unable, due to closure, bankruptcy, or other reasons, to reimburse us for a chargeback, we are responsible for the amount of the refund paid to the cardholder. The risk of chargebacks is typically greater with those merchants that promise future delivery of goods and services, rather than delivering goods or rendering services at the time of payment, as well as “card not present” transactions in which consumers are not physically present, such as eCommerce, telephonic, and mobile transactions. We may experience significant losses from chargebacks in the future. Any increase in chargebacks not paid by our merchants could have a material adverse effect on our business, financial condition, or results of operations. Notwithstanding our policies and procedures for managing credit risk, such as requiring merchant cash reserve accounts and monitoring transaction activity, it is possible that a on such obligations by one or more of our merchants could affect our business, financial condition, or results of operations.
In addition, in certain cases, governmental authorities may seek to freeze or take possession of merchant cash reserves as part of an investigation or regulatory proceeding. In that event, we may be unable to satisfy chargeback losses from the
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merchant cash reserves and may experience significant losses if we are required to satisfy chargeback losses from our own funds.
Failure to maintain or collect reimbursements from our financial institution referral partners could adversely affect our business.
Certain of our long-term referral arrangements with financial institutions permit our partners to offer their merchant customers lower rates for processing services than we typically provide to the general market. If one of our bank partners elects to offer these lower rates, they are contractually required to reimburse us for the full amount of the discount provided to their merchant customers; however, there can be no assurance that these contractual provisions will fully protect us from potential losses should a bank partner default on its obligations to reimburse us or seek to discontinue such reimbursement obligations in the future. If we are unable to collect the full amount of any such reimbursements for any reason, we may incur losses. In addition, any discount provided by our financial institution partner may cause merchants in these markets to demand lower rates for our services in the future, which could further reduce our margins or cause us to lose merchants, either of which could adversely affect our business, financial condition, or results of operations.
Fraud by merchants or others could adversely affect our business, financial condition, or results of operations.
We may be liable for certain fraudulent transactions and credits initiated by merchants or others. For example, if we were to process payments for a merchant that engaged in unfair or deceptive trade practices, we may be subject to enforcement actions by the Federal Trade Commission, other consumer protection agencies, state attorneys general, regulators or other governmental agencies. Examples of merchant fraud include merchants or other parties knowingly using a stolen or counterfeit credit or debit card, card number, or other credentials to record a false sales or credit transaction, processing an invalid card, or intentionally failing to deliver goods or services sold in an otherwise valid transaction. Criminals are using increasingly sophisticated methods to engage in illegal activities such as counterfeiting and , especially through eCommerce transactions. to effectively manage risk and prevent could increase our chargeback liability or cause us to incur other liabilities, including if we are subject to enforcement action by a regulatory authority. It is possible that of could increase in the future. Increases in chargebacks or other liabilities could affect our business, financial condition, or results of operations.
Because we rely on third-party vendors to provide products and services, we could be adversely impacted if they fail to fulfill their obligations.
We depend on third-party vendors and partners to provide us with certain products and services, including components of our computer systems, software, data centers, and telecommunications networks, to conduct our business. For example, we rely on third parties for services such as organizing and accumulating certain daily transaction data from each merchant and card issuer and forwarding the data to the relevant card network. We also rely on third parties for specific software and hardware used in providing our products and services. Some of these organizations and service providers are our competitors or provide similar services and technology to our competitors, and we do not have long-term or exclusive contracts with them. In addition, we rely on various financial institutions to provide clearing services in connection with our settlement activities. If these financial institutions stop providing clearing services, we would need to find other financial institutions to provide those services. If we were unable to do so we would no longer be able to provide processing services to certain merchants, which could adversely affect our business, financial condition, or results of operations.
The systems and operations of our third-party vendors and partners, including our terminal manufacturers, could be exposed to damage or interruption from, among other things, fire, natural disaster, power loss, telecommunications failure, unauthorized access, computer viruses, denial-of-service attacks, acts of terrorism, human error, vandalism or sabotage, financial insolvency, bankruptcy, and similar events.
In addition, we may be unable to renew our existing contracts with our most significant vendors and partners or our vendors and partners may stop providing or otherwise supporting the products and services we obtain from them, and we may not be able to obtain these or similar products or services on the same or similar terms as our existing arrangements, if at all. The failure of our vendors and partners to perform their obligations and provide the products and services we obtain from
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them in a timely manner for any reason could adversely affect our operations and profitability due to, among other consequences: (i) loss of revenues; (ii) loss of merchants and partners; (iii) loss of merchant and cardholder data; (iv) fines imposed by card networks; (v) reputational harm; (vi) exposure to fraud losses or other liabilities; (vii) additional operating and development costs; or (viii) diversion of management, technical and other resources.
We depend, in part, on our merchant and strategic relationships with various financial institutions and referral partners to grow our business. If we are unable to maintain these relationships, our business may be adversely affected.
We depend, in part, on our merchant relationships to grow our business. Our merchant processing agreements are our main source of revenue. Our failure to maintain or grow these relationships could adversely affect our business and result in a reduction of our revenue and profit.
We also rely on our various financial institution relationships, including our partnerships with Deutsche Bank USA, Deutsche Bank Group, Grupo Santander, PKO Bank Polski, Bank of Ireland, Raiffeisen Bank, Moneta, Citibanamex, Sabadell, Banco de Crédito e Inversiones, and the National Bank of Greece, among others, to grow our business. These relationships are structured in various ways, such as commercial alliance relationships, equity method investments, and joint ventures. We enter into long-term relationships with our bank partners where these partners typically provide exclusive referrals and credit facilities to fund our daily settlement obligations. These facilities are generally short term and at market interest rates. In some cases, our bank partners provide us with card network sponsorship, which enables us to route transactions under the bank’s control and identification numbers to clear card transactions through the card networks. Under the rules of the card networks, we are required to be a member of the network or sponsored through a member financial institution.
In addition, we rely on our various referral partners to grow our business. Our sales divisions work with a diverse mix of referral partners including ISVs, software dealers, and independent sales agents. These relationships generally consist of non-exclusive referral arrangements pursuant to which we pay our partners a referral fee based on profit generated by the merchants attributable to their referral. If an existing sales partner switches to another payment processor, terminates our services, internalizes payment processing functions that we perform, merges with or is acquired by one of our competitors, seeks alternative product or integration capabilities, or shuts down or becomes insolvent, we may no longer receive new merchant referrals from the sales partner and we risk losing existing merchants that were originally enrolled by the sales partner. In some jurisdictions, we are reliant on a small concentration of sales partners for a substantial portion of our merchant referrals.
We rely on the growth of our financial institution and referral partner relationships, and our ability to maintain these relationships, to support and grow our business. In addition, in certain of the markets in which we conduct our business, a substantial portion of our revenue is derived from long-term contracts. If we fail to maintain or renew these relationships, or our financial institution partners fail to maintain their brands or decrease the size of their branded networks, or our referral partners fail to penetrate their target markets or fail to remain competitive in such markets, our business, financial condition or results of operations may be adversely affected. Furthermore, failure to maintain our financial institution relationships may prevent us from obtaining settlement facilities, and we may be forced to secure alternative arrangements on less favorable terms. The loss of financial institution relationships or referral partners could adversely affect our business and result in a reduction of our revenue and profit.
Finally, we intend to grow our business by partnering with new financial institutions and tech-enabled partners in our existing markets, as well as new markets. The inability to partner with new financial organizations or tech-enabled partners may inhibit our growth prospects.
A significant number of our merchants are small- and medium-sized businesses or small affiliates of large companies, which can be more difficult and costly to retain than larger enterprises and may increase the impact of economic fluctuations on our business.
We market and sell our products and services to, among others, SMEs and small affiliates of large companies. To continue to grow our revenue, we must add merchants, sell additional services to existing merchants, and encourage existing
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merchants to continue doing business with us. However, retaining SMEs can be more difficult than retaining large enterprises because SME merchants often have higher rates of business failures and more limited resources; are typically less sophisticated in their ability to make technology-related decisions based on factors other than price; may have decisions related to the choice of payment processor dictated by their affiliated parent entity; and are more able to change their payment processors than larger organizations dependent on our services.
SMEs are typically more susceptible to the adverse effects of economic fluctuations and have been disproportionately affected by the adverse effects of the COVID-19 pandemic and resulting government regulations. Adverse changes in the economic environment or business failures of our SME merchants may have a greater impact on us than on our competitors who do not focus on SMEs to the extent that we do. As a result, we may need to attract and retain new merchants at an accelerated rate or decrease our expenses to mitigate negative impacts in the event our SME merchants experience business declines due to economic trends or otherwise, failure of which may negatively impact our business, financial condition, or results operations.
