SHIFT4 PAYMENTS, INC. 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 Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed with theSecurities and Exchange Commission ("SEC") onMarch 8, 2021 ("2020 Form 10-K"). 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 Part I, Item 1A of the 2020 Form 10-K. 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, toShift4 Payments, Inc. , and, unless otherwise stated, all of its subsidiaries, includingShift4 Payments, LLC and, unless otherwise stated, all of its subsidiaries, and (2) prior to the completion of the Reorganization Transactions, toShift4 Payments, LLC and, unless otherwise stated, all of its subsidiaries. •"Continuing Equity Owners" refers collectively to Searchlight, our Founder and their respective permitted transferees that 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 initial public offering ("IPO") and the concurrent private placement and the common units ofShift4 Payments, LLC that we acquired from the Former Equity Owners in connection with the consummation of the Reorganization Transactions. See the section entitled "Initial public offering and concurrent private placement" below. •"Founder" refers toJared Isaacman , our Chief Executive Officer and the sole stockholder ofRook Holdings Inc. Our Founder is a Continuing Equity Owner and an owner of Class C common stock. •"Former Equity Owner" refers toFPOS Holding Co., Inc. who exchanged its LLC Interests for shares of our Class A common stock in connection with the consummation of the Reorganization Transactions. •"Reorganization Transactions" refer to certain organizational transactions that we effected in connection with our IPO inJune 2020 . See the section entitled "Reorganization Transactions" below. •"Rook" refers toRook Holdings Inc. , aDelaware corporation wholly-owned by our Founder and for which our Founder is the sole stockholder. •"Searchlight" refers toSearchlight Capital Partners, L.P. , aDelaware limited partnership, and certain funds affiliated with Searchlight. Searchlight is a Continuing Equity Owner and an owner of Class C common stock. Overview We are a leading independent provider of 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 business and operational challenges facing our customers. 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. 37 -------------------------------------------------------------------------------- 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 mobile, contactless and QR code-based payments; •complementary software integrations; •full eCommerce capabilities, including web-store design, hosting, shopping cart management and fulfillment 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 over 7,000 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$13.5 billion and$7.1 billion for the three months endedSeptember 30, 2021 and 2020, respectively, and$33.3 billion and$17.5 billion for the nine months endedSeptember 30, 2021 and 2020, respectively. This end-to-end payment volume contributed approximately 67% and 65% of gross revenue less network fees for the three months endedSeptember 30, 2021 and 2020, respectively, and approximately 66% and 60% of gross revenue less network fees for the nine months endedSeptember 30, 2021 and 2020, respectively. Our merchants range from small to medium sized businesses to large and complex enterprises across numerous verticals including lodging, leisure, stadiums and arenas, and food and beverage. Revision of Previously Issued Financial Statements The accompanying Management's Discussion and Analysis of Financial Condition and Results of Operations gives effect to the revision of our previously reported consolidated financial statements for the three and nine months endedSeptember 30, 2020 . See Note 1 in the notes to the accompanying unaudited condensed consolidated financial statements for more information. Recent developments TSYS outage OnAugust 21, 2021 , TSYS, aGlobal Payments Company and an important vendor to the Company, experienced a significant platform outage that resulted in the disruption of payment processing for our merchants ("TSYS outage"). TSYS is utilized by many major credit card issuers and payment processors, which meant the impact of the outage was felt by many card accepting merchants and cardholders across the nation. In response to the TSYS outage, we distributed payments to both merchants and partners in order to alleviate the impact of the outage on their businesses. The following paragraphs describe how these payments are reflected in our accompanying unaudited condensed consolidated financial statements and disclosures. In the third quarter of 2021, we distributed$22.4 million in payments to our merchants to approximate the lost revenues they experienced as a result of the TSYS outage. Under ASC 606, these payments were recorded as contra revenue, which is reflected as a reduction of "Gross revenue" in our unaudited Condensed Consolidated Statements of Operations for the three and nine months endedSeptember 30, 2021 . These payments are considered nonrecurring and are therefore reflected as an 38 -------------------------------------------------------------------------------- adjustment when calculating adjusted EBITDA. In addition, for the three and nine months endedSeptember 30, 2021 , gross revenue less network fees excludes the impact of the TSYS outage. In the third quarter of 2021, we also distributed$2.3 million in payments to our partners to approximate their lost revenues and compensate them for the additional support required from them to manage the outage. Consistent with the treatment of our payments to our partners in the normal course of business, these payments are reflected as an increase to "Cost of sales" in our unaudited Condensed Consolidated Statements of Operations for the three and nine months endedSeptember 30, 2021 . These payments are considered nonrecurring and are therefore reflected as an adjustment when calculating adjusted EBITDA. See Note 3 to the accompanying unaudited condensed consolidated financial statements for more information about the TSYS outage and Key performance indicators and non-GAAP measures for more information about adjusted EBITDA and gross revenue less network fees. Recent acquisition Postec OnSeptember 1, 2021 , we acquiredPostec, Inc ( "Postec"), for approximately$14.0 million in cash, net of cash acquired. This acquisition enables the boarding of the vendor's customers on our end-to-end acquiring solution and empowers our distribution partners to sign the vendor's customer accounts and leverage the combined expertise to handle all aspects of installation, service, and support. See Note 2 in the notes to the accompanying unaudited condensed consolidated financial statements for more information. 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 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. The Reorganization Transactions resulted inShift4 Payments, Inc. becoming the sole managing member ofShift4 Payments, LLC . As the sole managing member ofShift4 Payments, LLC , we operate and control all of the business and affairs ofShift4 Payments, LLC . Accordingly, we consolidate the financial results ofShift4 Payments, LLC , and report a noncontrolling interest related to the interests inShift4 Payments, LLC held by the Continuing Equity Owners 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 TRA, which we expect to be significant. We intend forShift4 Payments, LLC to make 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. Initial public offering and concurrent private placement InJune 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$362.6 million , after deducting underwriting discounts and commissions and offering expenses of approximately$34.2 million . Concurrently with the IPO, we also completed a$100.0 million 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$462.6 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. 