The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the information presented in unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our final prospectus, datedJune 4, 2020 , filed with theSecurities and Exchange Commission , or theSEC , in accordance with Rule 424(b) of the Securities Act of 1933, as amended, onJune 8, 2020 , or the Prospectus, in connection with our initial public offering, or the IPO. The following discussion and analysis reflects the historical results of operations and financial position ofShift4 Payments, LLC and its consolidated subsidiaries prior to the Reorganization Transactions (as defined below) onJune 4, 2020 and that ofShift4 Payments, Inc. and its consolidated subsidiaries (includingShift4 Payments, LLC ) following the completion of the Reorganization Transactions. In addition to historical information, the following discussion contains forward-looking statements, such as statements regarding our expectation for future performance, liquidity and capital resources, that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our expectations. Our actual results may differ materially from those contained in or implied by any forward-looking statements. Factors that could cause such differences include those identified below and those described in "Cautionary Note Regarding Forward-Looking Statements," and "Risk Factors" in this Quarterly Report on Form 10-Q. We assume no obligation to update any of these forward-looking statements.
As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to:
• "we," "us," "our," the "Company," "Shift4" and similar references refer:
(1) following the consummation of the Reorganization Transactions, to
subsidiaries, including
all of its subsidiaries, and (2) prior to the completion of the
Reorganization Transactions, to
stated, all of its subsidiaries.
• "Blocker Companies" refers to certain direct and/or indirect owners of LLC
Interests inShift4 Payments, LLC , collectively, prior to the Reorganization Transactions that are taxable as corporations forU.S. federal income tax purposes and each of which is an affiliate of Searchlight (as defined below).
• "Blocker Mergers" refers to the acquisition by
Interests held by the Blocker Shareholders, pursuant to one or more
contributions by Blocker Shareholders of the equity interests in the
Blocker Companies to
mergers, and in exchange for which
Blocker Shareholders shares of Class B common stock and Class C common
stock. • "Blocker Shareholders" refers to the owners of Blocker Companies, collectively, prior to the Reorganization Transactions.
• "Continuing Equity Owners" refers collectively to Searchlight, our Founder
and their respective permitted transferees that will own LLC Interests
after the Reorganization Transactions and who may redeem at each of their
options, in whole or in part from time to time, their LLC Interests for, at
our election, cash or newly-issued shares ofShift4 Payments, Inc.'s Class A common stock. • "LLC Interests" refers to the common units ofShift4 Payments, LLC , including those that we purchased directly fromShift4 Payments, LLC with the proceeds from our IPO and the concurrent private placement and the
common units of
Equity Owners in connection with the consummation of the Reorganization
Transactions.
• "Founder" refers to
sole stockholder of
Owner and an owner of Class C common stock.
• "Former Equity Owner" refers to
LLC Interests for shares of our Class A common stock in connection with the
consummation of the Reorganization Transactions.
• "Rook" refers to
our Founder and for which our Founder is the sole stockholder.
• "RSU Holders" refers to certain current and former employees of Shift4
• "Searchlight" refers to
limited partnership, and certain funds affiliated with Searchlight.
Searchlight is a Continuing Equity Owner and an owner of Class C common
stock.
• "Shift4 Payments LLC Agreement" refers to
and restated limited liability company agreement.
• "Reorganization Transactions" refer to certain organizational transactions
that we effected in connection with our IPO inJune 2020 . See Notes 1 and 18 to our unaudited condensed consolidated financial statements for a
description of the Reorganization Transactions and the section entitled
"Reorganization Transactions" below. 29
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Table of Contents Overview We are a leading independent provider of integrated payment processing and technology solutions inthe United States based on total volume of payments processed. We have achieved our leadership position through decades of solving complex business and operational challenges facing our customers: software partners and merchants. For our software partners, we offer a single integration to an end-to-end payments offering, a proprietary gateway and a robust suite of technology solutions to enhance the value of their software and simplify payment acceptance. For our merchants, we provide a seamless, unified consumer experience as an alternative to relying on multiple providers to accept payments and utilize technology in their businesses. At the heart of our business is our payments platform. Our payments platform is a full suite of integrated payment products and services that can be used across multiple channels (in-store, online, mobile and tablet- based) and industry verticals, including: • end-to-end payment processing for a broad range of payment types; • merchant acquiring;
• proprietary omni-channel gateway capable of multiple methods of contactless
and QR code based payments; • complementary software integrations; • integrated and mobile POS solutions; • security and risk management solutions; and • reporting and analytical tools. In addition, we offer innovative technology solutions that go beyond payment processing. Some of our solutions are developed in-house, such as business intelligence and POS software, while others are powered by our network of complementary third-party applications. Our focus on innovation combined with our product-driven culture enables us to create scalable technology solutions that benefit from an extensive library of intellectual property. We have a partner-centric distribution approach. We market and sell our solutions through a diversified network of software partners, which consists of ISVs and VARs. ISVs are technology providers that develop commerce-enabling software suites with which they can bundle our payments platform. VARs are organizations that provide distribution support for ISVs and act as trusted and localized service providers to merchants by providing them with software and services. Together, our ISVs and VARs provide us immense distribution scale and provide our merchants with front-line service and support. Our end-to-end payments offering combines our payments platform, including our proprietary gateway and breadth of software integrations, and our suite of technology solutions to create a compelling value proposition for our merchants. Our end-to end payment volume was$4.2 billion and$5.5 billion for the three months endedJune 30, 2020 and 2019, respectively and$10.4 billion and$10.2 billion for the six months endedJune 30, 2020 and 2019, respectively. This end-to-end payment volume contributed approximately 57% and 60% of gross revenue less network fees for the three months endedJune 30, 2020 and 2019, respectively, and 57% and 58% of gross revenue less network fees for the six months endedJune 30, 2020 and 2019, respectively. Our merchants range from small to medium sized businesses, or SMBs, to large enterprises across numerous verticals in which we have deep industry expertise, including food and beverage, lodging and leisure.
Recent acquisitions
Merchant Link
InAugust 2019 , we completed the acquisition ofMerchant-Link, LLC , or Merchant Link, a leading provider of payment gateway and data security solutions, and which primarily services hotels and restaurants inthe United States , or the Merchant Link Acquisition. The Merchant Link Acquisition brings to us a highly complementary customer base, with a significant portion of the customers using software already integrated on our gateway. This overlap presents us with a substantial opportunity for improved share of wallet and cost efficiencies.