Our operating results and operating metrics are subject to seasonality and volatility, which could result in fluctuations in our quarterly revenues and operating results or in perceptions of our business prospects.
We have experienced in the past, and expect to continue to experience, seasonal fluctuations in our revenue, which can vary by region. Our revenue has typically been strongest in our fourth quarter and weakest in our first quarter. Some variability results from seasonal retail events and the number of business days in a month or quarter. Our typical seasonality patterns have been disrupted by the ongoing COVID-19 pandemic and related government actions. We also experience volatility in certain other metrics, such as number of transactions processed and payment processing volumes. Volatility in our key operating metrics or their rates of growth could result in fluctuations in financial condition or results of operations and may lead to adverse inferences about our business prospects, which could result in declines in our stock price.
Our business may be adversely affected by geopolitical and other risks associated with operations outside of the United States and, as we continue to expand internationally, we may become more susceptible to these risks.
We offer merchant acquiring and processing services in many geographies outside of the United States, including in Canada, the Czech Republic, Germany, Ireland, Mexico, Chile, Poland, Spain, and the United Kingdom. We are subject to risks associated with operations in international markets, including changes in foreign governmental policies and requirements applicable to our business. In particular, some countries where we operate lack well-developed legal systems or have not adopted clear regulatory frameworks for the payment services industry. This lack of legal certainty exposes our operations to increased risks, including difficulty enforcing our agreements in those jurisdictions and increased risks of adverse actions by local government authorities, such as expropriations. As we continue to expand internationally, we may face challenges due to the presence of more established competitors and our lack of experience in new markets.
In addition, our current and future financial institution partners in foreign jurisdictions, particularly in Europe, may be acquired, reorganized, or otherwise disposed of in the event of further market turmoil or losses in their loan portfolio that result in such financial institutions becoming less than adequately capitalized. Our revenue derived from these and other non-U.S. operations is subject to additional risks, including those resulting from social and geopolitical instability and unfavorable political or diplomatic developments, all of which could adversely affect our business, financial condition, or results of operations. A possible slowdown in global trade caused by increasing tariffs or other restrictions could decrease consumer or corporate confidence and reduce consumer, government, and corporate spending in countries outside the United States, which could adversely affect our foreign operations. Certain of our partners in foreign jurisdictions are also state-controlled entities, which may adversely affect our ability to seek redress for any contractual to the extent these partners can claim sovereign immunity. In addition, in the event ongoing or future sovereign debt in a particular country impact any such partner, our business could be impacted.
We have significant operations in the United Kingdom and throughout Europe more generally. The United Kingdom’s withdrawal from the European Union and the continuing negotiations to determine the terms of the United Kingdom’s relationship with the EU has created significant uncertainty, including the nature of the transition, implementation, or
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successor arrangements, and future trading arrangements between the United Kingdom and the EU, and may in the future have a material adverse effect on global economic conditions and the stability of the global financial markets. We continue to closely monitor the impact of Brexit on our operations as further details emerge regarding the post-Brexit regulatory landscape. However, lack of clarity about applicable future laws, regulations, or treaties between the United Kingdom and the European Union could increase our costs and depress market activity. If we are unable to successfully manage the foregoing risks relating to our business outside the United States, our business, financial condition, or results of operations could be adversely impacted.
A decline in the use of cards as a payment mechanism for consumers or other adverse developments with respect to the card industry in general may adversely impact us.
In order to consistently increase and maintain our profitability, consumers and businesses must continue to use electronic payment methods that we process, including credit and debit cards, and various factors may impact levels of use. For example, consumer credit risk may make it more difficult or expensive for consumers to gain access to credit facilities such as credit cards. Financial institutions may seek to charge their customers additional fees for use of credit or debit cards which could result in decreased use of credit or debit cards. In addition, various technology alternatives to credit and debit cards, such as digital wallets, have been introduced to the market and we expect that additional alternatives will be developed. Any other development that impacts the cost, convenience, or quality of services of electronic payments could result in a decline in the use of credit and debit cards or other electronic payments. Any such decline may adversely impact our business, financial condition, or results of operations.
Increases in card network fees and other changes to fee arrangements may result in the loss of merchants or a reduction in our earnings.
From time to time, card networks, including Visa and Mastercard, increase the fees that they charge processors. We could attempt to pass these increases along to our merchants but this strategy might result in the loss of merchants to our competitors who do not pass along the increases. If competitive practices prevent us from passing along the higher fees to our merchants in the future, we may have to absorb all or a portion of such increases, which may increase our operating costs and reduce our earnings.
In addition, in certain of our markets, card issuers pay merchant acquirers fees based on debit card usage in an effort to encourage debit card use. If this practice were discontinued, our revenue and margins in jurisdictions where we receive these fees would be adversely affected.
Further, governments in the markets in which we operate have and may continue to implement new laws or regulations that effectively limit our ability to provide DCC or set fees or foreign currency exchange spreads. In March 2018, the EU proposed additional regulations on cross-border transactions within the EU, including specific regulations on DCC. In December 2018, the European Commission, European Council, and European Parliament agreed to legislation that requires disclosure of foreign exchange margins applicable to DCC transactions and eventual comparability between foreign exchange rates offered by DCC providers and bank card issuers. The new legislation went into effect in April 2020. Such regulation could materially and adversely impact our financial results, by reducing the number of DCC transactions we process and the level of profit we generate from such transactions.
In addition to government regulation and card network rules, it is possible that merchants alter their business practices to avoid payment of certain fees to payment processors, such as inactive fees, paper statements, and PCI non-compliance fees. A significant decrease in these fees paid by merchants could have a material adverse effect on our business, financial condition, or results of operations.
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If we fail to comply with the applicable requirements of card networks, they could seek to fine us, suspend us or terminate our registrations. If our merchants or sales partners incur fines or penalties that we cannot collect from them, we may have to bear the cost of such fines or penalties.
In order to provide our transaction processing services, several of our subsidiaries are registered with Visa and Mastercard and other card networks as members or service providers for member institutions. Visa, Mastercard and other card networks set rules and standards with which we must comply. Any failure to comply with the networks’ requirements or to pay the fines they impose could cause the termination of our registration or status as a certified service provider and require us to stop providing payment processing services.
The card network rules subject us and our merchants to a variety of fines or penalties for certain acts or omissions by us or our merchants. The rules of card networks are set by their boards, which include members that are card issuers that directly or indirectly sell processing services to merchants in competition with us. There is a risk that these members could use their influence to enact changes to the card network rules or policies that are detrimental to us. Any changes in network rules or standards that increase the cost of doing business or limit our ability to provide processing services to our merchants will adversely affect the operation of our business. In addition, card networks and their member financial institutions regularly update, and generally expand, security expectations and requirements related to the security of cardholder data and environment. Under certain circumstances, we are required to report incidents to the card networks within a specified time frame.
In addition, if a merchant or sales partner fails to comply with the applicable requirements of card networks, it could be subject to a variety of fines or penalties that may be levied by card networks. We may have to bear the cost of such fines or penalties if we are unable to collect them from the applicable merchant or sales partner. The termination of our member registration, any change in our status as a service provider or merchant processor, or any changes in network rules or standards could prevent us from providing processing services relating to the affected card network and could adversely affect our business, financial condition, or results of operations.
Risks related to the Merger
The pendency of the Merger may result in disruptions to our business.
On August 1, 2022, we entered into the Merger Agreement with Global Payments and Merger Sub, pursuant to which we will be acquired by Global Payments in an all-cash transaction. The Merger Agreement generally requires us to operate our business in the ordinary course pending consummation of the Merger and prohibits us, without Global Payments’ consent, from taking certain specified actions until the Merger has been consummated. These prohibitions may affect our ability to execute our business strategies and attain financial and other goals and may impact our financial condition, results of operations and cash flows.
Further, in connection with the proposed transaction with Global Payments, our current and prospective employees may experience uncertainty about their future roles with us following the Merger, which may adversely affect our ability to attract and retain key personnel. Key employees may depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with us following the Merger, and may depart prior to the consummation of the Merger. Accordingly, no assurance can be given that we will be able to attract and retain key employees to the same extent that we have been able to in the past.
The proposed transaction with Global Payments could cause disruptions to our business or business relationships, which could have an adverse impact on our results of operations. Parties with which we have business relationships may experience uncertainty as to the future of such relationships and may delay or defer certain business decisions, seek alternative relationships with third parties or seek to alter their present business relationships with us. Parties with whom we otherwise may have sought to establish business relationships may seek alternative relationships with third parties.
The proposed transaction with Global Payments may place a significant burden on management and internal resources. It may also divert management’s time and attention from the day-to-day operation of our businesses and the execution of our
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other strategic initiatives. This could adversely affect our financial results. In addition, we have incurred and will continue to incur other significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed transaction with Global Payments, and many of these fees and costs are payable regardless of whether or not such transaction is consummated.
