NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (in millions, except share, unit, per unit and merchant count amounts)
1.Organization, Basis of Presentation and Significant Accounting Policies
Organization
Shift4 Payments, Inc., “Shift4 Payments” or “the Company”, was incorporated in Delaware on November 5, 2019 in order to carry on the business of Shift4 Payments, LLC and its consolidated subsidiaries.
The Company is a leading provider of integrated payment processing and technology solutions. Through the Shift4 Model, the Company offers software providers a single integration to an end-to-end payments offering, a powerful gateway and a robust suite of technology solutions (including cloud enablement, business intelligence, analytics, and mobile) to enhance the value of their software suites and simplify payment acceptance. The Company provides for its merchants a seamless customer experience at scale, rather than simply acting as one of multiple providers they rely on to operate their businesses. The Shift4 Model is built to serve a range of merchants from small-to-medium-sized businesses to large and complex enterprises across numerous verticals, including lodging, leisure, stadiums and arenas, and food and beverage. This includes the Company’s Harbortouch, Restaurant Manager, POSitouch, and Future POS brands, as well as over 350 additional software integrations in virtually every industry.
Initial Public Offering and Concurrent Private Placement
On June 4, 2020, the Securities and Exchange Commission (“SEC”) declared effective the Company’s Registration Statement on Form S-1 (File No. 333-238307), as amended, filed in connection with its Initial Public Offering (“IPO”) (the “Registration Statement”). The Company’s Class A common stock started trading on The New York Stock Exchange on June 5, 2020. On June 9, 2020, the Company completed its 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, the Company 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, the Company also completed a $100.0 million private placement of 4,625,346 shares of Class C common stock to Rook Holdings Inc. (“Rook”), a corporation wholly-owned by the Company’s Founder and Chief Executive Officer. The total net proceeds from the IPO and concurrent private placement were approximately $462.6 million. Shift4 Payments, Inc. used the proceeds to purchase newly-issued limited liability company interests from Shift4 Payments, LLC (“LLC Interests”). Shift4 Payments, LLC used these amounts received from Shift4 Payments, Inc. to repay certain existing indebtedness and for general corporate purposes. See Note 10 for more information. In connection with the IPO, the Company completed certain reorganization transactions (“Reorganization Transactions”) as described in the Company’s Form 10-K for the year ended December 31, 2020 filed with the SEC on March 8, 2021 (“2020 Form 10-K”).
Basis of Presentation
The accompanying interim condensed consolidated financial statements of the Company are unaudited. These unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and the applicable rules and regulations of the SEC for interim financial information. As such, these financial statements do not include all information and footnotes required by U.S. GAAP for complete financial statements. The December 31, 2020 Condensed Consolidated Balance Sheet was derived from audited financial statements as of that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments consisting only of normal recurring adjustments necessary to state fairly the financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP applicable to interim periods. The results of operations for the interim periods presented are not necessarily indicative of results for the full year or future periods. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 2020, as disclosed in the 2020 Form 10-K.
The unaudited condensed consolidated financial statements include the accounts of Shift4 Payments, Inc. and its wholly-owned subsidiaries. Shift4 Payments, Inc. consolidates the financial results of Shift4 Payments, LLC, which is
considered a variable interest entity (“VIE”). Shift4 Payments, Inc. is the primary beneficiary and sole managing member of Shift4 Payments, LLC and has decision making authority that significantly affects the economic performance of the entity. As a result, the Company consolidates Shift4 Payments, LLC, and reports a noncontrolling interest representing the economic interest in Shift4 Payments, LLC held by certain affiliates of Searchlight Capital Partners (“Searchlight”) and Rook (together, the “Continuing Equity Owners”).
As the Reorganization Transactions are considered transactions between entities under common control, the financial statement presentation for the periods prior to the IPO and Reorganization Transactions have been adjusted to combine the previously separate entities for presentation purposes. Prior to the Reorganization Transactions, Shift4 Payments, Inc. had no operations.
All intercompany balances and transactions have been eliminated in consolidation.
The assets and liabilities of Shift4 Payments, LLC represent substantially all of the consolidated assets and liabilities of Shift4 Payments, Inc. with the exception of certain cash balances and the aggregate principal amount of $690.0 million of 2025 Convertible Notes and $632.5 million of 2027 Convertible Notes that are held by Shift4 Payments, Inc. directly. See Note 10 for information about the 2025 Convertible Notes and the 2027 Convertible Notes. In connection with the issuance of each the 2025 Convertible Notes and the 2027 Convertible Notes, Shift4 Payments, Inc. entered into an intercompany convertible promissory note (“Intercompany Convertible Note”) with Shift4 Payments, LLC, whereby Shift4 Payments, Inc. provided the net proceeds from the issuance of the 2025 Convertible Notes and the 2027 Convertible Notes to Shift4 Payments, LLC in the amount of $673.6 million and $617.7 million, respectively. The terms of each Intercompany Convertible Note mirror the terms of each the 2025 Convertible Notes and the 2027 Convertible Notes issued by Shift4 Payments, Inc. The intent of each Intercompany Convertible Note is to maintain the parity of shares of Class A common stock with LLC Units as required by the Shift4 Payments LLC Agreement. As of September 30, 2021 and December 31, 2020, $9.6 million and $684.5 million of cash was held by Shift4 Payments, Inc., respectively. Shift4 Payments Inc., which was established November 5, 2019, has not had any material operations on a standalone basis since its inception, and all of the operations of the Company are carried out by Shift4 Payments, LLC and its subsidiaries.
Liquidity and Management’s Plan
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 throughout the United States have significantly impacted the restaurant and hospitality industries. As a result, the Company’s revenues, which are largely tied to processing volumes in these verticals, were materially impacted beginning in the final two weeks of March 2020. Since late March 2020, despite volumes in merchant categories associated with international travel and corporate travel running lower than pre-COVID-19 pandemic levels, the Company has seen a significant recovery in its end-to-end payment volumes as a result of merchants reopening their operations, new merchant onboarding and gateway conversions. While gross revenue and end-to-end volumes for the three and nine months ended September 30, 2021 have exceeded those for the three and nine months ended September 30, 2020, the Company will continue to evaluate the nature and extent of potential COVID-19-related impacts to its business, consolidated results of operations, and liquidity.
As of September 30, 2021, the Company had $1,772.5 million outstanding under its credit facilities and was in compliance with the financial covenants under its debt agreements. The Company expects to be in compliance for at least 12 months following issuance of these unaudited condensed consolidated financial statements. See Note 10 for further information on the Company’s debt obligations.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Significant estimates inherent in the preparation of the accompanying unaudited condensed consolidated financial statements include estimates of fair value of acquired assets and liabilities through business combinations, fair value of contingent liabilities related to earnout payments and change of control, fair value of debt instruments, allowance for doubtful accounts, income taxes, investments in securities, noncontrolling interests and the February 2021 transfer of the right to select a participant for one seat on board Inspiration4, the first all-civilian mission to space, from Jared Isaacman, the Company’s Chief Executive Officer and founder (“Founder”). Estimates are based on past experience and other considerations reasonable under the circumstances. Actual results may differ from these estimates.