Initial public offering and concurrent private placement
OnJune 9, 2020 , we completed our IPO of 17,250,000 shares of Class A common stock, including 2,250,000 shares pursuant to the full exercise of the underwriters' option to purchase additional shares, at a price to the public of$23.00 per share. Upon completion of the IPO, we received net proceeds of approximately$363.8 million , after deducting underwriting discounts and commissions and offering expenses of approximately$33.0 million . We also completed a$100.0 million concurrent private placement of 4,625,346 shares of Class C common stock to Rook. The total net proceeds from the IPO and concurrent private placement were approximately$463.8 million .Shift4 Payments, Inc. used the total proceeds to purchase newly-issued LLC Interests, fromShift4 Payments, LLC .Shift4 Payments, LLC used these amounts received fromShift4 Payments, Inc. to repay certain existing indebtedness and for general corporate purposes. 30
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Table of Contents Reorganization Transactions The historical results of operations discussed in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" are those of (1)Shift4 Payments, LLC and its consolidated subsidiaries for periods prior to the Reorganization Transactions onJune 4, 2020 and (2)Shift4 Payments, Inc. and its consolidated subsidiaries for periods beginning on or following the Reorganization Transactions onJune 4, 2020 . The historical results of operations and financial condition ofShift4 Payments, LLC prior to the completion of the Reorganization Transactions, including the IPO and concurrent private placement, do not reflect certain items that we expect will affect our results of operations and financial condition after giving effect to the Reorganization Transactions and the use of proceeds from the IPO and concurrent private placement. Following the completion of the Reorganization Transactions, we own 49.8% of the economic interest ofShift4 Payments, LLC and the Continuing Equity Holders own the remaining 50.2%.Shift4 Payments, Inc. is the sole managing member ofShift4 Payments, LLC and, although we do not have a majority economic interest inShift4 Payments, LLC , we control the management ofShift4 Payments, LLC . As a result, we consolidate the financial results ofShift4 Payments, LLC and report a noncontrolling interest of 50.2% related to the interests inShift4 Payments, LLC held by the Continuing Equity Holders on our consolidated financial statements. After consummation of the IPO,Shift4 Payments, Inc. became subject toU.S. federal, state and local income taxes with respect to our allocable share of any taxable income ofShift4 Payments, LLC and is taxed at the prevailing corporate tax rates. In addition to tax expenses, we also have and will continue to incur public company expenses related to our operations, plus payment obligations under the Tax Receivable Agreement, or TRA, which we expect to be significant. We intend to causeShift4 Payments, LLC to make distributions to us in an amount sufficient to allow us to pay our tax obligations and operating expenses, including distributions to fund any payments due under the TRA.
Impact of the COVID-19 pandemic
The unprecedented and rapid spread of COVID-19 as well as the shelter-in-place orders, promotion of social distancing measures, restrictions to businesses deemed non-essential, and travel restrictions implemented throughoutthe United States have significantly impacted the restaurant and hospitality industries - verticals in which we have predominantly focused on over the last decade. In response to these developments, we have implemented measures to focus on the safety of our employees, including implementing remote working capabilities, and to support our merchants as they shift to take-out and delivery operations, while at the same time seeking to mitigate the impact on our financial position and operations. We have also implemented new programs to help ease the burden for our merchants, encourage customers to support their local small businesses and restaurants and incentivize new merchants to enroll in our end-to-end payment platform. Specifically, we have:
• established www.shift4.com/situation in an effort to share data to educate
political leaders and advocacy groups as to where aid needs to be prioritized;
• released a gift card funding campaign to encourage consumers to support
their favorite bars or restaurants by purchasing a gift card through our Shift4Cares.com website; and • implemented temporary fee waivers on certain products fromMarch 2020 throughJune 2020 that did not have a material impact on financial performance. We believe we have sufficient liquidity to satisfy our cash needs, however, we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times. Our business was not significantly impacted by the COVID-19 pandemic until the latter part ofMarch 2020 , at which time our end-to-end payment volumes declined 70%. At that time, we took the following actions to increase liquidity and strengthen our financial position:
• furloughed approximately 25% of our employees of which approximately 75%
had returned to work as of
• accelerated approximately
related to prior acquisitions, including the Merchant Link Acquisition;
• re-prioritized our capital projects to defer certain non-essential improvements; • instituted a company-wide hiring freeze; and • reduced salaries for management across the organization. 31
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Since mid-March when shelter-in-place, social distancing, the closing of non-essential businesses and other restrictive measures were first put in place acrossthe United States , we have seen a significant recovery in our end-to-end payment volumes and, for the trailing seven days leading up toJune 30, 2020 , end-to-end payment volumes were approximately 90% of pre-COVID volumes in 2020. While end-to-end payment volumes for the six months endedJune 30, 2020 have exceeded those for the six months endedJune 30, 2019 , the ultimate impact that the COVID-19 pandemic will have on our consolidated results of operations in the second half of 2020 remains uncertain. We will continue to evaluate the nature and extent of these potential impacts to our business, consolidated results of operations, and liquidity. See "Risk Factors-Business risks-The recent novel coronavirus, or COVID-19, global pandemic has had and is expected to continue to have a material adverse effect on our business and results of operations." OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security, or CARES, Act was signed into law. The CARES Act provides a substantial stimulus and assistance package intended to address the impact of the COVID-19 pandemic, including tax relief and government loans, grants and investments. The CARES Act includes, among other things, provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified improvement property. Pursuant to the CARES Act, inJune 2020 , we submitted a carryback claim related to our net operating loss carryforward generated in 2018, which is expected to provide a cash tax savings of$0.6 million and is reflected in the condensed consolidated financial statements for the three and six months endedJune 30, 2020 . We will continue to monitor any effects that may result from the CARES Act or other government relief programs that are made available in the future.
Factors impacting our business and results of operations
In general, our results of operations are impacted by factors such as adoption of software integrated payment solutions, continued investment in core capabilities, on-going pursuit of strategic acquisitions, and macro-level economic trends.
Increased adoption of software-integrated payments. We primarily generate revenue through volume-based payments and transaction fees and subscription fees for software and technology solutions. We expect to grow this volume by attracting new software partners through our market-leading and innovative solutions. These software partners have proven to be an effective and efficient way of acquiring new merchants and servicing these relationships. Continued focus on the sale of our end-to-end payments offering and resulting revenue mix shift. Our customers utilize our comprehensive solutions to solve a variety of business challenges. Currently, a large percentage of our merchant base uses only our proprietary gateway. As these merchants adopt our end-to-end payment solutions, our revenue per merchant and merchant retention are expected to increase. Mix of our merchant base. The revenue contribution of our merchant portfolio is affected by several factors, including the amount of payment volume processed per merchant, the industry vertical in which the merchant operates, and the number of solutions implemented by the merchant. As the size and sophistication of our merchants change, we may experience shifts in the average revenue per merchant and the weighted average pricing of the portfolio.
Ability to attract and retain software partners. A key pillar of our Shift4 Model is our partner-centric distribution approach. We work with our software partners who are essential to helping us grow and serve our merchant base. Maintaining our product leadership and continued investment in innovative technology solutions is critical to attracting and retaining software partners.