Any of the foregoing could materially and adversely affect our business, our financial condition and our results of operations and prospects.
The Merger may not be consummated within the intended timeframe, or at all, and the failure to consummate the Merger will adversely affect the market price of our common stock and could adversely affect our business, results of operations and financial condition.
There can be no assurance that the Merger will be consummated within the intended timeframe, or at all. The Merger Agreement contains a number of conditions that must be satisfied or waived prior to the completion of the Merger.
Assuming the satisfaction or, to the extent permitted by law, waiver of customary closing conditions, the Company expects the Merger to be completed by March 31, 2023. There can be no assurance that the remaining closing conditions will be satisfied (or waived, if applicable), and if all closing conditions are satisfied (or waived, if applicable), we can provide no assurance that the Merger will be consummated promptly or at all.
If the Merger is not consummated within the intended timeframe or at all, we may be subject to a number of material risks. The price of our common stock will significantly decline if the proposed transaction with Global Payments is not consummated within the intended timeframe or at all. In addition, some costs related to the Merger must be paid whether or not the Merger is consummated, as we have already incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed transaction with Global Payments. If the proposed transaction with Global Payments is not consummated within the intended timeframe or at all, we may also experience negative reactions from our investors, customers, partners, suppliers, and employees. Along with transaction costs and fees, the proposed transaction with Global Payments has required and will continue to require the attention and resources of our management team. If the proposed transaction with Global Payments is not consummated within the intended timeframe or at all, our management team’s attention and resources will have been diverted from other uses with little to no additional benefit to EVO, Inc.
Risks related to our financial results and indebtedness
Our results of operations may be adversely affected by changes in foreign currency exchange rates.
We present our financial statements in U.S. dollars and have a significant proportion of net assets and earnings in non-U.S. dollar currencies. Accordingly, we are exposed to foreign currency exchange rate risk arising from transactions in the normal course of business.
Revenue and profit generated by our non-U.S. operations will increase or decrease compared to prior periods as a result of changes in foreign currency exchange rates and the impact may be significant. For example, revenue generated by our non-U.S. operations represented approximately 65% of our total revenue for the year ended December 31, 2022 , and a hypothetical uniform 10% strengthening in the value of the U.S. dollar relative to the local currencies of our non-U.S. operations would result in a decrease of approximately $ 8.0 million in pretax income for the year ended December 31, 2022 . In addition, currency variations can adversely affect the margins on our DCC product offerings. A greater portion of our revenue is generated outside the United States as compared to certain of our competitors and, as such, foreign currency exchange rates may have a more significant impact on our results.
In addition, we may become subject to exchange control regulations that restrict or prohibit the conversion of our other revenue currencies into U.S. dollars. Any of these factors could decrease the value of revenues and earnings we derive from our non-U.S. operations and adversely affect our business.
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While we currently have some degree of diversification in foreign currency, we may seek to reduce our exposure to fluctuations in foreign currency exchange rates in the future through the use of hedging arrangements. To the extent that we hedge our foreign currency exchange rate exposure in the future, we will forgo the benefits we would otherwise experience if foreign currency exchange rates changed in our favor. No strategy can completely insulate us from risks associated with such fluctuations and our currency exchange rate risk management activities could expose us to substantial losses if such rates move materially differently from our expectations.
Our balance sheet includes significant amounts of goodwill and intangible assets. The impairment of a significant portion of these assets would negatively affect our business, financial condition, or results of operations.
As a result of our prior acquisitions, a significant portion of our total assets consists of intangible assets (including goodwill). To the extent we engage in additional acquisitions, we may recognize additional intangible assets and goodwill. We evaluate on a regular basis whether all or a portion of our goodwill and other intangible assets may be impaired. Under current accounting rules, any determination that impairment has occurred would require us to record an impairment charge. An impairment of a significant portion of goodwill or intangible assets would adversely affect our business, financial condition, or results of operations.
If our business does not perform well, we may be required to establish a valuation allowance against the deferred tax assets, which would negatively impact the results of our operations.
We have substantial amounts of deferred tax assets on our balance sheet. The evaluation of realizability of these assets requires us to analyze historical taxable income and make significant assumptions related to forecasted revenues and taxable income in the appropriate tax jurisdiction. Estimated future taxable income can be sensitive to changes in the assumed revenue growth rate and expected operating margin, which are affected by expectations about future market conditions and are inherently uncertain due to their forward-looking nature. Future events could cause us to conclude that impairment indicators exist and may require us to record a valuation allowance. Any significant impairment loss would have an adverse impact on our reported earnings in the period in which the charge is recognized.
Our indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk, and prevent us from meeting our debt obligations.
Upon the consummation of the Merger, our Senior Secured Credit Facilities will be paid off in full. However, there can be no assurance that the Merger will be consummated within the anticipated timeline or at all. For additional discussion regarding our risks related to the Merger, see the risks described under the caption “ Risks related to the Merger” in this Annual Report. In the event our indebtedness is not repaid in connection with the consummation of the Merger our indebtedness exposes us to certain risks, including those set forth below.
Our indebtedness could have adverse consequences, including:
increasing our vulnerability to adverse economic, industry, or competitive developments;
requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use cash flow to fund our operations, capital expenditures, and future business opportunities;
making it more difficult for us to satisfy our obligations with respect to our indebtedness, including restrictive covenants and borrowing conditions, which could result in an event of default under the agreements governing such indebtedness;
restricting us from making strategic acquisitions, making it more difficult to structure new partnerships or joint ventures, or causing us to make non-strategic divestitures;
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making it more difficult for us to obtain card network sponsorship and clearing services from financial institutions or to obtain or retain other business with financial institutions; or
limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions, and general corporate or other purposes;
Successful execution of our business strategy is dependent in part upon our ability to manage our capital structure to reduce interest expense, have access to sufficient liquidity, and enhance free cash flow generation. We are party to a senior secured credit facility pursuant to a credit agreement dated November 1, 2021 (our “Senior Secured Credit Facilities”). The Senior Secured Credit Facilities consists of a revolver (the “Revolver”) and a term loan (the “Term Loan”). As of December 31, 2022, our Senior Secured Credit Facilities include revolver commitments of $200.0 million and a term loan of $588.0 million that are scheduled to mature in November 2026. We may not be able to refinance our Senior Secured Credit Facilities or our other existing indebtedness at or prior to their maturity at attractive rates of interest because of our high levels of debt, debt incurrence restrictions under our debt agreements, or because of adverse conditions in credit markets generally. We also have the ability to further increase our indebtedness by borrowing additional amounts on the Senior Secured Credit Facilities.
In addition, certain of our borrowings, including borrowings under our Senior Secured Credit Facilities, are at variable rates of interest. If interest rates increase, the interest payment obligations under our variable rate indebtedness will increase even if the amount borrowed remains the same. The condition of the financial and credit markets and prevailing interest rates have fluctuated in the past and are likely to fluctuate in the future. In addition, developments in our business and operations could lead to a ratings downgrade for us. In 2020, we entered into an interest rate swap with a notional amount of $500.0 million that matured on December 31, 2022 to reduce a portion of exposure to fluctuations in LIBOR interest rates associated with our variable-rate debt. As of December 31, 2022, we had $641.5 million aggregate principal amount of variable rate indebtedness. The impact of a 100 basis point increase in interest rates would have increased our annual interest expense by approximately $6.4 million upon the expiration of the interest rate swap as of December 31, 2022. Effective January 2023, interest rate payments of our entire outstanding term loan will be based on variable interest rates.
Any such fluctuation in the financial and credit markets, or in the credit rating of us or our subsidiaries, may impact our ability to access debt markets in the future or increase our cost of current or future debt, which could adversely affect our business, financial condition, or results of operations.
We may be required to purchase the remainder of our eService subsidiary in Poland.
In December 2013, we acquired a 66% ownership interest in Centrum Elektronicznych Uslug Platniczych eService Sp. z o.o., or eService, from PKO Bank Polski. In connection with the purchase, we granted a put option to PKO Bank Polski that, if exercised, could force us to buy the remainder of the business at the then-current market price. The option expires on January 1, 2024. If we are forced to purchase the remainder of our eService subsidiary at a time in which it is not otherwise in our best interest to do so, our business, including our liquidity, could be adversely affected.
The phase-out, replacement or unavailability of the London Interbank Offered Rate (“LIBOR”) may adversely affect our results of operations.