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 39 -------------------------------------------------------------------------------- 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, in 2020 we implemented measures to focus on the safety of our employees, including implementing remote working capabilities, and to support our merchants as they shifted to take-out and delivery operations, while at the same time seeking to mitigate the impact on our financial position and operations. 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%. Since lateMarch 2020 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 despite volumes in certain merchant categories associated with international travel and corporate travel running lower than pre-COVID-19 pandemic levels. End-to-end payment volumes for the third quarter of 2021 were approximately 90% higher than end-to-end payment volumes in the third quarter of 2020 and approximately 14% higher than the second quarter of 2021 as a result of merchants reopening their operations, new merchant onboarding and a growing number of gateway merchants converting to our end-to-end solution in 2021. While gross revenue and end-to-end payment volumes for the three and nine months endedSeptember 30, 2021 have exceeded those for the three and nine months endedSeptember 30, 2020 , we will continue to evaluate the nature and extent of potential COVID-19-related impacts to our business, consolidated results of operations, and liquidity. See "Risk Factors" in Part I, Item 1A of our 2020 Form 10-K. We believe we have sufficient liquidity to satisfy our cash needs for at least the next twelve months, 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. 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 ourShift4 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, numerous new products and enhancements that we introduced continue to allow our merchants the ability to enhance the customer experience in a more dynamic commerce environment through 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 40 -------------------------------------------------------------------------------- fluctuations to our revenue streams. Further, consumer spending habits are subject to seasonal fluctuations that could cause varied revenue results across the quarters. 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 payments-based revenue and subscription and other revenues: Payments-based revenue includes fees for payment processing services and gateway services. Payment processing fees are primarily driven as a percentage of payment volume. They may also have a fixed fee, a minimum monthly usage fee and a fee based on transactions.Gateway services, data encryption and tokenization are primarily driven by per transaction fees as well as monthly usage fees. In addition, the three and nine months endedSeptember 30, 2021 include nonrecurring payments of$22.4 million we made to our merchants related to the TSYS outage, described in Recent Developments above, that are treated as contra revenue and as such reduce payments-based revenue. Subscription and other revenues include software as a service ("SaaS") fees for point-of-sale systems and terminals provided to merchants and our Shift4Shop eCommerce platform. Point-of-sale and terminal SaaS fees are assessed based on the type and quantity of equipment deployed to the merchant. Shift4Shop SaaS fees are based on the eCommerce platform chosen by the merchant. SaaS fees also include 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. Subscription and other revenues also includes revenue derived from software license sales, hardware sales, third party residuals 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 throughJune 30, 2020 , contains other contract fulfillment costs as well as equipment provided under our warranty program that is included with the monthly SaaS fee. Subsequent toJune 30, 2020 , other contract fulfillment costs and equipment under our warranty program included with the monthly SaaS fee are capitalized as equipment for lease. Capitalized software development costs are amortized using the straight-line 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. In addition, the three and nine months endedSeptember 30, 2021 include nonrecurring payments of$2.3 million we made to our partners related to the TSYS outage described in Recent Developments above. 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. 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 twenty 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. 41 -------------------------------------------------------------------------------- Other operating (income) expense, net consists of other operating items. Loss on extinguishment of debt represents losses recorded for unamortized capitalized financing costs associated with debt prepayments. 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 represents federal, state and local taxes based on income in multiple 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 loss allocated to Continuing Equity Owners as a result of their proportional ownership of LLC Interests. Comparison of results for the three months endedSeptember 30, 2021 and 2020 The following table sets forth the consolidated statements of operations for the periods presented. Three Months Ended September 30, (in millions) 2021 2020 $ change % change Payments-based revenue$ 346.9 $ 196.8 $ 150.1 76.3 % Subscription and other revenues 30.9 18.0 12.9 71.7 % Total gross revenue 377.8 214.8 163.0 75.9 % Less: network fees 251.9 127.1 124.8 98.2 % Less: Other costs of sales 61.5 36.2 25.3 69.9 % Gross profit 64.4 51.5 12.9 25.0 % General and administrative expenses 48.1 35.4 12.7 35.9 % Depreciation and amortization expense 15.0 16.2 (1.2) (7.4) % Professional fees 3.3 2.9 0.4 13.8 % Advertising and marketing expenses 3.5 0.8 2.7 NM Restructuring expenses 0.1 0.1 - NM Total operating expenses 70.0 55.4 14.6 26.4 % Loss from operations (5.6) (3.9) (1.7) 43.6 % Other income, net 0.2 0.5 (0.3) (60.0) % Interest expense (7.4) (7.1) (0.3) 4.2 % Loss before income taxes (12.8) (10.5) (2.3) 21.9 % Income tax (expense) benefit (1.0) 0.7 (1.7) NM Net loss (13.8) (9.8) (4.0) 40.8 % Net loss attributable to noncontrolling interests (4.6) (4.8) 0.2 (4.2) % Net loss attributable to Shift4 Payments, Inc.$ (9.2) $ (5.0) $ (4.2) 84.0 % The three months endedSeptember 30, 2021 include nonrecurring payments we made in the third quarter of 2021 to our merchants of$22.4 million and partners of$2.3 million due to the TSYS outage and associated costs of$0.4 million . The TSYS outage payments and associated costs had the following impact on our results in our unaudited Condensed Consolidated Statements of Operations for the three months endedSeptember 30, 2021 : •$22.4 million decrease to Payments-based revenue and Gross revenue; •$2.3 million increase to Other costs of sales; •$24.9 million decrease to Gross profit; and •$25.1 million decrease to Loss from operations and Net loss. See Recent developments above and Note 3 to the accompanying unaudited condensed consolidated financial statements for more information about the TSYS outage. 