Investment in product, distribution and operations. We make significant investments in both new product development and existing product enhancement, such as mobile point-of-sale and cloud enablement for our software partners' existing systems. New product features and functionality are brought to market through varied distribution and promotional activities including collaborative efforts with industry leading software providers, trade shows, and customer conferences. Further, we will continue to invest in operational support in order to maintain service levels expected by our merchant customers. We believe these investments in product development and software integrations will lead to long-term growth and profitability. For example, in the second quarter of 2020, we released numerous new products and enhancements to help our merchants adapt to the rapidly changing commerce environment. These included numerous delivery/takeout products, contactless payment methods and QR code based mobile payment technologies. Pursuit of strategic acquisitions. From time to time, we may pursue acquisitions as part of our ongoing growth strategy. While these acquisitions are intended to add long-term value, in the short term they may add redundant operating expenses or additional carrying costs until the underlying value is unlocked. Economic conditions and resulting consumer spending trends. Changes in macro-level consumer spending trends, including as a result of the COVID-19 pandemic, could affect the amount of volumes processed on our platform, thus resulting in fluctuations to our revenue streams. Further, consumer spending habits are subject to seasonal fluctuations that could cause varied revenue results across the quarters. 32
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Table of Contents Key financial definitions
The following briefly describes the components of revenue and expenses as presented in the accompanying unaudited condensed consolidated statements of operations.
Gross revenue consists primarily of payment-based revenue and subscriptions and other revenues:
Payment-based revenue includes fees for payment processing services, gateway services, data encryption and tokenization. Payment processing fees are primarily driven as a percentage of payment volume and a per transaction fee. They may also be based on minimum monthly usage fees. Subscription and other revenues include software as a service, or SaaS, fees for point-of-sale systems provided to merchants. Point-of-sale SaaS fees are assessed based on the type and quantity of point-of-sale systems deployed to the merchant. This includes monthly minimums, statement fees, fees for our proprietary business intelligence software, annual fees, regulatory compliance fees and other miscellaneous services such as help desk support and warranties on equipment. This also includes revenue derived from third party residuals, automated teller machine services, and fees charged for technology support.
Cost of sales consists of interchange and processing fees, residual commissions, equipment and other costs of sales:
Interchange and processing fees represent payments to card issuing banks and assessments paid to card associations based on transaction processing volume. These also include fees incurred by third-parties for data transmission and settlement of funds, such as processors and sponsor banks.
Residual commissions represent monthly payments to software partners. These costs are typically based on a percentage of payment-based revenue.
Equipment represents our costs of devices that are purchased by the merchant.
Other costs of sales includes amortization of capitalized software development costs, capitalized software, acquired technology and capitalized customer acquisition costs. It also includes incentives, shipping and handling costs related to the delivery of devices and other contract fulfillment costs. Capitalized software development costs are amortized using the straight-lined method on a product-by-product basis over the estimated useful life of the software. Capitalized software, acquired technology and capitalized acquisition costs are amortized on a straight-line basis in accordance with our accounting policies. General and administrative expenses consist primarily of compensation, benefits and other expenses associated with corporate management, finance, human resources, shared services, information technology and other activities. General and administrative expenses also include the cost of equipment deployed that does not have a corresponding revenue stream, such as demonstration equipment and certain customer upgrades. Depreciation and amortization expense consists of depreciation and amortization expenses related to merchant relationships, trademarks and trade names, residual commission buyouts, equipment, leasehold improvements, and other intangible assets and property, plant and equipment. We depreciate and amortize our assets on a straight-line basis in accordance with our accounting policies. Leasehold improvements are depreciated over the lesser of the estimated life of the leasehold improvement or the remaining lease term. Maintenance and repairs, which do not extend the useful life of the respective assets, are charged to expense as incurred. Intangible assets are amortized on a straight-line basis over their estimated useful lives which range from two years to 15 years.
Professional fees consists of costs incurred for accounting, tax, legal, and consulting services.
Advertising and marketing expenses relate to costs incurred to participate in industry tradeshows and dealer conferences, advertising initiatives to build brand awareness, and expenses to fulfill loyalty program rewards earned by software partners. Restructuring expenses relate to strategic initiatives we have taken that include, but are not limited to, severance or separation costs and other exit and disposal costs. These expenses are typically not reflective of our ongoing operations.
Other operating (income) expense, net consists of other operating items.
Loss on extinguishment of debt represents a loss recorded for the unamortized capitalized financing costs associated with the debt prepayment.
Other income, net primarily consists of other non-operating items.
Interest expense consists of interest costs incurred on our borrowings and amortization of capitalized financing costs.
Income tax benefit (provision) represents federal, state and local taxes based on income in multiple domestic jurisdictions.
Net loss attributable to noncontrolling interests arises from net loss from the non-owned portion of businesses where we have a controlling interest but less than 100% ownership. This represents the noncontrolling interests inShift4 Payments, LLC and its consolidated subsidiaries, which is comprised of the income allocated to Continuing LLC Owners as a result of their proportional ownership of LLC interests. 33
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Table of Contents
Comparison of results for the three months ended
The following table sets forth the unaudited condensed consolidated statements of operations for the periods presented.
Three months ended June 30, (in millions) 2020 2019 $ change % change Payments-based revenue$ 121.2 $ 159.5 $ (38.3 ) (24.0 %) Subscription and other revenues 20.6 21.0 (0.4 ) (1.9 %) Total gross revenue 141.8 180.5 (38.7 ) (21.4 %) Less: network fees 74.4 105.2 (30.8 ) (29.3 %) Less: Other costs of sales 35.1 31.7 3.4 10.7 % Gross profit 32.3 43.6 (11.3 ) (25.9 %) General and administrative expenses 89.2 26.1 63.1 241.8 % Depreciation and amortization expense 10.4 9.8 0.6 6.1 % Professional fees 1.2 2.0 (0.8 ) (40.0 %) Advertising and marketing expenses 0.8 1.4 (0.6 ) (42.9 %) Restructuring expenses 0.1 0.1 - (- %) Other operating (income) expense, net (12.4 ) - (12.4 ) NM Total operating expenses 89.3 39.4 49.9 126.6 % (Loss) income from operations (57.0 ) 4.2 (61.2 ) NM Loss on extinguishment of debt (7.1 ) - (7.1 ) NM Other income, net 0.2 0.7 (0.5 ) (71.4 %) Interest expense (11.7 ) (12.7 ) 1.0 (7.9 %) Loss before income taxes (75.6 ) (7.8 ) (67.8 ) NM Income tax benefit (provision) 0.6 (0.4 ) 1.0 (250.0 %) Net loss (75.0 )$ (8.2 ) $ (66.8 ) NM Net loss attributable to noncontrolling interests (1.0 ) Net loss attributable to Shift4 Payments, Inc.$ (74.0 ) Gross Revenue Gross revenue was$141.8 million for the three months endedJune 30, 2020 , compared to$180.5 million for the three months endedJune 30, 2019 , a decrease of$38.7 million or 21.4%. Gross revenue is comprised of payments-based revenue and subscription and other revenues. Payments-based revenue was$121.2 million for the three months endedJune 30, 2020 , compared to$159.5 million for the three months endedJune 30, 2019 , a decrease of$38.3 million or 24.0%. The decrease in payments-based revenue is primarily driven by a decrease in end-to-end payment volume of$1.3 billion , or 22.9% for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 . The COVID-19 pandemic impacted our end-to-end payment volumes beginning mid-March when shelter-in-place, social distancing, the closing of non-essential businesses and other restrictive measures were first put in place acrossthe United States . Since mid-March, we have seen a significant recovery in our end-to-end payment volumes and, for the trailing seven days leading up toJune 30, 2020 , end-to-end payment volumes are approximately 90% of pre-COVID-volumes in 2020. Subscription and other revenues were$20.6 million for the three months endedJune 30, 2020 , compared to$21.0 million for the three months endedJune 30, 2019 , a decrease of$0.4 million or 1.9%. The decrease was driven primarily by a decline in hardware revenue and software license sales of$1.6 million , a decline in customer billing revenue due to temporary fee waivers on certain products fromMarch 2020 throughJune 2020 of$1.9 million as a result of the COVID-19 pandemic, and a decline of$0.4 million related to third-party residual revenue, partially offset by the Merchant Link Acquisition, which contributed$3.7 million in the three months endedJune 30, 2020 .