In July 2017, the United Kingdom’s Financial Conduct Authority (“FCA”) publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. In the United States, the Alternative Reference Rates Committee, which was convened by the Federal Reserve Board and the Federal Reserve Bank of New York, has identified the Secured Overnight Financing Rate (“SOFR”), a new index calculated by reference to short-term repurchase agreements for U.S. Treasury securities, as its preferred alternative rate for U.S. dollar LIBOR. Financial regulators in the United Kingdom, the European Union, Japan, and Switzerland also have formed working groups with the aim of recommending alternatives to LIBOR denominated in their local currencies.
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In March 2021, the FCA announced that LIBOR will no longer be provided for the one-week and two-month U.S. dollar settings after December 31, 2021 and that publication of the U.S. dollar settings for the overnight, one-month, three-month, six-month and 12-month LIBOR rates will cease after June 30, 2023.
There is currently no definitive successor reference rate to LIBOR and various industry organizations are still working to develop transition mechanisms. SOFR is calculated based on overnight transactions under repurchase agreements, backed by Treasury securities. SOFR is observed on a daily basis and backward looking, which stands in contrast with LIBOR under the current methodology, which is an estimated forward-looking rate for specified tenors and relies, to some degree, on the expert judgment of submitting panel members. Given that SOFR is a secured rate backed by government securities, it is a rate that does not take into account bank credit risk (as is the case with LIBOR). Because of these and other differences, there is no assurance that SOFR will perform in the same way as LIBOR would have performed at any time, and there is no guarantee that it will be a comparable substitute for LIBOR. As of December 31, 2022, approximately $641.5 million of our outstanding indebtedness had interest rate payments determined directly or indirectly based on LIBOR, EURIBOR, or the U.S. prime rate. The terms of our Senior Secured Credit Facilities include provisions that provide for the eventual replacement of LIBOR as a reference rate with SOFR or otherwise an alternate benchmark rate. However, uncertainty regarding the continued use and reliability of LIBOR as a benchmark interest rate could adversely affect the performance of LIBOR relative to its historic values prior to the replacement of LIBOR. Additionally, in 2020, the Company entered into an interest rate swap with a notional amount of $500.0 million to reduce a portion of the exposure to fluctuations in LIBOR interest rates associated with our variable-rate term loan. The interest rate swap had a fixed rate of 0.2025% and matured on December 31, 2022. We may incur expenses to amend and adjust our indebtedness to eliminate any differences between any alternative benchmark rate used by our interest rate hedge and our outstanding indebtedness. Any alternative benchmark rate may be calculated differently than LIBOR, may increase the interest expense associated with our existing or future indebtedness and may not align for our assets, liabilities, and hedging instruments. Any of these occurrences could affect our borrowing costs, financial condition, or results of operations.
Restrictions imposed by our Senior Secured Credit Facilities and our other outstanding indebtedness may materially limit our ability to operate our business and finance our future operations or capital needs.
The terms of our Senior Secured Credit Facilities restrict us and our subsidiaries from engaging in specified types of transactions. These covenants impose certain limitations, subject to certain exceptions, on our ability, and that of our subsidiaries, to, among other things:
incur indebtedness;
create liens;
engage in mergers or consolidations;
make investments, loans and advances;
pay dividends and distributions and repurchase capital stock;
sell assets;
engage in certain transactions with affiliates;
enter into sale and leaseback transactions;
make certain accounting changes; and
make prepayments on junior indebtedness.
In addition, the credit agreement governing our Senior Secured Credit Facilities contain a financial covenant that requires us to remain under a maximum consolidated leverage ratio determined on a quarterly basis with step-downs over time. We may elect to increase the maximum consolidated leverage level with which we must comply by 0.5x up to two times during the term upon the consummation of a “material acquisition.” See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” A breach of any of these covenants (or any other covenant in the documents governing our Senior Secured Credit Facilities) could result in a default or event of default under our Senior Secured Credit Facilities. If an event of default under our Senior Secured Credit Facilities occurred, the applicable lenders or agents could elect to terminate borrowing commitments and declare all borrowings and loans outstanding thereunder, together with accrued and unpaid interest and any fees and other obligations, to be immediately due and payable. In
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addition, or in the alternative, the applicable lenders or agents could exercise their rights under the security documents entered into in connection with our Senior Secured Credit Facilities. Subject to certain exceptions specified in our Senior Secured Credit Facilities, we have pledged substantially all of our U.S. assets as collateral securing our Senior Secured Credit Facilities and any such exercise of remedies on any material portion of such collateral would materially and adversely affect our financial condition and our ability to continue operations.
If we were unable to repay or otherwise refinance these borrowings and loans when due, and the applicable lenders proceeded against the collateral granted to them to secure that indebtedness, we may be forced into bankruptcy or liquidation. In the event the applicable lenders accelerate the repayment of our borrowings, we may not have sufficient assets to repay that indebtedness. Any acceleration of amounts due under our Senior Secured Credit Facilities would likely have a material adverse effect our business.
Accelerated funding programs increase our working capital requirements and expose us to incremental credit risk, and if we are unable to access or raise sufficient liquidity to address these funding programs we may be exposed to additional competitive risk.
In response to demand from our merchants and competitive offerings, we offer certain of our merchants various accelerated funding programs which are designed to enable qualified participating merchants to receive their deposits from credit card transactions in an expedited manner. These programs increase our working capital requirements and expose us to incremental credit risk related to our merchants, which could constrain our ability to raise additional capital to fund our operations and adversely affect our business, financial condition, or results of operations. Our inability to access or raise sufficient liquidity to address our needs in connection with the anticipated expansion of such advance funding programs could put us at a competitive disadvantage by restricting our ability to offer programs to all of our merchants similar to those made available by our various competitors.
Risks related to legal and regulatory requirements
Failure to comply with anti-corruption, anti-money laundering, economic and trade sanctions regulations, and similar laws and regulations could subject us to penalties and other adverse consequences.
We operate our business in various countries where certain business practices are prohibited by U.S., foreign, and other laws and regulations applicable to us. We are subject to anti-corruption laws and regulations, including the FCPA, the U.K. Bribery Act, and other laws that prohibit the making or offering of improper payments, including payments to foreign governments, officials, and business entities for the purpose of obtaining or retaining business. We have implemented policies, procedures, systems, and controls designed to identify and address potentially impermissible transactions under such laws and regulations; however, there can be no assurance that our employees, consultants, and agents, including those that may be based in or from countries where practices that violate U.S. or other laws may be customary, will not take actions in violation of our policies for which we may be ultimately responsible.
In addition, we are subject to certain anti-money laundering laws and regulations. In some jurisdictions, we are directly subject to these regulations. In other cases, we are contractually required to comply with certain regulations to which our bank partners are subject. These regulations, including the Bank Secrecy Act, as amended by the USA PATRIOT Act of 2001, and the EU Anti-Money Laundering Directive typically require businesses to develop and implement risk-based anti-money laundering programs, report large cash transactions and suspicious activity, and maintain transaction records.
We are also subject to certain economic and trade sanctions programs administered by OFAC and similar foreign governmental agencies, which prohibit or restrict transactions with specified countries, governments, and, in certain circumstances, nationals, as well as narcotics traffickers and terrorists or terrorist organizations. Other group entities may be subject to additional foreign or local sanctions requirements in other relevant jurisdictions.
Similar anti-money laundering and counter terrorist financing and proceeds of crime laws apply to movements of currency and payments through electronic transactions and to dealings with persons specified in lists maintained by the country
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equivalents to OFAC lists in several other countries and require specific data retention obligations to be observed by intermediaries in the payment process. Our businesses in those jurisdictions are subject to those data retention obligations.
Failure to comply with any of these laws or regulations or changes in this legal or regulatory environment, including changing interpretations and the implementation of new or varying regulatory requirements by the government, may result in significant financial penalties or reputational harm, or change the manner in which we currently conduct some aspects of our business, which could adversely affect our business, financial condition, or results of operations.
We are subject to governmental regulation and other legal obligations, particularly related to privacy, data protection, and information security, as well as consumer protection laws across different markets where we conduct our business. Our actual or perceived failure to comply with such obligations could harm our business.
Privacy and data security have become significant issues in North America, Europe, and in many other jurisdictions where we may conduct our operations in the future. As we receive, collect, process, use, and store personal and confidential data, we are subject to diverse laws and regulations relating to data privacy and security, including, in the United States, local state laws such as the CCPA which took effect on January 1, 2020, and the forthcoming California Privacy Rights and Enforcement Act of 2020 (the “CPRA”), which expands upon the CCPA and became operative in January 2023 (with a lookback to January 1, 2022), and, in the EU, the GDPR.