Additionally, the full impact of the COVID-19 pandemic is unknown and cannot be reasonably estimated. However, the Company has made accounting estimates based on the facts and circumstances available as of the reporting date. To the extent there are differences between these estimates and actual results, the unaudited condensed consolidated financial statements may be materially affected.
Revision of Previously Issued Financial Statements
During the course of preparing the Company’s consolidated financial statements for the year ended December 31, 2020, it was identified that $4.8 million of acquired technology recorded in “Other intangible assets, net” in the Consolidated Balance Sheet should have been impaired during fiscal year 2018. Although the Company has determined that this error did not have a material impact on its previously issued condensed consolidated financial statements, it has revised the accompanying condensed consolidated financial statements to correct for this error and to reflect the associated decrease in amortization expense of $0.1 million and $0.4 million recorded in “Cost of Sales” for the three and nine months ended September 30, 2020, respectively.
In addition, a misclassification of $0.1 million and $2.2 million was identified for the three and nine months ended September 30, 2020, respectively, resulting from expensing equipment provided to customers under the Company’s warranty program as “General and administrative expenses” which should have been classified as “Cost of sales” in the unaudited Condensed Consolidated Statements of Operations. This misclassification has also been corrected in connection with the revision of the unaudited Condensed Consolidated Statements of Operations. The revisions had no net impact on cash flows from operating, investing or financing activities in the unaudited Condensed Consolidated Statements of Cash Flows.
The applicable notes to the unaudited condensed consolidated financial statements have also been revised to correct for these errors. The following table sets forth the effects of the revisions to the previously issued unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 to correct for the prior period errors.
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For the three months ended September 30, 2020
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For the nine months ended September 30, 2020
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Consolidated Statements of Operations
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As previously
reported
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Adjustment
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As revised
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As previously reported
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Adjustment
|
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As revised
|
Cost of sales
|
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$
|
163.3
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|
|
$
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—
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|
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$
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163.3
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|
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$
|
427.7
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|
|
$
|
1.8
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|
|
$
|
429.5
|
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Gross profit
|
|
51.5
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|
|
—
|
|
|
51.5
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|
|
128.3
|
|
|
(1.8)
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|
|
126.5
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General and administrative expenses
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35.5
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(0.1)
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35.4
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147.0
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(2.2)
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144.8
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Total operating expenses
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55.5
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(0.1)
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55.4
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180.8
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(2.2)
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178.6
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Income (loss) from operations
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(4.0)
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0.1
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(3.9)
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(52.5)
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0.4
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(52.1)
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Loss before income taxes
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(10.6)
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0.1
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(10.5)
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(91.1)
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0.4
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(90.7)
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Net loss (a)
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(9.9)
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0.1
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(9.8)
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(90.1)
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0.4
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(89.7)
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Basic and diluted net loss per share - Class A and Class C
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(0.12)
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—
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(0.12)
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(0.15)
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—
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(0.15)
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(a)Net loss is equal to comprehensive loss.
As a result of the revisions, "Retained Deficit" and "Total equity (deficit)” as of September 30, 2020 were revised from $(262.6) million to $(266.3) million and $557.5 million to $553.9 million, respectively.
Significant Accounting Policies
The Company’s significant accounting policies are discussed in Note 2 to Shift4 Payments, Inc.’s consolidated financial statements as of and for the years ended December 31, 2020 and 2019 in the 2020 Form 10-K. There have been no significant changes to these policies which have had a material impact on the Company’s unaudited condensed consolidated financial statements and related notes during the nine months ended September 30, 2021, except as noted below.
Investments in securities
Investments in securities represents the Company’s investments in equity of non-public entities. These non-marketable equity investments have no readily determinable fair values and are measured using the measurement alternative,
which is defined as cost, less impairment, adjusted for observable price changes from orderly transactions for identical or similar investments of the same issuer. Adjustments, if any, are recorded in “Other income, net” on the unaudited Condensed Consolidated Statements of Operations. As of September 30, 2021, the Company has invested $27.5 million in Space Exploration Technologies Corp. (“SpaceX”), which designs, manufactures, and launches advanced rockets, spacecraft and satellites and $2.0 million in Sightline Payments, Inc. (“Sightline Payments”), a financial technology company that provides cashless, mobile, and omni-channel commerce solutions for the gaming, lottery, sports betting and other industries.
Recent Accounting Pronouncements
The Company, an emerging growth company (“EGC”), has elected to take advantage of the benefits of the extended transition period provided for in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards which allows the Company to defer adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company expects to become a large accelerated filer effective December 31, 2021, following which point the Company will follow the timeline for adoption of new accounting pronouncements for public companies.
Accounting Pronouncements Adopted
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities From Contracts With Customers. This ASU requires an acquirer to account for revenue contracts acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers, as if it had originated the contracts. Prior to ASU 2021-08, an acquirer generally recognized assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers and other similar contracts, at fair value on the acquisition date. The Company expects to become a large accelerated filer effective December 31, 2021, at which point the Company will follow the timeline for adoption of new accounting pronouncements for public companies. The guidance is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and should be applied prospectively to business combinations occurring on or after the effective date. Early adoption is permitted. An entity that early adopts in an interim period should apply the amendments (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and (2) prospectively to all business combinations that occur on or after the date of initial application. The Company adopted ASU 2021-08 in the third quarter of 2021 and retrospectively applied the ASU to its acquisitions that occurred in 2021. The adoption of ASU 2021-08 resulted in an increase to “Deferred revenue” of $5.7 million, of which $1.8 million was recognized as an increase to “Gross revenue” for the three and nine months ended September 30, 2021. The impact on net loss per Class A and Class C share, basic and diluted, was $0.03 for both the three and nine months ended September 30, 2021.
In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. This ASU removes certain separation models in ASC 470-20 for convertible instruments, and, as a result, embedded conversion features that do not require bifurcation under ASC 815 are no longer subject to separation into an equity classified component. Consequently, a convertible debt instrument, such as the Company's 2025 Convertible Notes, shall be accounted for as a single liability measured at its amortized cost. The Company adopted ASU 2020-06 on January 1, 2021 using the modified retrospective transition method. As of December 31, 2020, the Company had recorded a discount on the 2025 Convertible Notes of $111.5 million related to the separation of the conversion feature. This discount resulted in the accretion of interest expense over time and was removed upon adoption of this ASU. The adoption of ASU 2020-06 resulted in a decrease to additional paid-in capital of $111.5 million, a decrease to retained deficit of $1.6 million and a net increase to long-term debt of $109.9 million. Interest expense recognized in future periods will be reduced as a result of accounting for the convertible debt instrument as a single liability measured at its amortized cost. The impact on net loss per share and the Company’s debt covenants was not material.
In August 2018, the FASB issued ASU 2018-13: Fair Value Measurement—Disclosure Framework (Topic 820). The updated guidance improves the disclosure requirements on fair value measurements. The Company adopted ASU 2018-13 effective January 1, 2020 and there was no significant impact on the Company’s disclosures upon adoption.
Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02: Leases. The new standard requires a lessee to record assets and liabilities on the balance sheet for the rights and obligations arising from leases with terms of more than 12 months. The Company expects to become a large accelerated filer effective December 31, 2021, at which point the Company will follow the timeline for adoption of new accounting pronouncements for public companies. As a result, the Company expects to adopt this guidance on a modified retrospective basis on December 31, 2021 and to reflect the adoption as of January 1, 2021 in the annual results for the period ended December 31, 2021 and interim periods beginning January 1, 2022. The adoption is not expected to have a significant impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13: Financial Instruments—Credit Losses (Topic 326), which changes the impairment model for most financial assets, including accounts receivable, and replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. The Company expects to become a large accelerated filer effective December 31, 2021, at which point the Company will follow the timeline for adoption of new accounting pronouncements for public companies. As a result, the Company expects to adopt this guidance on a modified retrospective basis on December 31, 2021 and to reflect the adoption as of January 1, 2021 in our annual results for the period ended December 31, 2021 and interim periods beginning January 1, 2022. The Company is evaluating the potential impact of adopting ASU 2016-13 on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04: Simplifying the Test for Goodwill Impairment, which removes step 2 of the quantitative goodwill impairment test. Under the amended guidance, a goodwill impairment charge is recognized for the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. The Company expects to apply this guidance to the annual goodwill impairment test performed on October 1, 2021 for the year ended December 31, 2021. The Company is evaluating the potential impact of adopting ASU 2017-04 on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected. The guidance is effective for the Company for annual reporting periods beginning after December 15, 2020, and interim reporting periods beginning after December 15, 2021. The Company adopted ASU 2018-15 prospectively for the Company’s annual reporting period effective January 1, 2021 and will adopt it for interim reporting periods beginning on January 1, 2022. The adoption is not expected to have a significant impact on the Company’s consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 removes certain exceptions associated with (i) intraperiod tax allocations, (ii) recognition of deferred tax liability for equity method investments of foreign subsidiaries, and (iii) the calculation of income taxes in an interim period when in a loss position. Additionally, ASU 2019-12 simplifies accounting for (i) income taxes associated with franchise taxes, (ii) tax basis of goodwill in a business combination, (iii) the allocation of tax expense to a legal entity that is not subject to tax in standalone financial statements, (iv) enacted changes in tax laws, and (v) income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for under the equity method. The Company expects to become a large accelerated filer effective December 31, 2021, at which point the Company will follow the timeline for adoption of new accounting pronouncements for public companies. As a result, the Company expects to adopt this guidance on a modified retrospective basis on December 31, 2021 and to reflect the adoption as of January 1, 2021 in our annual results for the period ended December 31, 2021 and interim periods beginning January 1, 2022. The adoption is not expected to have a significant impact on the Company’s consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform, which provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships, subject to certain criteria, that reference the London Interbank Offered Rate (“LIBOR”), or another reference rate that is expected to be discontinued. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company is currently evaluating whether it will elect the optional expedients, as well as evaluating the impact of ASU 2020-04 on the Company’s consolidated financial statements.
In July 2021, the FASB issued ASU 2021-05: Lessors —Certain Leases with Variable Lease Payments, to amend lessor accounting for certain leases with variable lease payments that do not depend on a reference index or a rate and
would have resulted in the recognition of a loss at lease commencement if classified as a sales-type or a direct financing lease. ASU 2021-05 amends the classification requirements of such leases for lessors to result in an operating lease classification. This guidance can be applied either retrospectively or prospectively with early adoption permitted. The Company expects to become a large accelerated filer effective December 31, 2021, at which point the Company will follow the timeline for adoption of new accounting pronouncements for public companies. As a result, the Company expects to adopt ASU 2021-05 effective January 1, 2022. The Company is evaluating the method of adoption and the potential impact of adopting ASU 2021-05 on the Company’s consolidated financial statements.
2.Acquisitions
Each of the following acquisitions was accounted for as a business combination using the acquisition method of accounting. The respective purchase prices were allocated to the assets acquired and liabilities assumed based on the estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired was allocated to goodwill and represents the future economic benefits arising from other assets acquired, which cannot be individually identified or separately recognized. Under the acquisition method of accounting for business combinations, if there are changes to acquired deferred tax balances, valuation allowances or liabilities related to uncertain tax positions during the measurement period, and they are related to new information obtained about facts and circumstances that existed as of the acquisition date, those changes are considered a measurement-period adjustment, with the offset recorded to goodwill.
Postec
The Company completed the acquisition of Postec, Inc. ("Postec") on September 1, 2021, by acquiring 100% of its membership interests for $14.0 million, net of cash acquired. The purchase was funded with cash on hand. This acquisition enables the boarding of the vendor’s customers on the Company’s end-to-end acquiring solution and empowers the Company’s distribution partners to sign the vendor’s customer accounts and leverage the combined expertise to handle all aspects of installation, service, and support, similar to the hospitality technology vendor acquired in October 2020.
The following table summarizes the fair value assigned to the assets acquired and liabilities assumed at the acquisition date. These amounts reflect various preliminary fair value estimates and assumptions, and are subject to change within the measurement period as valuations are finalized. The primary areas of preliminary purchase price allocation subject
to change relate to the valuation of accounts receivable, accrued expenses and other current liabilities assumed and residual goodwill.
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Cash
|
$
|
1.7
|
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Accounts receivable
|
1.2
|
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Prepaid expenses and other current assets
|
0.3
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Inventory
|
0.6
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Other intangible assets
|
5.6
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Property, plant and equipment
|
0.3
|
|
Goodwill (a)
|
10.3
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Accounts payable
|
(1.0)
|
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Deferred revenue
|
(2.8)
|
|
Other accrued expenses
|
(0.5)
|
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Net assets acquired
|
15.7
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|
Less: cash acquired
|
(1.7)
|
|
Net assets acquired
|
$
|
14.0
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|
|
|
|
(a)Goodwill is deductible for tax purposes.
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During both the three and nine months ended September 30, 2021, the Company incurred expenses in connection with the Postec acquisition of $0.3 million. These expenses are included in “Professional fees” in the unaudited Condensed Consolidated Statements of Operations.
The fair values of intangible assets were estimated using inputs classified as Level 3 under the income approach using either the relief-from-royalty method (developed technology, trademarks and trade names) or the multi-period excess earnings method (customer relationships). The transaction was taxable for income tax purposes. The weighted average life of trademarks and trade names and customer relationships is 2 years and 11 years, respectively. The goodwill arising from the acquisition largely consists of revenue synergies associated with a larger total addressable market, the ability to cross-sell existing customers, new customers and technology capabilities.
The Postec acquisition did not have a material impact on the Company’s consolidated financial statements. Accordingly, revenue and expenses related to the acquisition and pro forma financial information have not been presented.