Network Fees
Network fees were
Gross revenue less network fees was$67.4 million for the three months endedJune 30, 2020 , compared to$75.3 million for the three months endedJune 30, 2019 , a decrease of$7.9 million or 10.5%. The decrease in gross revenue less network fees is correlated with the decrease in end-to-end payment volume. See "-Key performance indicators and non-GAAP measures" for a reconciliation of gross profit to gross revenue less network fees. 34
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Table of Contents Other costs of sales Other costs of sales was$35.1 million for the three months endedJune 30, 2020 , compared to$31.7 million for the three months endedJune 30, 2019 , an increase of$3.4 million , or 10.7%. This increase was primarily a result of:
• an increase in equipment deployed for new contracts of
• the Merchant Link Acquisition, which contributed
costs of sales for the three months ended
• higher capitalized acquisition cost amortization of
deal bonuses; partially offset by
• a decline in gross revenue less network fees driving lower residual
commissions of
Operating expenses
General and administrative expenses. General and administrative expenses were$89.2 million for the three months endedJune 30, 2020 , compared to$26.1 million for the three months endedJune 30, 2019 , an increase of$63.1 million or 241.8%. The increase was primarily due to equity-based compensation expense of$50.0 million and$11.0 million in change of control liabilities recognized as a result of the IPO. See Note 21 to our accompanying unaudited consolidated financial statements for more information on equity-based compensation and Note 12 to our accompanying unaudited consolidated financial statements for more information on the contingent liabilities. In addition, general and administrative expenses increased$5.6 million in 2020 due to the Merchant Link Acquisition. Depreciation and amortization expense. Depreciation and amortization expense was$10.4 million for the three months endedJune 30, 2020 , compared to$9.8 million for the three months endedJune 30, 2019 , an increase of$0.6 million or 6.1%. The increase was primarily due to the Merchant Link Acquisition, which contributed$0.6 million to depreciation and amortization expense in the three months endedJune 30, 2020 . Professional fees. Professional fees were$1.2 million for the three months endedJune 30, 2020 , compared to$2.0 million for the three months endedJune 30, 2019 , a decrease of$0.8 million or 40.0%. The decrease was primarily due to higher professional fees incurred in 2019 resulting from nonrecurring costs associated with activities to prepare for our IPO. Advertising and marketing. Advertising and marketing expenses were$0.8 million for the three months endedJune 30, 2020 , compared to$1.4 million for the three months endedJune 30, 2019 , a decrease of$0.6 million or 42.9%. The decrease was primarily due to postponing trade shows originally scheduled during the second quarter of 2020 as a result of the COVID-19 pandemic. Restructuring expenses. Restructuring expenses were$0.1 million for both the three months endedJune 30, 2020 and 2019. The restructuring expenses represent accretion on the one-time restructuring expenses incurred in 2018 for a historical acquisition. See Note 4 to our accompanying unaudited condensed consolidated financial statements for more information on restructuring expenses.
Other operating (income) expense, net
Other operating (income) expense, net includes the impact of modifying the terms and conditions of our SaaS arrangements and updating our operational procedures. As a result, beginningJune 30, 2020 , hardware provided under our SaaS agreements is accounted for as an operating lease, whereas prior toJune 30, 2020 , these arrangements were accounted for as sales-type leases. An adjustment of$12.4 million was recorded to reflect the impact of the lease modifications. Prior to amending the terms, the sales-type lease accounting treatment impacted net income negatively by$4.0 million and$3.3 million for the three months endedJune 30, 2020 and 2019, respectively.
Loss on extinguishment of debt
In connection with the pre-payment of$59.8 million on the First Lien Term Loan Facility and the full repayment of$130.0 million on the Second Lien Term Loan Facility, we incurred a non-cash loss on extinguishment of debt of$7.1 million representing the unamortized capitalized financing costs associated with the debt prepayment. See Note 10 to our accompanying unaudited condensed consolidated financial statements for more information on the loss on extinguishment of debt.
Other income, net
Other income, net was$0.2 million for the three months endedJune 30, 2020 , compared to$0.7 million for the three months endedJune 30, 2019 , a decrease of$0.5 million or 71.4%. The decrease is driven by unearned contingent liabilities associated with our residual commission buyout agreements. 35
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Table of Contents Interest expense Interest expense was$11.7 million for the three months endedJune 30, 2020 , compared to$12.7 million for the three months endedJune 30, 2019 , a decrease of$1.0 million or 7.9%. This decrease in interest expense was primarily due to the pre-payments for the First Lien and Second Lien Term Loan Facilities, as well as the repayment of the Revolving Credit Facility, inJune 2020 , which impacted interest expense by approximately$1.2 million , partially offset by additional borrowings under the First Lien Term Loan Facility from refinancing our outstanding indebtedness inOctober 2019 and additional borrowings under the Revolving Credit Facility during 2020 prior to the pre-payments.
Income tax provision
The effective tax rate for the three months endedJune 30, 2020 was (0.8)%, compared to the effective tax rate for the three months endedJune 30, 2019 of 5.1%. The 2020 income tax benefit was different than theU.S. federal statutory income tax rate of 21% primarily due to the loss allocated to the noncontrolling interest, changes in the valuation allowances inthe United States and recording a tax benefit of$0.6 million for a net operating loss carryback atShift4 Corporation which was allowed due to the CARES Act. The 2019 income tax expense was different than theU.S. federal statutory income tax rate of 21% primarily due toShift4 Payments, LLC being treated as a partnership and not paying income tax. The change in the effective tax rate between the periods was primarily a result of a mix of earnings between entities, the 2020 net operating loss carryback due to the CARES Act and the change in the noncontrolling interest and valuation allowance adjustment.