The CCPA requires companies (regardless of their location) that collect personal information of California residents to notify consumers about their data collection, use, and sharing practices and grants consumers specific rights to access and delete their data and to opt out of certain types of data sharing. The California Attorney General is currently responsible for the enforcement of the CCPA and can impose statutory fines for violations. Consumers also have a limited private right of action for unauthorized access to certain categories of information. The CPRA expands the CCPA to create additional consumer privacy rights, such as the right of correction and the right to limit the use and disclosure of sensitive personal information, and establishes a new privacy enforcement agency. Additionally, other U.S. states continue to propose, and in certain cases adopt, data privacy legislation such as Colorado, Virginia, Utah, and Connecticut. The privacy laws emulate the CCPA and the CPRA in many respects, but despite similarities each law includes its own unique compliance requirements. Aspects of the interpretation and enforcement of these laws remain uncertain. Additionally, the Federal Trade Commission and many state attorneys general are interpreting federal and state consumer protection laws to impose standards for the online collection, use, dissemination, and security of data. The effects of such laws and other laws and regulations that may be enacted, or new interpretations of existing laws and regulations, may require us to modify our data processing practices and policies and incur compliance-related costs and expense.
GDPR is directly applicable in each EU member state and applies to companies established in the EU that process personal data as well as companies outside of the EU that collect and use personal data to offer goods or services to, or monitor the behavior of, individuals in the EU. GDPR applies stringent data protection obligations for processors and controllers of personal data. Data Protection Authorities in each European jurisdiction are responsible for the enforcement of GDPR and can impose significant penalties and fines for failure to comply with GDPR, including fines of up to €20 million, or 4% of total worldwide annual turnover (revenue), whichever is higher, as well as orders to curtail operations, such as orders to cease certain processing activities or data transfers. Additionally, post-Brexit, the United Kingdom has implemented the GDPR into domestic law through the Data Protection Act and UK GDPR. As of January 2021, we are required to comply with the GDPR and also analogous UK laws, exposing us to two parallel regimes which may diverge in the future, each of which potentially authorizes similar and enforcement actions for certain .
Compliance with these privacy and data security requirements is rigorous and time-intensive and may increase our cost of doing business. Failure to comply with these requirements, or any other laws or regulations applicable to our business, may expose us to fines and other penalties, litigation, or reputational harm, any of which could materially and adversely affect our business, financial condition, or results of operations.
The regulatory framework for the receipt, collection, processing, use, safeguarding, and sharing and transfer of personal and confidential data is rapidly evolving and is likely to remain uncertain for the foreseeable future as new global privacy rules are enacted and existing ones are updated and strengthened. New or evolving regulations could require us to modify
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our systems, products, or processes, possibly in a material manner, and could limit our ability to develop new services and features.
Failure to enforce and defend our intellectual property rights may diminish our competitive advantages or interfere with our ability to market and promote our products and services.
Our trademarks, trade names, trade secrets, know-how, proprietary technology, and other intellectual property are important to our future success, including the rights associated with our EVO and certain of our operating subsidiaries’ trademarks and trade names, among others. We believe our trademarks and trade names are widely recognized and associated with quality and reliable service. While it is our policy to vigorously defend our intellectual property, there can be no assurance that the steps we have taken to protect our intellectual property will be adequate to prevent infringement, misappropriation, or other violations. We also cannot guarantee that others will not independently develop technology with the same or similar functions as the proprietary technology we rely on to conduct our business and differentiate ourselves from our competitors. Furthermore, we may face claims of infringement of third-party intellectual property that could interfere with our ability to market and promote our products and services. Any litigation to enforce our intellectual property rights or ourselves of of third-party intellectual property rights could be , attention of management, and may not ultimately be resolved in our favor. Moreover, if we are to that we have the intellectual property rights of others, we may be prevented from using certain intellectual property and may be liable for , which in turn could have a material effect on our business, financial condition, or results of operations. In addition, the laws of certain non-U.S. countries where we do business or may do business in the future may not recognize intellectual property rights or protect them to the same extent as do the laws of the United States.
We may be adversely impacted by new or revised tax regulations or their interpretations, or by becoming subject to additional foreign or U.S. federal, state, or local taxes that cannot be passed through to our merchants or partners.
We are subject to tax laws in each jurisdiction where we do business. Changes in tax laws or their interpretation could decrease the amount of revenues we receive, the value of any tax loss carry-forwards and tax credits recorded on our balance sheet, and the amount of our cash flow or net income, and adversely affect our business, financial condition, or results of operations. In addition, our financial results could be adversely impacted if we become subject to new or additional taxes that cannot be passed through to our merchants or partners.
In addition to changes in tax regulations or interpretations, our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:
allocation of expenses to and among different jurisdictions;
changes in the valuation of our deferred tax assets and liabilities;
expected timing and amount of the release of any tax valuation allowances;
tax effects of stock-based compensation; and
mix of future earnings and tax liabilities recognized in foreign jurisdictions at varying rates versus U.S. federal, state, and local income taxes.
In addition, we may be subject to audits of our income, sales, and other taxes by U.S. federal, state, and local, as well as foreign taxing authorities. Outcomes from these audits could have an adverse effect on our business, financial condition, or results of operations.
Failure to comply with, or changes in, laws, regulations, and enforcement activities may adversely affect our products, services, and the markets in which we operate.
We and our merchants are subject to laws and regulations that affect the electronic payments industry in the many countries in which our services are used. Our merchants are subject to numerous laws and regulations applicable to banks, financial institutions, and card issuers in the United States and abroad, and, consequently, we are at times affected by these foreign, federal, state, and local laws and regulations. A number of our subsidiaries in our European segment hold a PI license,
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allowing them to operate in the EU member states in which such subsidiaries do business. As a PI, we are subject to regulation and oversight in the applicable EU member states, which includes, among other obligations, a requirement to maintain specific regulatory capital and adhere to certain rules regarding the conduct of our business, including PSD2. PSD2 contains a number of additional regulatory provisions, such as provisions relating to SCA, which required industry wide systems upgrades, and DCC, which requires additional disclosures to our customers. Failure to comply with SCA requirements may result in fines from card networks as well as declined payments from card issuers which could adversely impact our business.
See “Item 1. Business—Regulatory” for more information on certain laws and regulations to which we are subject. In addition, the U.S. government has increased its scrutiny of a number of credit card practices from which some of our merchants derive significant revenue. Regulation of the payments industry, including regulations applicable to us and our merchants, has also increased significantly in recent years.
We are also subject to U.S. and international financial services regulations, a myriad of consumer protection laws, including economic sanctions, laws and regulations, anticorruption laws, escheat regulations, and privacy and information security regulations. In addition, certain of our financial institution partners are subject to regulation by federal and state authorities and, as a result, could pass through some of those compliance obligations to us, which could adversely affect our business, financial condition, or results of operations.
Failure to comply with laws and regulations could damage our reputation, result in the suspension or revocation of licenses and registrations (including our PI licenses), and subject us to enforcement or criminal actions or penalties, including fines. Post-Brexit, we are operating within the United Kingdom pursuant to the temporary permissions regime and have applied to the FCA for a stand alone PI license to operate long-term in the United Kingdom market.
A loss of our PI licenses would prevent us from operating our business in the EU. In addition, we are subject to the rules of Mastercard, Visa, and other credit and debit networks. Any failure to comply with the networks’ requirements or to pay the fines they impose could cause the termination of our registrations and require us to stop providing payment processing services. Violations of law by our merchants and partners could impact our ability to operate our business and could threaten our licenses and registrations. Any of the foregoing could adversely affect our business, financial condition, or results of operations.
Changes to regulations that are applicable to us, our merchants, our partners, or the card networks could require us to make capital investments to modify our processes or services and could reduce the fees we are able to charge our merchants. Regulations could also result in greater pricing transparency and increased price-based competition leading to lower margins and higher rates of merchant attrition. Furthermore, any regulatory change that results in modifications to our merchants’ business practices could change the demand for our services and alter the type or volume of transactions that we process on behalf of our merchants. Any of the foregoing could adversely impact our business, financial condition, or results of operations.
From time to time we are subject to various legal proceedings which could adversely affect our business, financial condition, or results of operations.
We are involved in various litigation matters. We are also involved in, or are the subject of, governmental or regulatory agency inquiries or investigations and make voluntary self-disclosures to government or regulatory agencies from time to time. Our insurance or indemnities may not cover all claims that may be asserted against us and any claims asserted against us, regardless of merit or eventual outcome, may harm our reputation. If we are unsuccessful in our defense in these litigation matters, or any other legal proceeding, we may be forced to pay damages or fines, enter into consent decrees or change our business practices, any of which could adversely affect our business, financial condition, or results of operations.
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Risks related to our organizational structure
Our principal asset is our interest in EVO, LLC, and, as a result, we depend on distributions from EVO, LLC to pay our taxes and expenses, including payments under the tax receivable agreement with the Continuing LLC Owners (the “TRA”). EVO, LLC’s ability to make such distributions may be subject to various limitations and restrictions.