42 -------------------------------------------------------------------------------- Gross Revenue Gross revenue was$377.8 million for the three months endedSeptember 30, 2021 , compared to$214.8 million for the three months endedSeptember 30, 2020 , an increase of$163.0 million or 75.9%. Gross revenue is comprised of payments-based revenue, subscription and other revenues and in the three months endedSeptember 30, 2021 includes$22.4 million in payments we made to merchants as a result of theAugust 2021 TSYS outage discussed in Recent developments above. Payments-based revenue was$346.9 million for the three months endedSeptember 30, 2021 , compared to$196.8 million for the three months endedSeptember 30, 2020 , an increase of$150.1 million or 76.3%. The increase in payments-based revenue is primarily driven by an increase in end-to-end payment volume of$6.4 billion , or approximately 90%, for the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 . The COVID-19 pandemic impacted our end-to-end payment volumes beginningmid-March 2020 when shelter-in-place, social distancing, the closing of non-essential businesses and other restrictive measures were first put in place acrossthe United States . This was partially offset by$22.4 million in payments we made to merchants as a result of theAugust 2021 TSYS outage discussed in Recent developments above, which were recorded as contra revenue. Subscription and other revenues were$30.9 million for the three months endedSeptember 30, 2021 , compared to$18.0 million for the three months endedSeptember 30, 2020 , an increase of$12.9 million or 71.7%. The increase in subscription and other revenues is driven primarily by the 3dcart, VenueNext, hospitality technology vendor andPostec acquisitions which collectively contributed$10.2 million more to subscription and other revenues in the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 . In addition, software license sales increased$1.3 million for three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 . Network Fees Network fees were$251.9 million for the three months endedSeptember 30, 2021 , compared to$127.1 million for the three months endedSeptember 30, 2020 , an increase of$124.8 million or 98.2%. This increase is correlated with the increase in end-to-end payment volume as described above. Gross revenue less network fees was$148.3 million for the three months endedSeptember 30, 2021 , compared to$87.7 million for the three months endedSeptember 30, 2020 , an increase of$60.6 million or 69.1%. For the three months endedSeptember 30, 2021 , gross revenue less network fees excludes the$22.4 million impact of the TSYS outage. The increase in gross revenue less network fees is largely correlated with an 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$61.5 million for the three months endedSeptember 30, 2021 , compared to$36.2 million for the three months endedSeptember 30, 2020 , an increase of$25.3 million , or 69.9%. This increase was primarily a result of: •higher residual commissions, which increased other costs of sales$14.1 million , were driven by the growth in gross revenue less network fees; •the 3dcart, VenueNext, hospitality technology vendor andPostec acquisitions which collectively increased other cost of sales$3.5 million in the three months endedSeptember 30, 2021 ; •payments to partners of$2.3 million , which increased other costs of sales in the three months endedSeptember 30, 2021 due to the TSYS outage discussed in Recent developments above; •higher capitalized acquisition cost amortization, which increased other costs of sales$1.2 million , related to deal bonuses paid to VARs to obtain processing contracts; and, •higher capitalized software development amortization, which increased other costs of sales$0.6 million . Operating expenses General and administrative expenses. General and administrative expenses were$48.1 million for the three months endedSeptember 30, 2021 , compared to$35.4 million for the three months endedSeptember 30, 2020 , an increase of$12.7 million or 35.9%. The increase was primarily due to higher employee-related expenses of$7.7 million in the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 , as a result of our continued growth and expansion. In addition, the acquisitions of VenueNext, 3dcart, a hospitality technology vendor andPostec collectively increased general and administrative expenses$4.9 million in the three months endedSeptember 30, 2021 . 43 -------------------------------------------------------------------------------- Depreciation and amortization expense. Depreciation and amortization expense was$15.0 million for the three months endedSeptember 30, 2021 , compared to$16.2 million for the three months endedSeptember 30, 2020 , a decrease of$1.2 million or 7.4%. The decrease was primarily due to certain intangible assets reaching the end of their amortization period. Professional fees. Professional fees were$3.3 million for the three months endedSeptember 30, 2021 , compared to$2.9 million for the three months endedSeptember 30, 2020 , an increase of$0.4 million or 13.8%. The increase was due to acquisition-related costs and increased fees related to requirements of operating as a public company. Advertising and marketing expenses. Advertising and marketing expenses were$3.5 million for the three months endedSeptember 30, 2021 , compared to$0.8 million for the three months endedSeptember 30, 2020 , an increase of$2.7 million . The increase was partially due to$1.6 million of costs associated with the Inspiration4 seat and higher trade show expenses of$0.5 million in the three months endedSeptember 30, 2021 since trade shows scheduled for the three months endedSeptember 30, 2020 were either postponed or cancelled due to the COVID-19 pandemic. In addition, the VenueNext, 3dcart, hospitality technology vendor andPostec acquisitions collectively increased advertising and marketing expenses$0.5 million in the three months endedSeptember 30, 2021 . Other income, net Other income, net was$0.2 million for the three months endedSeptember 30, 2021 , compared to$0.5 million for the three months endedSeptember 30, 2020 , a decrease of$0.3 million or 60.0%. The decrease is primarily driven by unearned contingent liabilities associated with our residual commission buyout agreements in the three months endedSeptember 30, 2020 . Interest expense Interest expense was$7.4 million for the three months endedSeptember 30, 2021 , compared to$7.1 million for the three months endedSeptember 30, 2020 , an increase of$0.3 million or 4.2% driven by higher interest expense of$1.4 million due to the issuance of the convertible senior notes due 2027 ("2027 Convertible Notes") inJuly 2021 . This is partially offset by the debt refinancing inOctober 2020 , which reduced the interest rate on our First Lien Term Loan Facility from 5.50% to 4.625% on the 2026 Senior Notes, which reduced interest expense by$1.1 million for the three months endedSeptember 30, 2021 . Income tax benefit The effective tax rate for the three months endedSeptember 30, 2021 was 7.8%, compared to the effective tax rate for the three months endedSeptember 30, 2020 of (6.7)%. The income tax benefit was different than theU.S. federal statutory income tax rate of 21% primarily due to the loss allocated to the noncontrolling interest and changes in the valuation allowances inthe United States for both the three months endedSeptember 30, 2021 andSeptember 30, 2020 . Net loss attributable to noncontrolling interests Net loss attributable to noncontrolling interests ofShift4 Payments, LLC was$(4.6) million for the three months endedSeptember 30, 2021 , compared to$(4.8) million for the three months endedSeptember 30, 2020 . 