Net loss attributable to noncontrolling interests
Net loss attributable to noncontrolling interests ofShift4 Payments, LLC was$(1.0) million for the three months endedJune 30, 2020 . There was no net loss attributable to noncontrolling interests ofShift4 Payments, LLC for the three months endedJune 30, 2019 as the Reorganization Transactions occurred onJune 4,2020 and the IPO was consummated onJune 9, 2020 .
Net loss attributable to
Net loss attributable to
Comparison of results for the six months ended
The following table sets forth the consolidated statements of operations for the periods presented. Six months ended June 30, (in millions) 2020 2019 $ change % change Payments-based revenue$ 297.6 $ 293.5 $ 4.1 1.4 % Subscription and other revenues 43.6 42.0 1.6 3.8 % Total gross revenue 341.2 335.5 5.7 1.7 % Less: network fees 194.7 193.9 0.8 0.4 % Less: Other costs of sales 69.7 59.4 10.3 17.3 % Gross profit 76.8 82.2 (5.4 ) (6.6 %) General and administrative expenses 111.5 52.6 58.9 112.0 % Depreciation and amortization expense 20.9 19.6 1.3 6.6 % Professional fees 2.9 3.8 (0.9 ) (23.7 %) Advertising and marketing expenses 2.1 2.8 (0.7 ) (25.0 %) Restructuring expenses 0.3 0.3 - (- %) Other operating (income) expense, net (12.4 ) - (12.4 ) (NM Total operating expenses 125.3 79.1 58.6 74.1 % (Loss) income from operations (48.5 ) 3.1 (64.0 ) NM Loss on extinguishment of debt (7.1 ) - (7.1 ) NM Other income, net 0.1 0.9 (0.8 ) (88.9 %) Interest expense (25.0 ) (25.2 ) 0.2 (0.8 %) Loss before income taxes (80.5 ) (21.2 ) (71.7 ) 338.2 % Income tax benefit (provision) 0.3 (0.5 ) 0.8 (160.0 %) Net loss (80.2 )$ (21.7 ) $ (70.9 ) 326.7 % Net loss attributable to noncontrolling interests (1.0 ) Net loss attributable to Shift4 Payments, Inc.$ (79.2 ) 36
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Table of Contents Gross Revenue Gross revenue was$341.2 million for the six months endedJune 30, 2020 , compared to$335.5 million for the six months endedJune 30, 2019 , an increase of$5.7 million or 1.7%. Gross revenue is comprised of payments-based revenue and subscription and other revenues. Payments-based revenue was$297.6 million for the six months endedJune 30, 2020 , compared to$293.5 million for the six months endedJune 30, 2019 , an increase of$4.1 million or 1.4%. The increase in payments-based revenue was driven by an increase in end-to-end payment volume of$0.2 billion or 2.0%, for the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 . The COVID-19 pandemic impacted our end-to-end payment volumes beginning mid-March when shelter-in-place, social distancing, the closing of non-essential businesses and other restrictive measures were first put in place acrossthe United States . Since mid-March, we have seen a significant recovery in our end-to-end payment volumes and, for the trailing seven days leading up toJune 30, 2020 , end-to-end payment volumes are approximately 90% of pre-COVID-volumes in 2020. Subscription and other revenues were$43.6 million for the six months endedJune 30, 2020 , compared to$42.0 million for the six months endedJune 30, 2019 , an increase of$1.6 million or 3.8%. The increase was driven by the Merchant Link Acquisition, which contributed$7.3 million in the six months endedJune 30, 2020 , offset by a decline in customer billing revenue due to temporary fee waivers on certain products fromMarch 2020 throughJune 2020 of$1.9 million as a result of the COVID-19 pandemic, as well as a decline in hardware revenue and software license sales of$2.3 million , for the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 .
Network Fees
Network fees were
Gross revenue less network fees was$146.5 million for the six months endedJune 30, 2020 , compared to$141.6 million for the six months endedJune 30, 2019 , an increase of$4.9 million or 3.5%. The increase in gross revenue less network fees is correlated with the increase in end-to-end payment volume. See "-Key performance indicators and non-GAAP measures" for a reconciliation of gross profit to gross revenue less network fees.
Other costs of sales
Other costs of sales was$69.7 million for the six months endedJune 30, 2020 , compared to$59.4 million for the six months endedJune 30, 2019 , an increase of$10.3 million , or 17.3%. This increase was primarily a result of:
• the Merchant Link Acquisition, which contributed
costs of sales for the six months ended
• higher capitalized acquisition cost amortization of
deal bonuses; • an increase in equipment deployed for new contracts of$3.1 million ;
• higher capitalized software development amortization of
• higher gross revenue less network fees driving higher residual commissions
of$0.4 million . Operating expenses General and administrative expenses. General and administrative expenses were$111.5 million for the six months endedJune 30, 2020 , compared to$52.6 million for the six months endedJune 30, 2019 , an increase of$58.9 million or 112.0%. The increase was primarily due to equity-based compensation expense of$50.0 million and$11.0 million in change of control liabilities recognized as a result of the IPO, offset by$13.8 million in non-cash adjustments for contingent liability valuations and deferred compensation arrangements. See Note 21 to our accompanying unaudited consolidated financial statements for more information on equity-based compensation and Note 12 to our accompanying unaudited condensed consolidated financial statements for more information on these contingent liabilities. In addition, general and administrative expenses increased$13.3 million in 2020 due to the Merchant Link Acquisition. Depreciation and amortization expense. Depreciation and amortization expense was$20.9 million for the six months endedJune 30, 2020 , compared to$19.6 million for the six months endedJune 30, 2019 , an increase of$1.3 million or 6.6%. The increase was primarily due to the Merchant Link Acquisition, which contributed$1.1 million to depreciation and amortization expense in the six months endedJune 30, 2020 . Professional fees. Professional fees were$2.9 million for the six months endedJune 30, 2020 , compared to$3.8 million for the six months endedJune 30, 2019 , a decrease of$0.9 million or 23.7%. The decrease was primarily due to higher professional fees incurred in 2019 resulting from nonrecurring costs associated with activities to prepare for our IPO. Advertising and marketing. Advertising and marketing expenses were$2.1 million for the six months endedJune 30, 2020 , compared to$2.8 million for the six months endedJune 30, 2019 , a decrease of$0.7 million or 25.0%. The decrease was primarily due to postponing trade shows originally scheduled during the second quarter of 2020 as a result of the COVID-19 pandemic. 37
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Restructuring expenses. Restructuring expenses were
Other operating (income) expense, net
Other operating (income) expense, net includes the impact of modifying the terms and conditions of our SaaS arrangements and updating our operational procedures. As a result, beginningJune 30, 2020 , hardware provided under our SaaS agreements is accounted for as an operating lease, whereas prior toJune 30, 2020 , these arrangements were accounted for as sales-type leases. An adjustment of$12.4 million was recorded to reflect the impact of the lease modifications. Prior to amending the terms, the sales-type lease accounting treatment impacted net income negatively by$8.6 million and$6.3 million for the six months endedJune 30, 2020 and 2019, respectively.