We are a holding company and have no material assets other than our ownership of LLC Interests. As such, we have no independent means of generating revenue or cash flow, and our ability to pay our taxes and operating expenses or declare and pay dividends in the future, if any, will be dependent upon the financial results and cash flows of EVO, LLC and its subsidiaries and distributions we receive from EVO, LLC. There can be no assurance that our subsidiaries will generate sufficient cash flow to distribute funds to us or that applicable state law and contractual restrictions, including negative covenants in our debt instruments, will permit such distributions. Although EVO, LLC is not currently subject to any debt instruments or other agreements that would restrict its ability to make distributions to EVO, Inc., the terms of our Senior Secured Credit Facilities restrict the ability of our subsidiary, EVO Payments International, LLC, and certain of its subsidiaries to pay dividends to EVO, LLC.
EVO, LLC will continue to report as a partnership for U.S. federal income tax purposes and, as such, will not be subject to any entity-level U.S. federal income tax. Instead, any taxable income of EVO, LLC will be allocated to holders of LLC Interests, including us. Accordingly, we will incur income taxes on our allocable share of any net taxable income of EVO, LLC. Under the terms of its limited liability company agreement, EVO, LLC will be obligated to make tax distributions to holders of LLC Interests, including us. In addition to tax expenses, we may also incur expenses related to our operations. We intend, as its managing member, to cause EVO, LLC to make cash distributions to the owners of LLC Interests in an amount sufficient to (1) fund all or part of their tax obligations in respect of taxable income allocated to them, including as applicable, payments under the TRA, which could be significant, and (2) cover our operating expenses. However, EVO, LLC’s ability to make such distributions may be subject to various limitations and restrictions, such as restrictions on distributions that would violate applicable law or any agreement to which EVO, LLC is then a party, including debt agreements, or that would have the effect of rendering EVO, LLC insolvent. Payments required under the TRA are generally funded by taxable income and represent the tax benefit from the step-up in tax basis that is passed on to the TRA holders. If we do not have sufficient funds to pay taxes or other liabilities or to fund our operations, we may have to borrow funds, which could materially and affect our liquidity and financial condition and subject us to various restrictions imposed by lenders. To the extent we are to make timely payments under the TRA for any reason, such payments generally will be deferred and will accrue interest until paid; provided, however, that for a specified period may constitute a material that would accelerate payments due under the TRA. In addition, if EVO, LLC does not have sufficient funds to make distributions, our ability to declare and pay cash dividends will also be restricted or . See “General Risks” and “Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities—Dividend policy.”
The TRA requires us to make cash payments to the Continuing LLC Owners in respect of certain tax benefits to which we may become entitled, and we expect that those payments will be substantial.
Under the TRA, we are required to make cash payments to the Continuing LLC Owners equal to 85% of the tax benefits, if any, that we actually realize, or in certain circumstances are deemed to realize, as a result of (1) the increases in our share of the tax basis of assets of EVO, LLC resulting from any purchases or redemptions of LLC Interests from the Continuing LLC Owners or exchanges by the Continuing LLC Owners of LLC Interests (and paired Class D common stock) for Class A common stock, and (2) certain other tax benefits related to our making payments under the TRA. In general, we are obligated to fund these payments over time on a pro rata basis to the extent we have realized or are deemed to realize tax benefits. We expect that the amount of the cash payments required under the TRA will be significant, but only to the extent we have taxable income. Any payments made by us to the Continuing LLC Owners under the TRA will generally reduce the amount of overall cash flow that might have otherwise been available to us. Furthermore, our future obligation to make payments under the TRA could make us a less attractive target for an acquisition, particularly in the case of an acquirer that cannot use some or all of the tax benefits that are the subject of the TRA.
The actual amount and timing of any payments under the TRA will vary depending upon a number of factors, including the timing of redemptions or exchanges by the holders of LLC Interests, the amount of gain recognized by such holders of
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LLC Interests, the amount and timing of the taxable income allocated to us or otherwise generated by us in the future, and the federal tax rates then applicable.
In connection with the execution and delivery of the Merger Agreement, EVO, Inc., EVO, LLC, and certain other parties to the TRA entered into Amendment No. 1 to the Tax Receivable Agreement (the “TRA Amendment”), pursuant to which such parties agreed to certain terms with respect to the treatment of the TRA upon the consummation of the Merger. In the event the Merger Agreement is terminated, the TRA Amendment will no longer be of any force and effect.
Our organizational structure, including the TRA, confers certain benefits upon the Continuing LLC Owners that do not benefit holders of our Class A common stock to the same extent that they benefit the Continuing LLC Owners.
Our organizational structure, including the TRA, confers certain benefits upon the Continuing LLC Owners that do not benefit the holders of our Class A common stock to the same extent, such as the payment by EVO, Inc. to the Continuing LLC Owners of 85% of the amount of certain tax benefits, discussed above. Although EVO, Inc. retains 15% of the amount of such tax benefits, this and other aspects of our organizational structure that benefit the Continuing LLC Owners may adversely impact the future trading market for the Class A common stock.
In certain cases, payments under the TRA to the Continuing LLC Owners may be accelerated or significantly exceed any actual benefits we realize in respect of the tax attributes subject to the TRA.
The TRA provides that, upon certain mergers, asset sales, business combinations, or changes of control transactions, or the early termination of the TRA at our election, payments to the Continuing LLC Owners under the TRA are based on certain assumptions, including an assumption that we will have sufficient taxable income to fully utilize the potential future tax benefits that are subject to the TRA.
As a result, (1) we could be required to make payments under the TRA that are greater than the specified percentage of any actual tax benefits we ultimately realize and (2) if we elect to terminate the TRA early, we would be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the TRA, based on certain assumptions, which payment may occur significantly in advance of the actual realization of such future tax benefits, if any. In these situations, our obligations under the TRA could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring, or preventing certain mergers, asset sales, other forms of business combinations, or other changes of control. There can be no assurance that we will be able to fund or finance our obligations under the TRA.
We will not be reimbursed for any payments made to the Continuing LLC Owners under the TRA in the event that any tax benefits are disallowed.
Payments under the TRA will be based on the tax reporting positions that we determine. The IRS or another tax authority may challenge all or part of the tax basis increases or other tax benefits we claim, as well as other related tax positions we take, and a court could sustain such challenge. If the outcome of any such challenge would reasonably be expected to materially affect a recipient’s payments under the TRA, then we will not be permitted to settle or fail to contest such challenge without the consent (not to be unreasonably withheld or delayed) of each Continuing LLC Owner that owns at least 10% of the outstanding LLC Interests. The interests of the Continuing LLC Owners in any such challenge may differ from or conflict with our interests or the interests of holders of our Class A common stock and therefore the exercise of their consent rights may be adverse to our interests and the interests of holders of our Class A common stock. We will not be reimbursed for any cash payments previously made to the Continuing LLC Owners under the TRA in the event that any tax benefits initially claimed by us and for which payment has been made to a Continuing LLC Owner are subsequently by a taxing authority and are ultimately . Instead, any excess cash payments made by us to a Continuing LLC Owner will be netted any future cash payments that we might otherwise be required to make to such Continuing LLC Owner under the terms of the TRA. However, we may not determine that we have effectively made an excess cash payment to a Continuing LLC Owner for a number of years following the initial time of such payment and, if any of our tax reporting positions are by a taxing authority, we will not be permitted to reduce any future cash payments under the TRA until any such is finally settled or determined. Moreover, the excess cash payments we previously made under the TRA could be than the amount of future cash payments which we would
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otherwise be permitted to net such excess. As a result, payments could be made under the TRA significantly in excess of any tax savings that we realize in respect of the tax attributes with respect to a Continuing LLC Owner that are the subject of the TRA.
If we were deemed to be an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), as a result of our ownership of EVO, LLC, applicable restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.
Under Sections 3(a)(1)(A) and (C) of the 1940 Act, a company generally will be deemed to be an “investment company” for purposes of the 1940 Act if it (1) is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities or (2) engages, or proposes to engage, in the business of investing, reinvesting, owning, holding, or trading in securities and it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We do not believe that we are an “investment company,” as such term is defined under the 1940 Act.
As the sole managing member of EVO, LLC, we control and operate EVO, LLC. On that basis, we believe that our interest in EVO, LLC is not an “investment security” as that term is used in the 1940 Act. However, if we were to cease participation in the management of EVO, LLC, our interest in EVO, LLC could be deemed an “investment security” for purposes of the 1940 Act.
We and EVO, LLC intend to conduct our operations so that we will not be deemed an investment company. However, if we were to be deemed an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.