44 -------------------------------------------------------------------------------- Comparison of results for the nine months endedSeptember 30, 2021 and 2020 The following table sets forth the consolidated statements of operations for the periods presented. YTD (in millions) 2021 2020 $ change % change Payments-based revenue$ 887.6 $ 494.4 $ 393.2 79.5 % Subscription and other revenues 80.5 61.6 18.9 30.7 % Total gross revenue 968.1 556.0 412.1 74.1 % Less: network fees 608.4 321.8 286.6 89.1 % Less: Other costs of sales 165.4 107.7 57.7 53.6 % Gross profit 194.3 126.5 67.8 53.6 % General and administrative expenses 153.3 144.8 8.5 5.9 % Depreciation and amortization expense 45.9 37.1 8.8 23.7 % Professional fees 13.0 5.8 7.2 124.1 % Advertising and marketing expenses 26.1 2.9 23.2 NM Restructuring expenses 0.2 0.4 (0.2) (50.0 %) Other operating (income) expense, net - (12.4) 12.4 NM Total operating expenses 238.5 178.6 59.9 33.5 % Loss from operations (44.2) (52.1) 7.9 (15.2 %) Loss on extinguishment of debt (0.2) (7.1) 6.9 (97.2 %) Other income, net 0.2 0.6 (0.4) (66.7 %) Interest expense (20.2) (32.1) 11.9 (37.1 %) Loss before income taxes (64.4) (90.7) 26.3 (29.0 %) Income tax benefit 4.1 1.0 3.1 NM Net loss (60.3) (89.7) 29.4 (32.8 %) Net loss attributable to noncontrolling interests (a) (21.5) (83.7) 62.2 (74.3 %) Net loss attributable to Shift4 Payments, Inc.$ (38.8) $ (6.0) $ (32.8) NM (a)For the nine months endedSeptember 30, 2020 , includes the net loss incurred prior to the Reorganization Transactions and prior toJune 4, 2020 , the date theSEC declared effective our Registration Statement on Form S-1 filed in connection with our IPO. The nine months endedSeptember 30, 2021 include nonrecurring payments we made in the third quarter of 2021 to our merchants of$22.4 million and partners of$2.3 million due to the TSYS outage and associated costs of$0.4 million . The TSYS outage payments and associated costs had the following impact on our results in our unaudited Condensed Consolidated Statements of Operations for the nine months endedSeptember 30, 2021 : •$22.4 million decrease to Payments-based revenue and Gross revenue; •$2.3 million increase to Other costs of sales; •$24.9 million decrease to Gross profit; and •$25.1 million decrease to Loss from operations and Net loss. See Recent developments above and Note 3 to the accompanying unaudited condensed consolidated financial statements for more information about the TSYS outage. Gross Revenue Gross revenue was$968.1 million for the nine months endedSeptember 30, 2021 , compared to$556.0 million for the nine months endedSeptember 30, 2020 , an increase of$412.1 million or 74.1%. Gross revenue is comprised of payments-based revenue and subscription and other revenues and in the nine months endedSeptember 30, 2021 includes$22.4 million in payments we made to merchants as a result of theAugust 2021 TSYS outage discussed in Recent developments above, which were recorded as contra revenue. Payments-based revenue was$887.6 million for the nine months endedSeptember 30, 2021 , compared to$494.4 million for the nine months endedSeptember 30, 2020 , an increase of$393.2 million or 79.5%. The increase in payments-based revenue is primarily driven by the increase in end-to-end payment volume of$15.8 billion , or approximately 90%, for the nine months 45 -------------------------------------------------------------------------------- endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 . The COVID-19 pandemic impacted our end-to-end payment volumes beginningmid-March 2020 when shelter-in-place, social distancing, the closing of non-essential businesses and other restrictive measures were first put in place acrossthe United States . This was partially offset by$22.4 million in payments we made to merchants as a result of theAugust 2021 TSYS outage discussed in Recent developments above. Subscription and other revenues were$80.5 million for the nine months endedSeptember 30, 2021 , compared to$61.6 million for the nine months endedSeptember 30, 2020 , an increase of$18.9 million or 30.7%. The increase is driven by the 3dcart, VenueNext, hospitality technology vendor andPostec acquisitions which collectively contributed$21.0 million more to subscription and other revenues in the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . In addition, software license revenue increased$0.6 million from the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 . This was offset by a decrease in hardware revenue of$2.6 million primarily due to hardware provided under our SaaS arrangements being accounted for as operating leases in the nine months endedSeptember 30, 2021 , whereby revenue is recognized monthly, as compared to the nine months endedSeptember 30, 2020 , when it was recognized at the time of shipment. Network Fees Network fees were$608.4 million for the nine months endedSeptember 30, 2021 , compared to$321.8 million for the nine months endedSeptember 30, 2020 , an increase of$286.6 million or 89.1%. This increase is correlated with the increase in end-to-end payment volume as described above. Gross revenue less network fees was$382.1 million for the nine months endedSeptember 30, 2021 , compared to$234.2 million for the nine months endedSeptember 30, 2020 , an increase of$147.9 million or 63.2%. For the nine months endedSeptember 30, 2021 , gross revenue less network fees excludes the$22.4 million impact of the TSYS outage. The increase in gross revenue less network fees is largely 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$165.4 million for the nine months endedSeptember 30, 2021 , compared to$107.7 million for the nine months endedSeptember 30, 2020 , an increase of$57.7 million , or 53.6%. This increase was primarily a result of: •higher residual commissions, which increased other costs of sales$40.8 million , driven by the growth in gross revenue less network fees; •the 3dcart, VenueNext, hospitality technology vendor andPostec acquisitions, which collectively increased other costs of sales$9.8 million in the three months endedSeptember 30, 2021 ; •higher than normal chargeback losses during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 , driven by the business failure of one merchant causing$5.5 million in estimated unrecoverable chargeback transactions in the nine months endedSeptember 30, 2021 ; •higher capitalized acquisition cost amortization, which increased other costs of sales$4.4 million , related to deal bonuses paid to VARs to obtain processing contracts; •payments to partners of$2.3 million , which increased other costs of sales in the nine months endedSeptember 30, 2021 due to the TSYS outage discussed in Recent developments above; and, •higher capitalized software development amortization, which increased other costs of sales$1.8 million ; partially offset by, •the impact of modifying the terms and conditions of our SaaS arrangements and updating our operational procedures to account for our hardware as operating leases, which resulted in a decline of$12.6 million in costs of sales. EffectiveJune 30, 2020 , equipment leased to merchants is capitalized as a fixed asset, whereas, prior toJune 30, 2020 , these arrangements were accounted for as sales-type leases and expensed when deployed. Operating expenses General and administrative expenses. General and administrative expenses were$153.3 million for the nine months endedSeptember 30, 2021 , compared to$144.8 million for the nine months endedSeptember 30, 2020 , an increase