VenueNext
The Company completed the acquisition of VenueNext Inc. (“VenueNext”), a leader in integrated payments solutions in sporting arenas and event complexes, on March 3, 2021, for $66.9 million, by acquiring 100% of VenueNext’s membership interests. This acquisition enhances the Company’s presence and capabilities in a number of large and growing verticals such as stadiums and arenas, while significantly expanding its total addressable market with entry into entertainment, universities, theme parks, airports, and other verticals. The purchase price included the following forms of consideration:
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|
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Cash
|
$
|
42.2
|
|
Shares of Class A common stock (a)
|
24.5
|
|
RSUs granted for fair value of equity-based compensation awards (b)
|
1.8
|
|
Total purchase consideration
|
68.5
|
|
Less: cash acquired
|
(1.6)
|
|
Total purchase consideration, net of cash acquired
|
$
|
66.9
|
|
|
|
|
(a)Total purchase consideration includes 345,423 shares of common stock. As of September 30, 2021, 341,924 shares of common stock have been issued.
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(b)The Company assumed all equity awards held by continuing employees. The portion of the fair value of the equity-based compensation awards associated with prior service of VenueNext employees represents a component of the total consideration as presented above and was valued based on the fair value of the VenueNext awards on March 3, 2021, the acquisition date.
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The following table summarizes the fair value assigned to the assets acquired and liabilities assumed at the acquisition date. These amounts reflect various preliminary fair value estimates and assumptions, and are subject to change within the measurement period as valuations are finalized. The primary areas of preliminary purchase price allocation subject to change relate to the valuation of accounts receivable, accrued expenses, other current liabilities assumed and residual goodwill.
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|
|
|
|
|
Accounts receivable
|
$
|
0.7
|
|
Prepaid expenses and other current assets
|
0.2
|
|
Inventory
|
0.2
|
|
Other intangible assets
|
19.8
|
|
Goodwill (a)
|
52.7
|
|
Accounts payable
|
(0.9)
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|
Deferred revenue
|
(5.8)
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|
Net assets acquired
|
$
|
66.9
|
|
(a)Goodwill is not deductible for tax purposes.
As a result of the adoption of ASC 2021-08 in the third quarter of 2021, the Company retrospectively evaluated the revenue contracts acquired and in the third quarter of 2021 adjusted the preliminary purchase price allocation to reflect an increase to deferred revenue of $5.7 million, of which the Company recognized $2.8 million within "Gross revenue" in the three and nine months ended September 30, 2021. This resulted in corresponding adjustments of $1.3 million in the preliminary fair value assigned to "Other intangible assets" and "Goodwill."
During the nine months ended September 30, 2021, the Company incurred expenses in connection with the VenueNext acquisition of $1.1 million. These expenses are included in “Professional fees” in the unaudited Condensed Consolidated Statements of Operations.
The fair values of intangible assets were estimated using inputs classified as Level 3 under the income approach using either the relief-from-royalty method (developed technology, trademarks and trade names) or the multi-period excess earnings method (customer relationships). The transaction was not taxable for income tax purposes. The weighted average life of developed technology, trademarks and trade names, and customer relationships is 10 years, 10 years and 11 years, respectively. The goodwill arising from the acquisition largely consists of revenue synergies associated with a larger total addressable market, the ability to cross-sell existing customers, new customers and technology capabilities.
The VenueNext acquisition did not have a material impact on the Company’s consolidated financial statements. Accordingly, revenue and expenses related to the acquisition and pro forma financial information have not been presented.
3dcart
The Company completed the acquisition of Infomart2000 Corp., doing business as 3dcart, on November 5, 2020, by acquiring 100% of its membership interests for $39.9 million in cash, net of cash acquired, and approximately $19.2 million in shares of the Company’s Class A common stock. The purchase was funded with cash on hand. Since the acquisition, 3dcart has been rebranded as Shift4Shop to align the eCommerce offering with Shift4’s existing ecosystem of services. The acquisition expanded the Company’s omni-channel transaction capabilities and enabled Shift4Shop merchants to augment their eCommerce platform experience with the Company’s secure integrated payments solutions. In addition, the Company’s indirect sales distribution network is able to offer Shift4Shop’s turnkey eCommerce capabilities to the Company’s new and existing POS and payments customers.
Hospitality Technology Vendor
The Company completed the acquisition of a Hospitality Technology Vendor on October 16, 2020, by acquiring 100% of its membership interests for $9.9 million, net of cash acquired. Subsequently, the total consideration was adjusted to $9.5 million during the measurement period due to a working capital adjustment of $0.4 million, which reduced goodwill. In the second and third quarters of 2021, the Company made measurement period adjustments of $(0.3) million and $2.3 million, respectively, to accounts receivable with corresponding changes to goodwill to reflect the facts and circumstances in existence as of the effective date of the acquisition. The purchase was funded with cash on hand. This acquisition enables the boarding of the vendor’s customers on the Company’s end-to-end acquiring solution
and empowers the Company’s distribution partners to sign the vendor’s customer accounts and leverage the combined expertise to handle all aspects of installation, service, and support.
3.Revenue
ASC 606: Revenue from Contracts with Customers
Under ASC 606, the Company has three separate performance obligations under its recurring software as a service agreements (“SaaS”) arrangements for point-of-sale systems provided to merchants: (1) point-of-sale software, (2) lease of hardware and (3) other support services. For the period January 1, 2019 through June 29, 2020, the hardware provided under the Company’s SaaS agreements was accounted for as a sales-type lease. Effective June 30, 2020, the Company modified the terms and conditions of its SaaS arrangements and updated its operational procedures. As a result, beginning June 30, 2020, hardware provided under the Company’s SaaS agreements is accounted for as an operating lease. See Note 8 for more information on equipment for lease.
TSYS outage
On August 21, 2021, TSYS, a Global Payments company and an important vendor to the Company, experienced a significant platform outage that resulted in the disruption of payment processing for the Company’s 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, the Company 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 the Company's condensed consolidated financial statements.
In the third quarter of 2021, the Company distributed $22.4 million in payments to its 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 the Company’s unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021.
In the third quarter of 2021, the Company also distributed $2.3 million in payments to its 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 the Company's payments to its partners in the normal course of business, these payments are reflected in “Cost of sales” in the Company’s unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021.
Disaggregated Revenue
Based on similar operational characteristics, the Company’s revenue from contracts with customers is disaggregated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Payments-based revenue (a)
|
$
|
346.9
|
|
|
$
|
196.8
|
|
|
$
|
887.6
|
|
|
$
|
494.4
|
|
Subscription and other revenues
|
30.9
|
|
|
18.0
|
|
|
80.5
|
|
|
61.6
|
|
Total
|
$
|
377.8
|
|
|
$
|
214.8
|
|
|
$
|
968.1
|
|
|
$
|
556.0
|
|
Based on similar economic characteristics, the Company’s revenue from contracts with customers is disaggregated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Over-time revenue (a)
|
$
|
366.9
|
|
|
$
|
210.3
|
|
|
$
|
938.2
|
|
|
$
|
533.8
|
|
Point-in-time revenue
|
10.9
|
|
|
4.5
|
|
|
29.9
|
|
|
22.2
|
|
Total
|
$
|
377.8
|
|
|
$
|
214.8
|
|
|
$
|
968.1
|
|
|
$
|
556.0
|
|
(a) For the three and nine months ended September 30, 2021, payments-based revenue includes nonrecurring payments of $22.4 million the Company made to merchants related to the TSYS outage that are treated as contra revenue and as such reduce payments-based revenue.