Risks related to our Series A Convertible Preferred Stock and the ownership interest of our Continuing LLC Owners
Our Series A convertible preferred stock has rights, preferences, and privileges that are not held by, and are preferential to, the rights of holders of our Class A common stock, which could adversely affect our liquidity and financial condition, and could in the future substantially dilute the ownership interest of holders of our Class A common stock.
In April 2020, the Company issued 152,250 shares of Series A convertible preferred stock (the “Preferred Stock”), all of which were purchased by an affiliate of MDP.
The Preferred Stock ranks senior to the Company’s Class A common stock with respect to dividends and distributions on liquidation, winding-up and dissolution. Holders of Preferred Stock are entitled to cumulative, paid-in-kind (“PIK”) dividends, which will be payable semi-annually in arrears by increasing the liquidation preference for each outstanding share of Preferred Stock. These PIK dividends accrue at an annual rate of (i) 6.00% per annum for the first ten years and (ii) 8.00% per annum thereafter. Holders of Preferred Stock are also entitled to participate in and receive any dividends declared or paid on the Class A common stock on an as-converted basis, and no dividends may be paid to holders of Class A common stock unless full participating dividends are concurrently paid to holders of Series A Preferred Stock. See Note 16, “Redeemable Preferred Stock,” in the notes to the accompanying consolidated financial statements for additional information.
Under various circumstances defined in the Certificate of Designations, (a) holders of shares of our Preferred Stock may be entitled to convert such shares into shares of our Class A common stock, or (b) we may require all holders of such shares to convert such shares to shares of our Class A common stock. Additionally, if the Company undergoes a change of control (as defined in the Certificate of Designations), each holder of Preferred Stock may require the Company to repurchase all or a portion of the Preferred Stock for cash consideration equal to up to 150% of the then-current liquidation preference per share plus accumulated and unpaid dividends, if any. In connection with the execution of the Merger Agreement, the holders of Preferred Stock agreed to convert the Preferred Stock into Class A common stock effective immediately prior to the closing of the Merger.
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The share repurchase obligations could adversely affect our liquidity and reduce the amount of cash available for working capital, capital expenditures, growth opportunities, acquisitions, and other general corporate purposes. Our obligations to the holders of Preferred Stock could also limit our ability to obtain additional financing and increase our borrowing costs, which could have an adverse effect on our financial condition. The preferential rights could also result in divergent interests between the holders of Preferred Stock and holders of shares of our Class A common stock.
As holders of our Preferred Stock are entitled to vote, on an as-converted basis, together with holders of our Class A common stock, the issuance of the Preferred Stock effectively reduces the relative voting power of the holders of our Class A common stock. Any conversion of Preferred Stock into Class A common stock would dilute the ownership interest of existing holders of our Class A common stock, and any sales in the public market of the Class A common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock.
Holders of the Preferred Stock may exercise influence over us, including through their ability to designate a member of our board of directors.
As of December 31, 2022, the outstanding shares of our Preferred Stock represented approximately 18.9% of our outstanding Class A common stock, on an as-converted basis. Holders of Preferred Stock generally will be entitled to vote with the holders of the shares of Class A common stock on all matters submitted for a vote of holders of shares of Class A common stock (voting together with the holders of shares of Class A common stock as one class) on an as-converted basis. The terms of the Preferred Stock grant holders of the Preferred Stock consent rights with respect to certain actions by us, including (1) the authorization, creation, increase in the authorized amount of, or issuance of any class or series of senior or parity equity securities or any security convertible into, or exchangeable or exercisable for, shares of senior or parity equity securities, (2) amendments, modifications or repeal of any provision of the Company’s charter or of the Certificate of Designations that would adversely affect the rights, preferences or voting powers of the Preferred Stock, and (3) certain business combinations and binding or statutory share exchanges or reclassification involving the Preferred Stock unless such events do not adversely affect the rights, preferences or voting powers of the Preferred Stock. As a result, holders of Preferred Stock have the ability to influence the outcome of certain matters affecting our governance and capitalization.
In addition, under the terms of our director nomination agreement with MDP, which was amended and restated in connection with the issuance of the Preferred Stock, MDP has the right to designate for nomination up to two of our directors until MDP no longer holds at least 15% of the voting power of our outstanding voting stock. Thereafter, MDP will have the right to designate one director for nomination until such time as MDP no longer holds at least 5% of the voting power of our outstanding voting stock. Any director designated by MDP is entitled to serve on committees of our board of directors, subject to applicable law and stock exchange rules. Notwithstanding the fact that all directors will be subject to fiduciary duties to us and to applicable law, the interests of the director designated by MDP may differ from the interests of other stockholders.
The Continuing LLC Owners have significant influence over us.
The Continuing LLC Owners control a significant portion of the aggregate voting power represented by all our outstanding classes of stock. As a result, the Continuing LLC Owners exercise significant influence over all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation, and approval of significant corporate transactions, and will continue to have significant control over our management and policies. Four members of our board of directors are Continuing LLC Owners or are affiliated with our Continuing LLC Owners. The Continuing LLC Owners can take actions that have the effect of delaying or preventing a change of control of us or discouraging others from making tender offers for our shares, which could prevent stockholders from receiving a premium for their shares. These actions may be taken even if other stockholders oppose them. In addition, the concentration of voting power with the Continuing LLC Owners may have an adverse effect on the price of our Class A common stock and the interests of the Continuing LLC Owners may not be consistent with the interests of our Class A stockholders.
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General Risks
The global COVID-19 pandemic has disrupted, and may continue to disrupt, our business.
The ongoing effects of the global COVID-19 pandemic and measures taken in response have had a significant impact on global economic conditions and may negatively impact certain aspects of our business and results of operations in the future. While many of the direct impacts of the COVID-19 pandemic have eased, the longer-term macroeconomic effects on global supply chains, inflation, labor shortages and wage increases continue to impact many industries and we, and our merchants, may continue to experience disruption in our business, including volatility in transaction volume and the number of transactions processed.
The pandemic continues to evolve, with the potential for new strains of existing viruses to emerge, or other pandemics or epidemics, and certain of the impacts of the pandemic may continue to affect our results in the future, including due to: inflationary pressures arising from supply chain disruptions, depressed transaction activity, and reimpositions of travel restrictions which may reduce cross-border transactions. Continued or future shutdowns, partial reopenings, or the re-imposition of previously lifted restrictions could directly or indirectly impact transaction volumes and negatively impact our operating results. A prolonged disruption in economic activity could adversely impact our business and financial performance, including the potential impairment of certain assets.
The full extent of the impact and effects of COVID-19, and any future pandemics or epidemics, on our business will depend on future developments, including, among other factors, the duration and spread of the outbreak (including whether there are additional periods of increases in the number of COVID-19 cases in future periods), its severity, the evolution of new variants of the virus, the effectiveness of government actions to contain the virus or treat its impact, the length of government restrictions, the distribution and effectiveness of the vaccines, and how quickly and to what extent normal economic and operating conditions resume. COVID-19, or any future pandemics or epidemics, and resulting impacts on the global economy and consumer spending and future developments in these and other areas present uncertainty and risk with respect to our future performance and results of operations.
Certain provisions of Delaware law and antitakeover provisions in our organizational documents could delay or prevent a change of control.
Certain provisions of Delaware law and our amended and restated certificate of incorporation and amended and restated bylaws may have an antitakeover effect and may delay, defer, or prevent a merger, acquisition, tender offer, takeover attempt, or other change of control transaction that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by our stockholders. These provisions provide for, among other things:
a multi-class common stock structure;
a classified board of directors with staggered three-year terms;
the ability of our board of directors to issue one or more series of preferred stock;
advance notice for nominations of directors by stockholders and for stockholders to include matters to be considered at our annual meetings;
certain limitations on convening special stockholder meetings;
a prohibition on cumulative voting in the election of directors;
the removal of directors only for cause and only upon the affirmative vote of the holders of at least 66 2/3% of the voting power represented by our then-outstanding common stock; and
amendment of certain provisions of our certificate of incorporation only by the affirmative vote of at least 66 2/3% of the voting power represented by our then-outstanding common stock.
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These provisions could make it more difficult for a third party to acquire us, even if the third party’s offer was considered beneficial by many of our stockholders. As a result, our stockholders may be limited in their ability to obtain a premium for their shares.
In addition, we have opted out of Section 203 of the General Corporation Law of the State of Delaware (the “DGCL”), but our amended and restated certificate of incorporation provides that engaging in any of a broad range of business combinations with any “interested” stockholder (any stockholder with 15% or more of our voting stock) for a period of three years following the date on which the stockholder became an “interested” stockholder is prohibited, subject to certain exceptions.