of$8.5 million or 5.9%. The increase was due to higher employee-related expenses of$23.9 million in the nine months endedSeptember 30 , 46 -------------------------------------------------------------------------------- 2021, compared to the nine months endedSeptember 30, 2020 , as a result of our continued growth and expansion. In addition, the recent acquisitions of VenueNext, 3dcart, a hospitality technology vendor andPostec collectively increased general and administrative expenses$16.2 million in the nine months endedSeptember 30, 2021 . This was partially offset by lower equity-based compensation expense of$32.2 million in the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 , as a result of compensation expense recognized in the nine months endedSeptember 30, 2020 related to contractual change of control bonuses in connection with the IPO. See Note 20 in the notes to the accompanying unaudited condensed consolidated financial statements for more information on equity-based compensation. Depreciation and amortization expense. Depreciation and amortization expense was$45.9 million for the nine months endedSeptember 30, 2021 , compared to$37.1 million for the nine months endedSeptember 30, 2020 , an increase of$8.8 million or 23.7%. The increase was primarily due to hardware provided under our SaaS arrangements being accounted for as operating leases, effectiveJune 30, 2020 , while previously they were accounted for as sales-type leases driving higher depreciation expense for the nine months endedSeptember 30, 2021 , as compared to the nine months endedSeptember 30, 2020 , of$9.7 million . See Note 3 in the notes to the accompanying unaudited condensed consolidated financial statements for more information on the change to the terms and conditions of our SaaS arrangements. In addition, the recent acquisitions of VenueNext, 3dcart, a hospitality technology vendor andPostec collectively increased depreciation and amortization expense$1.9 million in the nine months endedSeptember 30, 2021 . This was partially offset by a decline in intangible amortization expense as certain intangible assets reached the end of their amortization period. Professional fees. Professional fees were$13.0 million for the nine months endedSeptember 30, 2021 , compared to$5.8 million for the nine months endedSeptember 30, 2020 , an increase of$7.2 million or 124.1%. The increase was due to acquisition-related costs and increased fees related to requirements of operating as a public company. Advertising and marketing expenses. Advertising and marketing expenses were$26.1 million for the nine months endedSeptember 30, 2021 , compared to$2.9 million for the nine months endedSeptember 30, 2020 , an increase of$23.2 million . The increase was primarily due to expenses related to the integration of 3dcart and its rebranding as Shift4Shop and$3.7 million of costs associated with the Inspiration4 seat. These expenses are anticipated to be nonrecurring in nature. 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 in the second quarter of 2020 to reflect the impact of the lease modifications. Loss on extinguishment of debt A loss on extinguishment of debt, representing unamortized capitalized financing costs, of$0.2 million was incurred with the refinancing of the Revolving Credit Facility during the nine months endedSeptember 30, 2021 . 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 during the nine months endedSeptember 30, 2020 representing the unamortized capitalized financing costs associated with the debt prepayment. See Note 10 to the accompanying unaudited condensed consolidated financial statements for more information. Other income, net Other income, net was$0.2 million for the nine months endedSeptember 30, 2021 , compared to$0.6 million for the nine months endedSeptember 30, 2020 , a decrease of$0.4 million or 66.7%. The decrease is driven by unearned contingent liabilities associated with our residual commission buyout agreements in 2020. Interest expense Interest expense was$20.2 million for the nine months endedSeptember 30, 2021 , compared to$32.1 million for the nine months endedSeptember 30, 2020 , a decrease of$11.9 million or 37.1%. This decrease in interest expense was primarily due to the pre-payments for the First Lien and Second Lien Term Loan Facilities and the repayment of the Revolving Credit Facility, all of which were completed inJune 2020 , and impacted interest expense by approximately$9.2 million . In addition, the debt refinancing inOctober 2020 reduced the interest rate on our First Lien Term Loan Facility from 5.50% to 4.625% on the 2026 Senior Notes, which reduced interest expense by$4.4 million . This was partially offset by an increase in interest expense as a result of the issuance of the 2027 Convertible Notes inJuly 2021 . 47 -------------------------------------------------------------------------------- Income tax benefit The effective tax rate for the nine months endedSeptember 30, 2021 was (6.4)%, compared to the effective tax rate for the nine months endedSeptember 30, 2020 of (1.1)%. The 2021 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 the tax windfall related to vested equity-based compensation awards. The income tax benefit for the nine months endedSeptember 30, 2020 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$0.6 million for a net operating loss carryback atShift4 Corporation which was allowed due to the CARES Act. Net loss attributable to noncontrolling interests Net loss attributable to noncontrolling interests ofShift4 Payments, LLC was$(21.5) million for the nine months endedSeptember 30, 2021 compared to$(83.7) million for the nine months endedSeptember 30, 2020 . The net loss incurred for the nine months endedSeptember 30, 2020 includes the net loss incurred prior to the Reorganization and prior toJune 4, 2020 , the date theSEC declared effective our Registration Statement on Form S-1 filed in connection with our IPO. Key performance indicators and non-GAAP measures The following table sets forth our key performance indicators and non-GAAP measures for the periods presented. Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2021 2020 2021 2020 End-to-end payment volume$ 13,457.2 $
7,090.7
148.3 87.7 382.1 234.2
EBITDA 20.4 20.8 32.6 1.1
Adjusted EBITDA 55.8 28.7 123.2 61.0
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 ("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. For the three and nine months ended September
30, 2021 , gross revenue less network fees excludes the impact of the payments to
merchants, included in "Gross revenue," and payments to partners and associated
expenses due to the TSYS outage, in both cases included in "Other costs of
sales" in our unaudited Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2021 . These are nonrecurring payments
that occurred outside of our day-to-day operations, and we have excluded them in
order to provide more useful information to investors in the evaluation of our
performance period-over-period. 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 nonrecurring items that management believes are not
indicative of ongoing operations. These adjustments include the TSYS outage and
associated costs, acquisition, restructuring and integration costs, equity-based
compensation expense and other nonrecurring items. The financial impact of
certain elements of these activities is often large relative to the Company's
overall financial performance and can adversely affect the comparability of our
operating results and investors' ability to analyze the business from period to
period.