Contract Liabilities
The Company charges merchants for various post-contract license support/service fees and annual regulatory compliance fees. These fees typically relate to a period of one year. The Company recognizes the revenue on a straight-line basis over its respective period. As of September 30, 2021 and December 31, 2020, the Company had deferred revenue of $19.4 million and $8.1 million, respectively. The change in the contract liabilities is primarily the result of a timing difference between payment from the customer and the Company’s satisfaction of each performance obligation.
The following reflects the amounts the Company recognized as annual service fees and regulatory compliance fees within “Gross revenue” in the unaudited Condensed Consolidated Statements of Operations and the amount of such fees that was included in deferred revenue at the beginning of the respective period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Annual service fees and regulatory compliance fees
|
$
|
8.8
|
|
|
$
|
3.5
|
|
|
$
|
18.9
|
|
|
$
|
10.3
|
|
Amount of these fees included in deferred revenue at beginning of period
|
4.4
|
|
|
2.6
|
|
|
4.4
|
|
|
3.3
|
|
Accounts Receivable
The change in the Company’s allowance for doubtful accounts was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
September 30,
2020
|
Beginning balance
|
$
|
5.7
|
|
|
$
|
2.5
|
|
Additions to expense (a)
|
10.3
|
|
|
6.2
|
|
Write-offs, net of recoveries and other adjustments
|
(2.6)
|
|
|
(2.8)
|
|
Ending balance
|
$
|
13.4
|
|
|
$
|
5.9
|
|
|
|
|
(a)Includes a $5.5 million allowance on chargebacks from a single merchant recorded during the nine months ended September 30, 2021, which is included in “Cost of Sales” on the unaudited Condensed Consolidated Statements of Operations.
|
4.Restructuring
The following table summarizes the changes in the Company’s restructuring accrual:
|
|
|
|
|
|
Balance at December 31, 2020
|
$
|
2.9
|
|
Severance payments
|
(1.2)
|
|
Accretion of interest (a)
|
0.2
|
|
Balance at September 30, 2021
|
$
|
1.9
|
|
(a)Accretion of interest is included within “Restructuring expenses” in the unaudited Condensed Consolidated Statements of Operations.
The Company recognized restructuring expenses associated with a historical acquisition of $0.1 million and $0.2 million for the three and nine months ended September 30, 2021, respectively, and $0.1 million and $0.4 million for the three and nine months ended September 30, 2020, respectively.
The current portion of the restructuring accrual of $1.5 million and $1.4 million at September 30, 2021 and December 31, 2020, respectively, is included within “Accrued expenses and other current liabilities” on the Company's unaudited Condensed Consolidated Balance Sheets. The long-term portion of the restructuring accrual of $0.4 million and $1.5 million at September 30, 2021 and December 31, 2020, respectively, is included within “Other noncurrent liabilities” on the Company's unaudited Condensed Consolidated Balance Sheets.
Of the $1.9 million restructuring accrual outstanding as of September 30, 2021, approximately $0.4 million is expected to be paid in 2021 and $1.6 million in 2022, less accreted interest of $0.1 million.
5.Goodwill
The changes in the carrying amount of goodwill were as follows:
|
|
|
|
|
|
Balance at December 31, 2020
|
$
|
477.0
|
|
VenueNext acquisition (Note 2)
|
52.7
|
|
Postec acquisition (Note 2)
|
10.3
|
|
Hospitality Technology Vendor measurement period adjustments (Note 2)
|
(2.4)
|
|
Balance at September 30, 2021
|
$
|
537.6
|
|
6.Other Intangible Assets, Net
Other intangible assets, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
Amortization Period
(in years)
|
|
September 30, 2021
|
|
Carrying Value
|
|
Accumulated
Amortization
|
|
Net Carrying
Value
|
Merchant relationships
|
8
|
|
$
|
200.1
|
|
|
$
|
126.7
|
|
|
$
|
73.4
|
|
Acquired technology
|
9
|
|
113.2
|
|
|
51.7
|
|
|
61.5
|
|
Trademarks and trade names
|
18
|
|
20.3
|
|
|
3.4
|
|
|
16.9
|
|
Capitalized software development costs
|
4
|
|
36.2
|
|
|
7.9
|
|
|
28.3
|
|
Residual commission buyouts (a)
|
3
|
|
13.2
|
|
|
5.0
|
|
|
8.2
|
|
Total intangible assets
|
|
|
$
|
383.0
|
|
|
$
|
194.7
|
|
|
$
|
188.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
Amortization Period
(in years)
|
|
December 31, 2020
|
|
Carrying Value
|
|
Accumulated
Amortization
|
|
Net Carrying
Value
|
Merchant relationships
|
8
|
|
$
|
185.8
|
|
|
$
|
106.5
|
|
|
$
|
79.3
|
|
Acquired technology
|
9
|
|
105.1
|
|
|
42.2
|
|
|
62.9
|
|
Trademarks and trade names
|
9
|
|
57.4
|
|
|
39.1
|
|
|
18.3
|
|
Noncompete agreements
|
2
|
|
3.9
|
|
|
3.9
|
|
|
—
|
|
Capitalized software development costs
|
4
|
|
25.1
|
|
|
5.8
|
|
|
19.3
|
|
Leasehold interest
|
2
|
|
0.1
|
|
|
0.1
|
|
|
—
|
|
Residual commission buyouts (a)
|
3
|
|
20.0
|
|
|
13.5
|
|
|
6.5
|
|
Total intangible assets
|
|
|
$
|
397.4
|
|
|
$
|
211.1
|
|
|
$
|
186.3
|
|
|
|
|
(a)Residual commission buyouts include contingent payments of $3.9 million and $3.4 million as of September 30, 2021 and December 31, 2020, respectively.
|
As of September 30, 2021, the estimated amortization expense for intangible assets for each of the five succeeding years and thereafter is as follows:
|
|
|
|
|
|
2021 (remaining three months)
|
$
|
14.1
|
|
2022
|
43.6
|
|
2023
|
30.9
|
|
2024
|
25.8
|
|
2025
|
23.2
|
|
Thereafter
|
50.7
|
|
Total
|
$
|
188.3
|
|
Amounts charged to expense in the unaudited Condensed Consolidated Statements of Operations for amortization of intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Depreciation and amortization expense
|
$
|
8.2
|
|
|
$
|
9.8
|
|
|
$
|
27.7
|
|
|
$
|
28.7
|
|
Cost of sales
|
4.9
|
|
|
3.3
|
|
|
14.1
|
|
|
10.2
|
|
Total
|
$
|
13.1
|
|
|
$
|
13.1
|
|
|
$
|
41.8
|
|
|
$
|
38.9
|
|
7.Capitalized Acquisition Costs, Net
Capitalized acquisition costs, net were $34.3 million and $30.2 million at September 30, 2021 and December 31, 2020, respectively. This consists of upfront processing bonuses with a gross carrying value of $65.2 million and $55.7 million and less accumulated amortization of $30.9 million and $25.5 million at September 30, 2021 and December 31, 2020, respectively.