Loss on extinguishment of debt
In connection with the pre-payment of$59.8 million on the First Lien Term Loan Facility and the full repayment of$130.0 million on the Second Lien Term Loan Facility, we incurred a non-cash loss on extinguishment of debt of$7.1 million representing the unamortized capitalized financing costs associated with the prepaid debt. See Note 10 to our accompanying unaudited condensed consolidated financial statements for more information.
Other income, net
Other income, net was$0.1 million for the six months endedJune 30, 2020 , compared to$0.9 million for the six months endedJune 30, 2019 , a decrease of$0.8 million or 88.9%. The decrease is driven by unearned contingent liabilities associated with our residual commission buyout agreements.
Interest expense
Interest expense was$25.0 million for the six months endedJune 30, 2020 , compared to$25.2 million for the six months endedJune 30, 2020 , a decrease of$0.2 million or 0.8%. This decrease in interest expense was primarily due to the pre-payments for the First Lien and Second Lien Term Loan Facilities, as well as the repayment of the Revolving Credit Facility, inJune 2020 , which impacted interest expense by approximately$1.2 million , partially offset by additional borrowings under the First Lien Term Loan Facility from refinancing of our outstanding indebtedness inOctober 2019 and additional borrowings under the Revolving Credit Facility during 2020 prior to the pre-payments.
Income tax provision
The effective tax rate for the six months endedJune 30, 2020 was (0.4)%, compared to the effective tax rate for the six months endedJune 30, 2019 of 2.4%. The 2020 income tax benefit was different than theU.S. federal statutory income tax rate of 21% primarily due to the loss allocated to the noncontrolling interest, changes in the valuation allowances inthe United States and recording a tax benefit of$0.6 million for a net operating loss carryback atShift4 Corporation which was allowed due to the CARES Act. The 2019 income tax expense was different than theU.S. federal statutory income tax rate of 21% primarily due toShift4 Payments, LLC being treated as a partnership and not paying income tax. The change in the effective tax rate between the periods was primarily a result of a mix of earnings between entities, the 2020 net operating loss carryback due to the CARES Act and the change in the noncontrolling interest and valuation allowance adjustment.
Net loss attributable to noncontrolling interests
Net loss attributable to noncontrolling interests ofShift4 Payments, LLC was$(1.0) million for the six months endedJune 30, 2020 . There was no net loss attributable to noncontrolling interests ofShift4 Payments, LLC for the six months endedJune 30, 2019 as the Reorganization Transactions occurred onJune 4, 2020 and the IPO was consummated onJune 9, 2020 .
Net loss attributable to
Net loss attributable to
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Key performance indicators and non-GAAP measures
The following table sets forth our key performance indicators and non-GAAP measures for the periods presented.
Three months ended June 30, Six months ended June 30, (in millions) 2020 2019 2020 2019 End-to-end payment volume$ 4,240.0 $ 5,501.6 $ 10,386.1 $ 10,163.2 Gross revenue less network fees 67.4 75.3 146.5 141.6 EBITDA (45.8 ) 20.2 (19.7 ) 34.2 Adjusted EBITDA 14.8 24.0 32.3 44.6 End-to-end payment volume End-to-end payment volume is defined as the total dollar amount of card payments that we authorize and settle on behalf of our merchants. This volume does not include volume processed through our gateway-only merchants.
Gross revenue less network fees, EBITDA and adjusted EBITDA
We use supplemental measures of our performance which are derived from our consolidated financial information but which are not presented in our consolidated financial statements prepared in accordance with GAAP. These non-GAAP financial measures include: gross revenue less network fees, which includes interchange and assessment fees; earnings before interest expense, income taxes, depreciation, and amortization, or EBITDA; and adjusted EBITDA. Gross revenue less network fees represents a key performance metric that management uses to measure changes in the mix and value derived from our customer base as we continue to execute our strategy to expand our reach to serve larger, complex merchants. Adjusted EBITDA is the primary financial performance measure used by management to evaluate its business and monitor results of operations. Adjusted EBITDA represents EBITDA further adjusted for certain non-cash and other non-recurring items that management believes are not indicative of ongoing operations. These adjustments include acquisition, restructuring and integration costs, equity-based compensation expense, management fees and other nonrecurring items. We use non-GAAP financial measures to supplement financial information presented on a GAAP basis. We believe that excluding certain items from our GAAP results allows management to better understand our consolidated financial performance from period to period and better project our future consolidated financial performance as forecasts are developed at a level of detail different from that used to prepare GAAP-based financial measures. Moreover, we believe these non-GAAP financial measures provide our stakeholders with useful information to help them evaluate our operating results by facilitating an enhanced understanding of our operating performance and enabling them to make more meaningful period to period comparisons. There are limitations to the use of the non-GAAP financial measures presented in this report. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes. The non-GAAP financial measures are not meant to be considered as indicators of performance in isolation from or as a substitute for net income (loss) prepared in accordance with GAAP, and should be read only in conjunction with financial information presented on a GAAP basis. Reconciliations of EBITDA and adjusted EBITDA to its most directly comparable GAAP financial measure are presented below. We encourage you to review the reconciliations in conjunction with the presentation of the non-GAAP financial measures for each of the periods presented. In future fiscal periods, we may exclude such items and may incur income and expenses similar to these excluded items.
Reconciliations of gross revenue less network fees, EBITDA and adjusted EBITDA
The tables below provide reconciliations of gross profit to gross revenue less network fees and net loss on a consolidated basis for the periods presented to EBITDA and adjusted EBITDA.
Gross revenue less network fees:
Three months ended June 30, Six months ended June 30, (in millions) 2020 2019 2020 2019 Gross profit$ 32.3 $ 43.6 $ 76.8 $ 82.2 Add back: Other costs of sales 35.1 31.7 69.7 59.4 Gross revenue less network fees$ 67.4 $ 75.3 $ 146.5 $ 141.6 39
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Table of Contents EBITDA and adjusted EBITDA: Three months ended June 30, Six months ended June 30, (in millions) 2020 2019 2020 2019 Net loss $ (75.0 )$ (8.2 ) (80.2 ) (21.7 ) Interest expense 11.7 12.7 25.0 25.2 Income tax (benefit) provision (0.6 ) 0.4 (0.3 ) 0.5 Depreciation and amortization expense 18.1 15.3 35.8 30.2 EBITDA (45.8 ) 20.2 (19.7 ) 34.2 Acquisition, restructuring and integration costs (a) 12.9 4.2 3.1 10.9 Equity-based compensation (b) 50.0 - 50.0 - Impact of lease modifications (c) (12.4 ) - (12.4 ) - Management fees (d) 0.3 0.5 0.8 1.0 Other nonrecurring items (e) 9.8 (0.9 ) 10.5 (1.5 ) Adjusted EBITDA $ 14.8$ 24.0 32.3$ 44.6
(a) For the three months ended
control liabilities as a result of the IPO of
adjustments to contingent liabilities of
ended
result of the IPO of
contingent liabilities of
arrangements of
2019, consists primarily of fair value adjustments to contingent liabilities
of
arrangements of
professional fees of
and 12 to the accompanying unaudited condensed consolidated financial
statements for more information on the restructuring expenses and contingent
liability adjustments, respectively.