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
48
--------------------------------------------------------------------------------
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 gross revenue less
network fees, 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 September 30,
Nine Months Ended
2021 2020 2021 2020
Gross profit (a) (b) $ 64.4 $ 51.5 $ 194.3 $ 126.5
Add back: Other costs of sales (a) 61.5 36.2 165.4 107.7
Add back: TSYS outage payments (b) 22.4 - 22.4 -
Gross revenue less network fees
(a)Both the three and nine months endedSeptember 30, 2021 include$2.3 million of nonrecurring payments to partners associated with the TSYS outage. See Recent developments above and Note 3 to the accompanying unaudited condensed consolidated financial statements for more information about the TSYS outage. (b)Both the three and nine months endedSeptember 30, 2021 include$22.4 million of nonrecurring payments to merchants associated with the TSYS outage. See Recent developments above and Note 3 to the accompanying unaudited condensed consolidated financial statements for more information about the TSYS outage. EBITDA and Adjusted EBITDA: Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2021 2020 2021 2020 Net loss$ (13.8) $ (9.8) $ (60.3) $ (89.7) Interest expense 7.4 7.1 20.2 32.1 Income tax (benefit) provision 1.0 (0.7) (4.1) (1.0) Depreciation and amortization expense 25.8 24.2 76.8 59.7 EBITDA 20.4 20.8 32.6 1.1 TSYS outage payments and associated costs (a) 25.1 - 25.1 - Acquisition, restructuring and integration costs (b) 4.0 1.7 33.0 4.8 Equity-based compensation (c) 6.6 6.2 32.0 56.2 Impact of lease modifications (d) - - - (12.4) Other nonrecurring items (e) (0.3) - 0.5 11.3 Adjusted EBITDA$ 55.8 $ 28.7 $ 123.2 $ 61.0 (a)Includes nonrecurring payments we made in the third quarter of 2021 to our merchants of$22.4 million and partners of$2.3 million due to the TSYS outage and other expenses incurred associated with the TSYS outage of$0.4 million . See Recent developments above and Note 3 to the accompanying unaudited condensed consolidated financial statements for more information about the TSYS outage. 49 -------------------------------------------------------------------------------- (b)For the three months endedSeptember 30, 2021 , consists primarily of$2.0 million of acquisition-related costs and$1.6 million of costs associated with the Inspiration4 seat. For the three months endedSeptember 30, 2020 , consists primarily of fair value adjustments to contingent liabilities of$1.1 million . For the nine months endedSeptember 30, 2021 , consists primarily of expenses related to the integration of 3dcart and its rebranding as Shift4Shop of$20.4 million , acquisition-related costs incurred of$6.3 million and$3.7 million of costs associated with the Inspiration4 seat. For the nine months endedSeptember 30, 2020 , consists primarily of change of control liabilities as a result of the IPO of$10.3 million and deferred compensation arrangements of$2.1 million , offset by fair value adjustments to contingent liabilities of$8.0 million . See Note 12 in the notes to the accompanying unaudited condensed consolidated financial statements for more information on the contingent liability adjustments. (c)Represents equity-based compensation expense for RSUs, including employer taxes for vested RSUs. See Note 20 in the notes to the accompanying unaudited condensed consolidated financial statements for more information on equity-based compensation. (d)EffectiveJune 30, 2020 , we modified the terms and conditions of our SaaS arrangements and updated 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. This adjustment represents the one-time cumulative impact of modifying the contracts effectiveJune 30, 2020 . Prior to amending the terms, the sales-type lease accounting treatment impacted EBITDA and adjusted EBITDA negatively by$8.6 million for nine months endedSeptember 30, 2020 . (e)For the nine months endedSeptember 30, 2020 , primarily consists of a$7.1 million loss on extinguishment of debt associated with the debt pre-payments and$1.6 million for temporary fee waivers granted on certain products fromMarch 2020 throughJune 2020 as a result of the COVID-19 pandemic. See Note 10 in the notes to the accompanying unaudited condensed consolidated financial statements for more information on the loss on extinguishment of debt. For the nine months endedSeptember 30, 2020 , also includes$0.8 million of 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. 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 or equity transactions. 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 successfully operate until these industries fully recover. We do not intend to pay cash dividends on our Class A common stock in the foreseeable future.Shift4 Payments, Inc. is a holding company that does not conduct any business operations of its own. As a result,Shift4 Payments, Inc.'s ability to pay cash dividends on its common stock, if any, is dependent upon cash dividends and distributions and other transfers fromShift4 Payments, LLC . The amounts available toShift4 Payments, Inc. to pay cash dividends are subject to the covenants and distribution restrictions in its subsidiaries' agreements governing its indebtedness, including covenants in such agreements providing that the payments of dividends or other distributions are subject to annual limitations based on our market capitalization. The following table sets forth summary cash flow information for the periods presented. Nine Months Ended September 30, (in millions) 2021 2020 Net cash provided by operating activities $ 25.6$ 17.0 Net cash used in investing activities (162.0) (31.9) Net cash provided by financing activities 496.7 340.1 Total $ 360.3$ 325.2 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 nine months endedSeptember 30, 2021 , net cash provided by operating activities of$25.6 million is primarily a result of: •net loss of$60.3 million , which is net of$25.1 million of nonrecurring payments to our merchants and partners due to the TSYS outage and associated costs incurred in the third quarter of 2021, adjusted for non-cash expenses, including