Capitalized acquisition costs had a weighted average amortization period of three years at both September 30, 2021 and December 31, 2020. Amortization expense for capitalized acquisition costs is $5.4 million and $15.5 million for the three and nine months ended September 30, 2021, respectively, and $4.2 million and $11.2 million for the three and nine months ended September 30, 2020, respectively, and is included in “Cost of sales” in the unaudited Condensed Consolidated Statements of Operations.
As of September 30, 2021, the estimated future amortization expense for capitalized acquisition costs is as follows:
|
|
|
|
|
|
2021 (remaining three months)
|
$
|
5.4
|
|
2022
|
17.1
|
|
2023
|
9.8
|
|
2024
|
2.0
|
|
Total
|
$
|
34.3
|
|
8.Equipment for Lease, Net
Equipment for lease, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
Depreciation Period
(in years)
|
|
September 30, 2021
|
|
Carrying Value
|
|
Accumulated Depreciation
|
|
Net Carrying Value
|
Equipment under lease
|
3
|
|
$
|
65.5
|
|
|
$
|
18.5
|
|
|
$
|
47.0
|
|
Equipment held for lease (a)
|
N/A
|
|
9.3
|
|
|
—
|
|
|
9.3
|
|
Total equipment for lease
|
|
|
$
|
74.8
|
|
|
$
|
18.5
|
|
|
$
|
56.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
Depreciation Period
(in years)
|
|
December 31, 2020
|
|
Carrying Value
|
|
Accumulated Depreciation
|
|
Net Carrying Value
|
Equipment under lease
|
3
|
|
$
|
36.5
|
|
|
$
|
6.9
|
|
|
$
|
29.6
|
|
Equipment held for lease (a)
|
N/A
|
|
7.0
|
|
|
—
|
|
|
7.0
|
|
Total equipment for lease, net
|
|
|
$
|
43.5
|
|
|
$
|
6.9
|
|
|
$
|
36.6
|
|
(a)Represents equipment that was not yet initially deployed to a merchant and, accordingly, is not being depreciated.
The amount charged to “Depreciation and amortization expense” in the unaudited Condensed Consolidated Statements of Operations for depreciation of equipment under lease was $5.8 million and $15.4 million for the three and nine months ended September 30, 2021, respectively, and $5.7 million for both the three and nine months ended September 30, 2020. Effective June 30, 2020, the Company modified the terms and conditions of its SaaS arrangements and updated its operational procedures. As a result, beginning June 30, 2020, hardware provided under the Company’s SaaS agreements is accounted for as an operating lease.
9.Property, Plant and Equipment, Net
Property, plant and equipment, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
December 31,
2020
|
Equipment
|
$
|
11.4
|
|
|
$
|
16.0
|
|
Capitalized software
|
8.5
|
|
|
8.7
|
|
Leasehold improvements
|
8.5
|
|
|
11.6
|
|
Furniture and fixtures
|
2.0
|
|
|
3.1
|
|
Vehicles
|
0.3
|
|
|
0.2
|
|
Total property and equipment, gross
|
30.7
|
|
|
39.6
|
|
Less: Accumulated depreciation
|
(12.9)
|
|
|
(24.5)
|
|
Total property, plant and equipment, net
|
$
|
17.8
|
|
|
$
|
15.1
|
|
Amounts charged to expense in the unaudited Condensed Consolidated Statements of Operations for depreciation of property, plant and equipment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Depreciation and amortization expense
|
$
|
1.0
|
|
|
$
|
0.8
|
|
|
$
|
2.8
|
|
|
$
|
2.7
|
|
Cost of sales
|
0.5
|
|
|
0.4
|
|
|
1.3
|
|
|
1.2
|
|
Total depreciation expense
|
$
|
1.5
|
|
|
$
|
1.2
|
|
|
$
|
4.1
|
|
|
$
|
3.9
|
|
10.Debt
The Company’s outstanding debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
December 31,
2020
|
Convertible Notes due 2025 (2025 Convertible Notes)
|
$
|
690.0
|
|
|
$
|
577.5
|
|
Convertible Notes due 2027 (2027 Convertible Notes)
|
632.5
|
|
|
—
|
|
Senior Notes due 2026 (2026 Senior Notes)
|
450.0
|
|
|
450.0
|
|
Other financing arrangements
|
—
|
|
|
0.9
|
|
Total borrowings
|
1,772.5
|
|
|
1,028.4
|
|
Less: Current portion of debt
|
—
|
|
|
(0.9)
|
|
|
1,772.5
|
|
|
1,027.5
|
|
Less: Unamortized capitalized financing costs
|
(35.7)
|
|
|
(22.1)
|
|
Total long-term debt
|
$
|
1,736.8
|
|
|
$
|
1,005.4
|
|
Amortization of capitalized financing fees is included in “Interest expense” within the unaudited Condensed Consolidated Statements of Operations. Amortization expense was $1.7 million and $4.1 million for the three and nine months ended September 30, 2021, respectively, and $0.8 million and $2.9 million for the three and nine months ended September 30, 2020, respectively.
Convertible Notes due 2025
In December 2020, Shift4 Payments, Inc. issued an aggregate principal amount of $690.0 million of convertible senior notes due 2025 (“2025 Convertible Notes”) in an offering to qualified institutional buyers exempt from registration under the Securities Act. The Company received net proceeds, after deducting initial purchasers’ discounts and estimated offering expenses, of approximately $673.6 million from the 2025 Convertible Notes Offering. The 2025 Convertible Notes do not bear regular interest and will mature on December 15, 2025 unless earlier repurchased, redeemed or converted. The Company will settle conversions by paying in cash up to the principal amount of the 2025 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 its election, based on the conversion rate. The initial conversion rate for the 2025 Convertible Notes is 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 customary adjustments upon the occurrence of specified events. Before September 15, 2025, noteholders will have the right to convert their 2025 Convertible Notes under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ended March 31, 2021 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the 2025 Convertible Notes for each trading day of the 2025 Measurement Period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate in effect on each such trading day; (3) if the Company calls any or all of the 2025 Convertible Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. From and after September 15, 2025, holders may convert their 2025 Convertible Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. Upon conversion of the 2025 Convertible Notes, the Company will pay in cash the principal amount of the 2025 Notes with any excess to be paid or delivered, as the case may be, in cash or shares of the Company’s Class A common stock or a combination of both at the Company’s election. The 2025 Convertible Notes will be redeemable, in whole or in part, for cash at the Company’s option at any time, and from time to time, on or after December 20, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, but only if the last reported sale price per share of the Company’s Class A common stock exceeds 130% of the conversion price for a specified period of time. The redemption price will be equal to the principal amount of the 2025 Convertible Notes to be redeemed, plus accrued and unpaid special interest, if any, to, but excluding, the redemption date. Upon the occurrence of a “fundamental change,” which term includes certain change of control transactions, the Company must offer to repurchase the 2025 Convertible Notes at a price equal to 100% of their principal amount, plus accrued and unpaid special interest, if any, to, but not including, the date of repurchase. In addition, if a “make-whole
fundamental change” occurs prior to the maturity date or if the Company delivers a notice of redemption, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its 2025 Convertible Notes in connection with such make-whole fundamental change or notice of redemption, as the case may be.