(b) Represents the equity-based compensation expense for restricted stock units
that vest over time and are not subject to continued service, as well as the
restricted stock units that vest ratably over time and are subject to
continued employment. See Note 21 to our accompanying unaudited consolidated
financial statements for more information on equity-based compensation.
(c) Effective June 30, 2020, we modified the terms and conditions of our SaaS
arrangements and updated operational procedures. As a result, beginning June
30, 2020, hardware provided under our SaaS agreements is accounted for as an
operating lease, whereas prior to
accounted for as sales-type leases. This adjustment represents the one-time
cumulative impact of modifying the contracts effective
to amending the terms, the sales-type lease accounting treatment impacted
EBITDA and adjusted EBITDA negatively by
the three and six months ended
and
respectively.
(d) Represents fees to the Continuing Equity Owners for consulting and managing
services through the date of the IPO. These fees are not required to be paid
subsequent to the IPO. See Note 15 to the accompanying unaudited condensed
consolidated financial statements for more information about these related
party transactions.
(e) For the three and six months ended
pre-payments and
products from
10 to the accompanying unaudited condensed consolidated financial statements
for more information on the loss on extinguishment of debt.
Liquidity and capital resources
Overview
We have historically sourced our liquidity requirements primarily with cash flow from operations and, when needed, with borrowings under our Credit Facilities. The principal uses for liquidity have been debt service, capital expenditures (including research and development) and funds required to finance acquisitions. Given the impact the COVID-19 pandemic has had on the restaurant and hospitality industries, we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure we can continue to operate during these uncertain times. The following table sets forth summary cash flow information for the periods presented. Six months ended June 30, (in millions) 2020 2019 Net cash provided by operating activities$ 6.7 $
22.9
Net cash used in investing activities (16.7 ) (17.9 ) Net cash provided by (used in) financing activities 250.3 (4.6 ) Change in cash$ 240.3 0.4 Operating activities
Net cash provided by operating activities consists of net loss adjusted for certain non-cash items and changes in other assets and liabilities.
For the six months ended
• net loss of
equity-based compensation of
of$35.8 million , cumulative impact of modifying our lease contracts of$(12.4) million , loss on extinguishment of debt 40
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of
provision for bad debts of
financing costs of
• changes in operating assets and liabilities of
primarily a result of change of control liabilities established at the time
of the IPO of
For the six months ended
• net loss of
depreciation and amortization of
liabilities of$6.8 million , provision for bad debts of$2.5 million and amortization of capitalized financing costs of$1.9 million ; plus,
• changes in operating assets and liabilities of
result of working capital fluctuations, primarily due to the deferred
tenant improvement allowance received for leasehold improvements made to
ourLas Vegas office. Investing activities Net cash used in investing activities includes purchases of future commission streams of our software partners, purchases of property and equipment, capitalized software development costs and upfront processing bonuses provided to software partners. Net cash used in investing activities was$16.7 million for the six months endedJune 30, 2020 , a decrease of$1.2 million compared to net cash used in investing activities of$17.9 million for the six months endedJune 30, 2019 . This decrease is primarily the result of:
• a decrease of
driven by leasehold improvements made in 2019 to our
partially offset by,
• an increase of$2.9 million in capitalized software development costs driven by development for additional new products and enhancements and timing of when technological feasibility is established; and,
• an increase in costs to obtain contracts of
merchants that subscribe to our end-to-end payments platform.
Financing activities
Net cash provided by financing activities was$250.3 million for the six months endedJune 30, 2020 , an increase of$254.9 million , compared to net cash used in financing activities of$4.6 million for the six months endedJune 30, 2019 . This increase was primarily due to the IPO and concurrent private placement net proceeds of approximately$465.7 million after deducting underwriting discounts, commissions and offering costs paid in 2020, offset by the partial repayment of the First Lien Term Loan Facility and full repayment of our Second Lien Term Loan Facility, totaling$189.8 million .
Credit Facilities
As ofJune 30, 2020 , we had$450.0 million outstanding under the First Lien Term Loan Facility. Both the Second Lien Term Loan Facility and the Revolving Credit Facility were paid in full using the proceeds from the IPO and concurrent private placement. The Revolving Credit Facility has a borrowing capacity of$89.5 million , net of a$0.5 million letter of credit. As ofJune 30, 2020 , we had no outstanding borrowings under the Revolving Credit Facility. 41
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Table of Contents Contractual obligations The only significant changes in contractual obligations sinceDecember 31, 2019 , as disclosed in the Prospectus, result from payments during the six months endedJune 30, 2020 on our Credit Facilities and Revolving Credit Facility. See Note 10 in the notes to the accompanying unaudited condensed consolidated financial statements for further information about our debt financings. The table below reflects obligations based on the amounts outstanding atJune 30, 2020 . Payments due by period 2020 (remaining six 2021 and 2023 and (in millions) Total months) 2022 2024 Long-term debt$ 450.0 $ - $ -$ 450.0 Interest on long-term debt (1) 111.0 12.7 50.2 48.1 Other financing arrangements 2.6 1.4 1.2 - Total$ 563.6 $ 14.1 $ 51.4 $ 498.1
(1) Assumes interest payment through stated maturity. Payments herein are subject
to change, as payments for variable rate debt have been estimated.
Off-balance sheet arrangements
During the periods presented, we did not engage in any off-balance sheet financing activities other than those reflected in the notes to the accompanying unaudited condensed consolidated financial statements.
Critical accounting policies
Our discussion and analysis of our historical financial condition and results of operations for the periods described is based on our audited consolidated financial statements, and our unaudited interim condensed consolidated financial statements, each of which have been prepared in accordance withU.S. GAAP. The preparation of these historical financial statements in conformity withU.S. GAAP requires management to make estimates, assumptions and judgments in certain circumstances that affect the reported amounts of assets, liabilities and contingencies as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. We evaluate our assumptions and estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Additionally, the full impact of the COVID-19 pandemic is unknown and cannot be reasonably estimated. However, we have made accounting estimates for our allowance for doubtful accounts, valuation of our contingent liabilities, other intangible assets and goodwill based on the facts and circumstances available as of the reporting date. Actual results may differ from these estimates under different assumptions or conditions. We have provided a summary of our significant accounting policies in Note 1 to our accompanying unaudited condensed consolidated financial statements. The following critical accounting discussion pertains to accounting policies management believes are most critical to the portrayal of our historical financial condition and results of operations and that require significant, difficult, subjective or complex judgments. Other companies in similar businesses may use different estimation policies and methodologies, which may impact the comparability of our financial condition, results of operations and cash flows to those of other companies.