depreciation and amortization of$76.8 million , equity-based compensation of$26.9 million and provision for bad debts of$10.3 million ; plus, •changes in operating assets and liabilities of$(29.3) million , which is primarily a result of$25.3 million of additional funds deposited in our sponsor bank merchant settlement account to facilitate gross card 50 -------------------------------------------------------------------------------- transaction deposits for those customers we bill on a monthly, versus a daily basis, offset by working capital fluctuations. For the nine months endedSeptember 30, 2020 , net cash provided by operating activities of$17.0 million is primarily a result of: •net loss of$89.7 million , adjusted for non-cash expenses including equity-based compensation of$56.2 million , depreciation and amortization of$59.7 million , cumulative impact of modifying our lease contracts of$(12.4) million , loss on extinguishment of debt of$7.1 million , revaluation of contingent liabilities of$(5.9) million , provision for bad debts of$6.9 million , and amortization of capitalized financing costs of$2.9 million ; plus, •changes in operating assets and liabilities of$(9.0) million , which is primarily a result of change of control liabilities established at the time of the IPO of$10.3 million , offset by working capital fluctuations. Investing activities Net cash used in investing activities includes cash paid for acquisitions, purchases of future commission streams of our software partners, purchases of property, plant and equipment, purchases of equipment to be leased, capitalized software development costs and upfront processing bonuses provided to software partners. Net cash used in investing activities was$162.0 million for the nine months endedSeptember 30, 2021 , an increase of$130.1 million compared to net cash used in investing activities of$31.9 million for the nine months endedSeptember 30, 2020 . This increase is primarily the result of: •the acquisition of VenueNext inMarch 2021 for$68.5 million in aggregate purchase consideration, including$40.6 million in cash, net of cash acquired of$1.6 million ; •the investment inSpaceX of$27.5 million ; •the acquisition ofPostec inSeptember 2021 for$14.0 million , net of cash acquired of$1.7 million ; •higher purchases for equipment to be leased of$29.5 million ; •higher capitalized software development costs of$6.0 million ; and •higher capitalized acquisition costs of$4.9 million . Financing activities Net cash provided by financing activities was$496.7 million for the nine months endedSeptember 30, 2021 , an increase of$156.6 million , compared to net cash provided by financing activities of$340.1 million for the nine months endedSeptember 30, 2020 . This increase was primarily the result of: •the net proceeds from the 2027 Convertible Notes during the nine months endedSeptember 30, 2021 of$617.7 million ; •the partial repayment of the First Lien Term Loan Facility and full repayment of our Second Lien Term Loan Facility in the nine months endedSeptember 30, 2020 , totaling$189.8 million ; partially offset by, •the IPO and concurrent private placement net proceeds of approximately$557.2 million after deducting underwriting discounts, commissions and offering costs paid in the nine months endedSeptember 30, 2020 ; and •$119.7 million in employee taxes paid on vested RSUs during the nine months endedSeptember 30, 2021 . Senior Notes and Credit Facilities As ofSeptember 30, 2021 andDecember 31, 2020 , we had$1,772.5 million total principal amount of debt outstanding, including$690.0 million of 2025 Convertible Notes,$632.5 million of 2027 Convertible Notes and$450.0 million 2026 Senior Notes. 51 -------------------------------------------------------------------------------- Convertible Notes Offering - 2027 Notes InJuly 2021 ,Shift4 Payments, Inc. issued an aggregate principal amount of$632.5 million of 2027 Convertible Notes to qualified institutional buyers in an offering exempt from registration under the Securities Act. We received net proceeds, after deducting initial purchasers' discounts and estimated offering expenses, of approximately$617.7 million from the offering of the 2027 Convertible Notes. The net proceeds of the 2027 Notes Offering, together with cash on hand, will be used for general corporate purposes. The 2027 Convertible Notes will mature onAugust 1, 2027 , unless earlier repurchased, redeemed or converted, and accrue interest at a rate of 0.50% per year. Interest on the 2027 Convertible Notes is payable semi-annually in arrears on eachFebruary 1 andAugust 1 , commencing onFebruary 1, 2022 . We will settle conversions by paying in cash up to the principal amount of the 2027 Convertible Notes with any excess to be paid or delivered, as the case may be, in cash or shares of Class A common stock or a combination of both at our election, based on the conversion rate. The initial conversion rate is 8.1524 shares of Class A common stock per$1,000 principal amount of 2027 Convertible Notes (equivalent to an initial conversion price of approximately$122.66 per share of Class A common stock), subject to adjustment upon the occurrence of specified events. None of the specified events for the conversion of the 2027 Convertible Notes occurred as ofSeptember 30, 2021 . See Note 10 to the accompanying unaudited condensed consolidated financial statements for more information. Senior Notes Offering - 2026 Notes InOctober 2020 ,Shift4 Payments, LLC andShift4 Payments Finance Sub, Inc. issued an aggregate principal amount of$450.0 million 4.625% Senior Notes due 2026 ("2026 Senior Notes") in an offering to qualified institutional buyers exempt from registration under the Securities Act. We received net proceeds, after deducting initial purchasers' discounts and estimated offering expenses, of approximately$442.8 million from the offering of the 2026 Senior Notes. The net proceeds of the 2026 Senior Notes offering, together with cash on hand, were used to repay all indebtedness outstanding under the First Lien Term Loan Facility. The 2026 Senior Notes will mature onNovember 1, 2026 , and accrue interest at a rate of 