Because we have no current plans to pay regular cash dividends on our Class A common stock, you may not receive any return on investment unless you sell your Class A common stock for a price greater than that which you paid for it.
We do not anticipate paying any regular cash dividends on our Class A common stock. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions, and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends is, and may be, limited by covenants of existing and any future outstanding indebtedness we or our subsidiaries incur, including under our existing Senior Secured Credit Facilities. Therefore, any return on investment in our Class A common stock is solely dependent upon the appreciation of the price of our Class A common stock on the open market, which may not occur. Pursuant to the terms of the Merger Agreement, the Company has agreed to suspend any regular cash dividends during the term of the Merger Agreement.
Our amended and restated certificate of incorporation provides, subject to limited exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees, or stockholders.
Our amended and restated certificate of incorporation provides, subject to limited exceptions, that unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall, to the fullest extent permitted by law, be the sole and exclusive forum for any (1) derivative action or proceeding brought on behalf of our Company, (2) claim of breach of a fiduciary duty owed by any director, officer, employee, or stockholder to the Company or the Company’s stockholders, (3) claim against the Company or any director or officer of the Company arising pursuant to any provision of the DGCL, our amended and restated certificate of incorporation, or our amended and restated bylaws or (4) action asserting a claim against the Company or any director or officer of the Company governed by the internal affairs doctrine.
Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provisions in our amended and restated certificate of incorporation. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in another jurisdiction, which could adversely affect our business, financial condition, or results of operations.
We have renounced the doctrine of corporate opportunity to the fullest extent permitted by applicable law.
Our amended and restated certificate of incorporation provides that the corporate opportunity doctrine will not apply, to the extent permitted by applicable law, against any of our officers, directors, or stockholders or their respective affiliates (other than those officers, directors, stockholders, or affiliates acting in their capacity as our employee or director) in a manner that would prohibit them from investing or participating in competing businesses. To the extent any of our officers, directors or stockholders or their respective affiliates invest in such other businesses, they may have differing interests than our other stockholders. For example, subject to any contractual limitations, our officers, directors or stockholders or
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their respective affiliates’ funds may currently invest, and may choose in the future to invest, in other companies within the electronic payments industry which may compete with our business. Accordingly, in certain circumstances, the interests of our officers, directors, or stockholders or their respective affiliates may compete against us or pursue opportunities instead of us, for which we have no recourse. These actions on the part of our officers, directors, or stockholders or their respective affiliates could adversely impact our business, financial condition, or results of operations.
If securities analysts do not publish research or reports about our business or if they downgrade our stock or our sector, the price and trading volume of our Class A common stock could decline.
The trading market for our Class A common stock relies, in part, on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. Furthermore, if one or more of the analysts who cover us downgrade our stock or our industry, or the stock of any of our competitors, or publish inaccurate or unfavorable research about our business, the price of our stock could decline. If one or more of these analysts stops covering us or fails to publish reports on us regularly, we could lose visibility in the market, which in turn could cause the stock price or trading volume of our Class A common stock to decline.
As a public reporting company, we are subject to rules and regulations established from time to time by the SEC and Nasdaq regarding our internal control over financial reporting.
We are a public reporting company subject to the rules and regulations established from time to time by the SEC and Nasdaq. These rules and regulations require, among other things, that we establish and periodically evaluate procedures with respect to our internal control over financial reporting. For example, we are required to assess the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. If we identify deficiencies in our internal control over financial reporting or if we are unable to comply with the requirements applicable to us as a public company, in a timely manner, we may be unable to accurately report our financial results, or report them within the timeframes required by the SEC. If this occurs, we could become subject to sanctions or investigations by the SEC or other regulatory authorities. In addition, if we are unable to assert that our internal control over financial reporting is effective, investors may lose confidence in the accuracy and completeness of our financial reports, we may face restricted access to the capital markets, and the market price for our Class A common stock may be affected.
Future sales of Class A common stock in the public market (including shares of Class A common stock issuable upon exchange of LLC Interests or upon conversion of our Series A convertible preferred stock), or the perception of future sales, by us or our existing stockholders could cause the market price for our Class A common stock to decline.
The sale of a significant amount of shares of our Class A common stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of shares of our Class A common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
As part of the Reorganization Transactions, the Continuing LLC Owners received certain sale and exchange rights. Specifically, Blueapple has a sale right providing that, upon our receipt of a sale notice from Blueapple, we will use our commercially reasonable best efforts to pursue a public offering of shares of our Class A common stock and use the net proceeds therefrom to purchase LLC Interests from Blueapple. In addition, pursuant to an exchange agreement (the “Exchange Agreement”) each Continuing LLC Owner (other than Blueapple) has an exchange right providing that, upon receipt of an exchange notice from such Continuing LLC Owner, we will exchange the applicable LLC Interests from such Continuing LLC Owner for newly issued shares of our Class A common stock on a one-for-one basis. Each Continuing LLC Owner (other than Blueapple) also received certain registration rights pursuant to a registration rights agreement, including customary piggyback registration rights, which include the right to participate on a pro rata basis in any public offering we conduct in response to our receipt of a sale notice from Blueapple. In addition, MDP received customary demand registration rights that require us to register shares of Class A common stock held by it, including any Class A common stock received upon our exchange of Class A common stock for its LLC Interests. These registration rights also cover the shares of Class A common stock issuable upon conversion of the Series A convertible preferred stock held by MDP. Blueapple has the right, in connection with any public offering we conduct (including any offering conducted as a result of an exercise by MDP of its registration rights), to request that we use our commercially reasonable efforts to
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pursue a public offering of shares of our Class A common stock and use the net proceeds therefrom to purchase a pro rata portion of its LLC Interests. The market price of shares of our Class A common stock could decline, potentially significantly, if any of these stockholders exercise their registration, sale, or exchange rights.
In the future, we may also issue securities in connection with investments, acquisitions, or capital raising activities. In particular, the number of shares of our Class A common stock issued in connection with an investment or acquisition, or to raise additional equity capital, could constitute a material portion of our then-outstanding shares of our Class A common stock. In addition, we have reserved shares of Class A common stock for issuance under our Amended and Restated 2018 Omnibus Equity Incentive Plan to our employees, directors, officers, and consultants. Any issuance of additional securities in the future may result in additional dilution to the holders of our Class A common stock or may adversely impact the price of our Class A common stock.
The market price for our Class A common stock may change significantly, and holders of our Class A common stock may not be able to resell shares at or above the price they paid or at all.
It is possible that an active trading market for our Class A common stock will not be sustained, which could make it difficult for holders of our Class A common stock to sell their shares at an attractive price or at all. In addition, volatility in the market price of our Class A common stock may prevent shareholders from selling shares of our Class A common stock at or above the price they paid for them. Many factors, which are outside our control, may cause the market price of our Class A common stock to fluctuate significantly, including those described elsewhere in this “Risk Factors” section and elsewhere in this Annual Report on Form 10-K, as well as the following:
results of operations that vary from those of our competitors or the expectations of securities analysts and investors;
changes in expectations as to our future financial performance, including financial estimates and investment recommendations by securities analysts and investors;
technology changes, changes in consumer behavior, or changes in merchant relationships in our industry;
security breaches related to our systems or those of our merchants, affiliates, or partners;
changes in market valuations of, or earnings and other announcements by, companies in our industry;
declines in the market prices of stocks generally, particularly those of payment companies;
market response to the ongoing COVID-19 pandemic and related government actions;
announcements by us, our competitors, or our partners of significant contracts, new products, acquisitions, joint ventures, other strategic relationships and partnerships, or capital commitments;
changes in business, regulatory, economic, or market conditions affecting our industry or the economy as a whole and, in particular, in the consumer spending environment;
investor perceptions of the investment opportunity associated with our Class A common stock relative to other investment alternatives;
announcements relating to litigation or governmental investigations;
guidance, if any, that we provide to the public, any changes in this guidance, or our failure to meet this guidance;
the development and sustainability of an active trading market for our Class A common stock;
changes in accounting principles; and
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other events or factors, including those resulting from system failures and disruptions, pandemics, natural disasters, war, acts of terrorism, or responses to these events.
Broad market and industry fluctuations may adversely affect the market price of our Class A common stock, regardless of our actual operating performance. Furthermore, the stock market may experience extreme volatility that, in some cases, may be unrelated or disproportionate to the operating performance of particular companies. For example, in 2022, our stock and the stock of many companies in the payments and financial services industries experienced significant volatility. In addition, price volatility may be greater if the public float and trading volume of our Class A common stock is low.
In addition, the price of our Class A common stock increased significantly in connection with the announcement of the Merger. The price of our Class A common stock will significantly decline if the proposed transaction with Global Payments is not consummated within the intended timeframe or at all.