In connection with the issuance of the 2025 Convertible Notes, Shift4 Payments, Inc. entered into an Intercompany Convertible Note with Shift4 Payments, LLC, whereby Shift4 Payments, Inc. provided the net proceeds from the issuance of the 2025 Convertible Notes to Shift4 Payments, LLC in the amount of $673.6 million. The terms of the Intercompany Convertible Note mirror the terms of the 2025 Convertible Notes issued by Shift4 Payments, Inc. The intent of the Intercompany Convertible Note is to maintain the parity of shares of Class A common stock with LLC Units as required by the Shift4 Payments LLC Agreement.
As of December 31, 2020, in accounting for the issuance of the 2025 Convertible Notes, the Company separated the 2025 Convertible Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was $114.2 million and was determined by deducting the fair value of the liability component from the par value of the 2025 Convertible Notes.
Debt issuance costs related to the 2025 Convertible Notes are comprised of discounts and commissions paid to the initial purchasers and third-party offering costs and total $16.4 million. As of December 31, 2020, the Company allocated the total amount incurred to the liability and equity components of the 2025 Note based on their relative values. Issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity.
The Company adopted ASU 2020-06 on January 1, 2021 using the modified retrospective transition method. As of December 31, 2020, the Company recorded a discount on the 2025 Convertible Notes of $111.5 million related to the separation of the conversion feature. This discount was removed upon adoption of this ASU. The adoption of ASU 2020-06 resulted in a decrease to additional paid-in capital of $111.5 million, a decrease to retained deficit of $1.6 million, and a net increase to long-term debt of $109.9 million.
The net carrying amount of the 2025 Convertible Notes was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
December 31,
2020
|
Principal outstanding
|
$
|
690.0
|
|
|
$
|
690.0
|
|
Unamortized debt discount
|
—
|
|
|
(112.5)
|
|
Unamortized debt issuance costs
|
(13.7)
|
|
|
(13.5)
|
|
Net carrying value
|
$
|
676.3
|
|
|
$
|
564.0
|
|
The debt issuance costs are amortized to interest expense over the term of the 2025 Convertible Notes at an effective interest rate of 0.48%.
Convertible Notes due 2027
In July 2021, Shift4 Payments, Inc. issued an aggregate principal amount of $632.5 million 0.50% Convertible Senior Notes due 2027 (“2027 Convertible Notes”) in an offering to qualified institutional buyers exempt from registration under the Securities Act. The Company received net proceeds, after deducting initial purchasers’ discounts and estimated offering expenses, of approximately $617.7 million from the 2027 Convertible Notes Offering. The 2027 Convertible Notes are the Company’s senior, unsecured obligations and are equal in right of payment with the Company’s existing and future senior, unsecured indebtedness, senior in right of payment to the Company’s future indebtedness that is expressly subordinated to the 2027 Convertible Notes and effectively subordinated to the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness. The 2027 Convertible Notes are structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of the Company’s subsidiaries.
The 2027 Convertible Notes bear regular interest of 0.50% per year, payable semi-annually in arrears on February 1 and August 1 of each year, beginning on February 1, 2022. The 2027 Convertible Notes will mature on August 1, 2027, unless earlier repurchased, redeemed or converted. Before May 1, 2027, noteholders will have the right to convert their 2027 Convertible Notes only upon the occurrence of certain events. From and after May 1, 2027, noteholders may convert their 2027 Convertible Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. The Company 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 its 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 customary adjustments upon the occurrence of specified events. Before May 1, 2027, holders will have the right to convert their 2027 Convertible Notes under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ended September 30, 2021 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the 2027 Convertible Notes for each trading day of the 2027 Measurement Period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate in effect on each such trading day; (3) if the Company calls any or all of the 2027 Convertible Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. From and after May 1, 2027, holders may convert their 2027 Convertible Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date.
In addition, if certain corporate events that constitute a “make-whole fundamental change” occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time. The 2027 Convertible Notes will be redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or after August 6, 2024 and on or before the 40th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the 2027 Convertible Notes to be redeemed, plus accrued and unpaid special interest, if any, to, but excluding, the redemption date, but only if the last reported sale price per share of the Company’s Class A common stock exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (2) the trading day immediately before the date the Company sends such notice. In addition, calling any 2027 Convertible Note for redemption will constitute a make-whole fundamental change with respect to that 2027 Convertible Note, in which case the conversion rate applicable to the conversion of that 2027 Convertible Note will be increased in certain circumstances if it is converted after it is called for redemption and prior to the second business day immediately before the related redemption date. If certain corporate events that constitute a “fundamental change” occur, then, subject to a limited exception for certain cash mergers, noteholders may require the Company to repurchase their 2027 Convertible Notes at a cash repurchase price equal to the principal amount of the 2027 Convertible Notes to be repurchased, plus accrued and unpaid special interest, if any, to, but excluding, the fundamental change repurchase date. The definition of fundamental change includes certain business combination transactions involving the Company and certain de-listing events with respect to the Company’s Class A common stock.
In connection with the issuance of the 2027 Convertible Notes, Shift4 Payments, Inc. entered into an Intercompany Convertible Note with Shift4 Payments, LLC, whereby Shift4 Payments, Inc. provided the net proceeds from the issuance of the 2027 Convertible Notes to Shift4 Payments, LLC in the amount of $617.7 million. The terms of the Intercompany Convertible Note mirror the terms of the 2027 Convertible Notes issued by Shift4 Payments, Inc. The
intent of the Intercompany Convertible Note is to maintain the parity of shares of Class A common stock with LLC Units as required by the Shift4 Payments LLC Agreement.
Debt issuance costs related to the 2027 Convertible Notes are comprised of discounts and commissions paid to the initial purchasers and third-party offering costs and total $14.8 million. The net carrying amount of the 2027 Convertible Notes was as follows:
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
|
Principal outstanding
|
$
|
632.5
|
|
|
|
Unamortized debt issuance costs
|
(14.5)
|
|
|
|
Net carrying value
|
$
|
618.0
|
|
|
|
The debt issuance costs are amortized to interest expense over the term of the 2027 Convertible Notes at an effective interest rate of 0.89%.