Revenue recognition
Application of the accounting principles inU.S. GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. Complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting. Specifically, the determination of whether we are a principal to a transaction or an agent can require considerable judgment. We have concluded that we are the principal in our payment processing arrangements as we control the service on our payments platform, which is transformative in nature and allows for front-end and back-end risk mitigation, merchant portability, third party software integrations, and enhanced reporting functionality. We also contract directly with our merchants and have complete pricing latitude on the processing fees charged to our merchants. As such, we bear the credit risk for network fees and transactions charged back to the merchant. In addition, our SaaS arrangements include multiple performance obligations with differing patterns of revenue recognition. For such arrangements, we allocate revenue to each performance obligation based on its relative standalone selling price, which is based on the fair value of each product and service. Changes in judgments with respect to these assumptions and estimates could impact the amount of revenue recognized.
Business combinations
Upon acquisition of a company, we determine if the transaction is a business combination, which is accounted for using the acquisition method of accounting. Under the acquisition method, once control is obtained of a business, the assets acquired, and liabilities assumed, including 42
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amounts attributed to noncontrolling interests, are recorded at fair value. We use our best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. One of the most significant estimates relates to the determination of the fair value of these assets and liabilities. The determination of the fair values is based on estimates and judgments made by management. Our estimates of fair value are based upon assumptions we believe to be reasonable, but which are inherently uncertain and unpredictable. Measurement period adjustments are reflected at the time identified, up through the conclusion of the measurement period, which is the time at which all information for determination of the values of assets acquired and liabilities assumed is received, and is not to exceed one year from the acquisition date. We may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. Additionally, uncertain tax positions and tax-related valuation allowances are initially recorded in connection with a business combination as of the acquisition date. We continue to collect information and reevaluate these estimates and assumptions periodically and record any adjustments to preliminary estimates to goodwill, provided we are within the measurement period. If outside of the measurement period, any subsequent adjustments are recorded to the consolidated statement of operations.
We perform a goodwill impairment test annually atOctober 1 and whenever events or circumstances make it more likely than not that impairment may have occurred. We have determined that our business comprises one reporting unit. We have the option to first assess qualitative factors to determine whether events or circumstances indicate it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, in which case a quantitative impairment test is not required. Intangible assets with finite lives are amortized over their estimated useful life on a straight-line basis. We monitor conditions related to these assets to determine whether events and circumstances warrant a revision to the remaining amortization or depreciation period. We test these assets for potential impairment whenever our management concludes events or changes in circumstances indicate that the carrying amount may not be recoverable. The original estimate of an asset's useful life and the impact of an event or circumstance on either an asset's useful life or carrying value involve significant judgment regarding estimates of the future cash flows associated with each asset.
Income taxes
Shift4 Payments, LLC is considered a flow-through entity forU.S. federal and most applicable state and local income tax purposes. As a flow-through entity, taxable income or loss fromShift4 Payments, LLC is passed through to and included in the taxable income of its members. Following the Reorganization Transactions and the consummation of the IPO,Shift4 Payments, LLC continues to be treated as a pass-through entity.Shift4 Payments, Inc. is subject toU.S. federal, state and local income taxes with respect to our allocable share of any taxable income ofShift4 Payments, LLC and will be taxed at the prevailing corporate tax rates. We entered into a TRA withShift4 Payments, LLC , each of the Continuing Equity Owners and each of the Blocker Shareholders that will provide for the payment byShift4 Payments, Inc. to the Continuing Equity Owners of 85% of the amount of certain tax benefits, if any, thatShift4 Payments Inc. actually realizes or in some circumstances is deemed to realize in its tax reporting, as a result of (1) the increases in our share of the tax basis of assets ofShift4 Payments, LLC resulting from any redemptions of LLC interests from the Continuing Equity Owners, (2) our utilization of certain tax attributes of the Blocker Companies and (3) certain other tax benefits related to making our payments under the TRA. In addition to tax expenses, we will also make payments under the TRA, which we expect to be significant. We will account for the income tax effects and corresponding TRA's effects resulting from future taxable purchases or redemptions of LLC Interests of the Continuing LLC Owners by us orShift4 Payments, LLC or the Blocker Shareholders by recognizing an increase in our deferred tax assets, based on enacted tax rates at the date of the purchase or redemption. Further, we will evaluate the likelihood that we will realize the benefit represented by the deferred tax asset and, to the extent that we estimate that it is more likely than not that we will not realize the benefit, we will reduce the carrying amount of the deferred tax asset with a valuation allowance. The amounts to be recorded for both the deferred tax assets and the liability for our obligations under the TRA will be estimated at the time of any purchase or redemption as a reduction to shareholders' equity, and the effects of changes in any of our estimates after this date will be included in net income (loss). Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income (loss) . We currently believe that all deferred tax assets will be recovered based upon the projected profitability of our operations. Judgement is required in assessing the future tax consequences of events that have been recognized inShift4 Payments, Inc.'s financial statements. A change in the assessment of such consequences, such as realization of deferred tax assets, changes in tax laws or interpretations thereof could materially impact our results. As we currently do not generate taxable income, the consolidated financial statements assume that no payments under the TRA will be made. Noncontrolling Interests After the Reorganization Transactions, we are the sole managing member ofShift4 Payments, LLC . We own 49.8% of the economic interest ofShift4 Payments, LLC and we have the majority of the voting interest in and control the management ofShift4 Payments, LLC . As a result, we consolidate the financial results ofShift4 Payments, LLC and report a noncontrolling interest of 50.2% related to the interests inShift4 Payments, LLC held by the Continuing Equity Holders on our unaudited condensed consolidated balance sheet. 43
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New accounting pronouncements
For information regarding new accounting pronouncements, and the impact of these pronouncements on our unaudited condensed consolidated financial statements, if any, refer to Note 1 to our accompanying unaudited condensed consolidated financial statements.
JOBS Act
We qualify as an "emerging growth company" pursuant to the provisions of the JOBS Act, enacted onApril 5, 2012 . Section 102 of the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. We are electing to delay the adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result, our consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if as an emerging growth company we choose to rely on such exemptions, we may not be required to, among other things, (1) provide an auditor's attestation report on our systems of internal controls over financial reporting pursuant to Section 404, (2) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Act, (3) comply with the requirement of the PCAOB regarding the communication of critical audit matters in the auditor's report on the financial statements, and (4) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer's compensation to median employee compensation. These exemptions will apply until we no longer meet the requirements of being an emerging growth company. We will remain an emerging growth company until the earlier of (a) the last day of the fiscal year (i) following the fifth anniversary of the completion of our IPO, (ii) in which we have total annual gross revenue of at least$1.07 billion or (iii) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds$700.0 million as of the last business day of our prior second fiscal quarter, and (b) the date on which we have issued more than$1.07 billion in non-convertible debt during the prior three-year period.
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