4.625% per year. Interest on the 2026 Senior Notes is payable semi-annually in arrears on eachMay 1 andNovember 1 , commencing onMay 1, 2021 . Convertible Notes Offering - 2025 Notes InDecember 2020 ,Shift4 Payments, Inc. issued an aggregate principal amount of$690.0 million of convertible senior notes due 2025 ("2025 Convertible Notes") (and together with the 2026 Senior Notes and the 2027 Convertible Notes, "the Notes") to qualified institutional buyers in an offering exempt from registration under the Securities Act. We received net proceeds, after deducting initial purchasers' discounts and estimated offering expenses, of approximately$673.6 million from the 2025 Convertible Notes Offering. The net proceeds of the 2025 Convertible Notes Offering, together with cash on hand, will be used for general corporate purposes. The 2025 Convertible Notes do not bear regular interest and will mature onDecember 15, 2025 unless earlier repurchased, redeemed or converted. The Company will settle conversions by paying in cash up to the principal amount of Notes with any excess to be paid or delivered, as the case may be, in cash or shares of Class A common stock or a combination of both at its election, based on the conversion rate. The conversion rate for the 2025 Convertible Notes will initially be 12.4262 shares of Class A common stock per$1,000 principal amount of 2025 Convertible Notes (equivalent to an initial conversion price of approximately$80.48 per share of Class A common stock), subject to adjustment upon the occurrence of specified events. None of the specified events for the conversion of the 2025 Convertible Notes occurred as ofSeptember 30, 2021 . See Note 10 to the accompanying unaudited condensed consolidated financial statements for more information. Revolving Credit Facility InOctober 2020 , the Company fully repaid the$650.0 million of aggregate principal amount of secured term loans comprised of first lien term loans of$520.0 million dueNovember 30, 2024 ("First Lien Term Loan Facility"), using the proceeds from the 2026 Senior Notes. The credit agreement governing the First Lien Term Loan Facility ("First Lien Credit Agreement") included a revolving credit facility that had a borrowing capacity of$90.0 million ("Revolving Credit Facility"), which previously matured onNovember 30, 2022 . Amended and Restated Revolving Credit Facility OnJanuary 29, 2021 ,Shift4 Payments, LLC amended and restated its First Lien Credit Agreement and increased the borrowing capacity under the Revolving Credit Facility to$100.0 million . The Revolving Credit Facility matures onJanuary 29, 2026 or, if greater than$150.0 million aggregate principal amount ofShift4 Payments, LLC's 2025 Convertible Notes remains outstanding onSeptember 15, 2025 , on that date. The Revolving Credit Facility requires periodic interest payments until maturity. 52 -------------------------------------------------------------------------------- Loans incurred under the Revolving Credit Facility bear interest at our option at either the LIBO rate plus a margin ranging from 3.00% to 3.50% per year or the alternate base rate (the highest of the Federal Funds rate plus 0.50%, or the prime rate announced from time to time inThe Wall Street Journal ) plus a margin ranging from 2.00% to 2.50% per year ("Applicable Rate"). The Applicable Rate varies depending on the Company's total leverage ratio (as defined in the Credit Agreement). The alternate base rate and the LIBO rate are each subject to a zero percent floor. In addition, we are required to pay a commitment fee under the Revolving Credit Facility in respect of the unutilized commitments thereunder at a rate ranging from 0.25% per year to 0.50% per year, in each case based on the total leverage ratio. We are also subject to customary letter of credit and agency fees. The Revolving Credit Facility has a borrowing capacity of$99.5 million , net of a$0.5 million letter of credit. As ofSeptember 30, 2021 , we had no outstanding borrowings under the Revolving Credit Facility. Contractual obligations As a result of issuing the 2027 Convertible Notes, our contractual obligations for long-term debt and interest on long-term debt as presented in our Form 10-K have been modified. The following table provides an update as ofSeptember 30, 2021 . Payments due by period 2021 (remaining 2026 and (in millions) Total three months) 2022 and 2023 2024 and 2025 beyond Long-term debt$ 1,772.5 $ - $
-
10.4 48.0 48.0 27.1
Total $ 1,906.0 $ 10.4 $ 48.0 $ 738.0 $ 1,109.6
Off-balance sheet arrangements
During the periods presented, we did not engage in any off-balance sheet
financing activities.
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 accompanying unaudited condensed consolidated
financial statements, each of which have been prepared in accordance with U.S.
GAAP. The preparation of these historical financial statements in conformity
with U.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 in
the notes to the 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.
New accounting pronouncements
For information regarding new accounting pronouncements, and the impact of these
pronouncements on our consolidated financial statements, if any, refer to Note 1
in the notes to the accompanying unaudited condensed consolidated financial
statements.
JOBS Act
We qualify as an EGC pursuant to the provisions of the JOBS Act, enacted on
April 5, 2012 . Section 102 of the JOBS Act provides that an EGC can take
advantage of the extended transition period provided in Section 7(a)(2)(B) of
the Securities Act
53--------------------------------------------------------------------------------
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-EGCs. 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 EGC 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-EGCs 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 EGC. We will remain an EGC 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. As ofJune 30, 2021 , the market value of our common stock that is held by non-affiliates exceeded$700.0 million ; therefore, as ofDecember 31, 2021 , we expect that we will cease to be an EGC.
© Edgar Online, source