Senior Notes due 2026
In October 2020, the Company’s subsidiaries Shift4 Payments, LLC and Shift4 Payments Finance Sub, Inc. (together, the “Issuers”) issued an aggregate of $450.0 million principal amount of 4.625% Senior Notes due 2026 (“2026 Senior Notes”). The Company received net proceeds, after deducting initial purchasers’ discounts and estimated offering expenses, of approximately $442.8 million from the 2026 Senior Notes Offering. The net proceeds of the 2026 Senior Notes Offering, together with cash on hand, were used to repay the remaining $450.0 million left on the First Lien Term Loan Facility. The 2026 Senior Notes mature on November 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 each May 1 and November 1, commencing on May 1, 2021. The Issuers may redeem all or a portion of the 2026 Senior Notes at any time prior to November 1, 2022 at a redemption price equal to 100% of the principal amount of the 2026 Senior Notes, plus the applicable “make-whole” premium as provided in the indenture governing the 2026 Senior Notes, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. At any time on or after November 1, 2022, the Issuers may redeem all or a portion of the 2026 Senior Notes at the redemption prices set forth in the indenture governing the 2026 Senior Notes, plus accrued and unpaid interest, if any, to but excluding, the date of redemption. In addition, at any time prior to November 1, 2022, the Issuers may also redeem up to 40% of the original aggregate principal amount of the 2026 Senior Notes (including any additional 2026 Senior Notes) with the proceeds of certain equity offerings, at a redemption price equal to 104.625% of the principal amount of the 2026 Senior Notes, plus accrued and unpaid interest, if any to the redemption date. The Issuers may make such redemption so long as, after giving effect to any such redemption, at least 50% of the original aggregate principal amount of the 2026 Senior Notes (including any additional 2026 Senior Notes) remains outstanding (unless all 2026 Senior Notes are redeemed concurrently) and such redemption occurs not less than 10 days nor more than 60 days prior notice to the holders of the 2026 Senior Notes.
The 2026 Senior Notes have not been registered under the Securities Act of 1933, as amended (“Securities Act”), or the securities laws of any other jurisdiction. The 2026 Senior Notes were sold to persons reasonably believed to be qualified institutional buyers pursuant to Rule 144A and outside the United States pursuant to Regulation S of the Securities Act.
First Lien and Second Lien Term Loan Facility
As of December 31, 2019, Shift4 Payments, LLC had borrowings of $650.0 million in aggregate principal amount of secured term loans comprised of first lien term loans of $520.0 million due November 30, 2024 (“First Lien Term Loan Facility”) and second lien term loans of $130.0 million due November 30, 2025 (“Second Lien Term Loan Facility”). Interest with respect to the First Lien Term Loan Facility was payable quarterly in arrears at a rate of LIBOR plus 4.50% per annum. Interest with respect to the Second Lien Term Loan Facility was payable quarterly in arrears at a rate of LIBOR plus 8.50% per annum. The interest rate was determined based on Shift4 Payments, LLC first lien leverage ratio for the preceding fiscal quarter. Additional details on the credit agreement governing the First Lien Term Loan Facility are provided below under the heading “Revolving Credit Facility”.
In June 2020, the Company made $59.8 million in principal payments on the First Lien Term Loan Facility and repaid in full the $130.0 million outstanding under the Second Lien Term Loan Facility. In connection with these payments, the Company incurred a loss on extinguishment of debt of $7.1 million representing the unamortized capitalized financing costs associated with the prepaid debt, which was recorded to “Loss on extinguishment of debt” in the unaudited Condensed Consolidated Statements of Operations in the three and nine months ended September 30, 2020.
In October 2020, the Company fully repaid the First Lien Term Loan Facility, as discussed above, using the proceeds from the 2026 Senior Notes.
Revolving Credit Facility
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”), with a maturity date of November 30, 2022. The Company was in compliance with these covenants at December 31, 2020.
Loans incurred under the Revolving Credit Facility bore interest at the Company’s option at either the LIBO rate plus a margin ranging from 4.00% to 4.50% per year or the alternate base rate plus a margin ranging from 3.00% to 3.50% per year. The interest rate varied depending on the Company’s first lien leverage ratio. The alternate base rate and the LIBO rate were each subject to a zero percent floor.
The Revolving Credit Facility unused commitment fee ranged from 0.25% to 0.50%. The applicable margin and unused commitment fee were determined based on the Company’s first lien net leverage ratio at the previously reported fiscal quarter.
In the first quarter of 2020, the Company drew $68.5 million under the Revolving Credit Facility for general corporate purposes and to strengthen its financial position amid the COVID-19 pandemic. In June 2020, the Company repaid the outstanding borrowings of $89.5 million under the Revolving Credit Facility. Borrowing capacity on the Revolving Credit Facility was $89.5 million as of December 31, 2020, net of a $0.5 million letter of credit.
Amended and Restated Revolving Credit Facility
On January 29, 2021, the Company amended and restated its First Lien Credit Agreement (“Amended Credit Agreement”) and increased the borrowing capacity under the Revolving Credit Facility to $100.0 million, of which $25.0 million is available for letters of credit. Subject to certain exceptions, all obligations under the First Lien Term Credit Agreement were repaid in full and all commitments thereunder terminated in connection with the Amended Credit Agreement. In connection with the amendment, the Company incurred a loss on extinguishment of debt of $0.2 million, representing unamortized capitalized financing costs, which was recorded to “Loss on extinguishment of debt” in the unaudited Condensed Consolidated Statements of Operations in the three and nine months ended September 30, 2021.
The Revolving Credit Facility matures on January 29, 2026, or, if greater than $150.0 million aggregate principal amount of the Company’s 2025 Convertible Notes remains outstanding on September 15, 2025, on that date.
The Amended Credit Agreement requires periodic interest payments until maturity. The Company may prepay all revolving loans under the Amended Credit Agreement at any time without premium or penalty (other than customary LIBO rate breakage costs), subject to certain notice requirements. The Company may also be subject to mandatory prepayments if the Revolving Credit Exposure exceeds the Revolving Credit Commitments under the Revolving Credit Facility.
Loans incurred under the Revolving Credit Facility bear interest at the Company’s 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 in The Wall Street Journal) plus a margin ranging from 2.00% to 2.50% per year (such margins being referred to as the “Applicable Rate”). The Applicable Rate varies depending on the Company’s total leverage ratio (as defined in the Amended Credit Agreement). The alternate base rate and the LIBO rate are each subject to a zero percent floor.
In addition, the Company is 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. The Company is also subject to customary letter of credit and agency fees.
Borrowings under the Amended Credit Agreement are guaranteed by each of the Company’s current and future direct and indirect wholly owned domestic subsidiaries, subject to certain customary exceptions as set forth in the Amended Credit Agreement. The obligations under the Amended Credit Agreement are secured by a first priority lien on substantially all the property and assets (real and personal, tangible and intangible) of the Company and the other guarantors, subject to certain customary exceptions.
The Amended Credit Agreement requires compliance with certain financial covenants, including a maximum secured leverage ratio, tested quarterly when the loans and certain letters of credit outstanding under the revolving credit facility exceed 35% of the total revolving commitments. In addition, the Amended Credit Agreement contains various
covenants that, among other restrictions, limit the Company’s and its subsidiaries’ ability to incur indebtedness; incur certain liens; consolidate, merge or sell or otherwise dispose of assets; alter the business conducted by the Company and its subsidiaries; make investments, loans, advances, guarantees and acquisitions; enter into sale and leaseback transactions; pay dividends or make other distributions on equity interests, or redeem, repurchase or retire equity interests; enter into transactions with affiliates; enter into agreements restricting the ability to pay dividends; redeem, repurchase or refinance other indebtedness; and amend or modify governing documents. The Company was in compliance with these covenants at September 30, 2021.
The Amended Credit Agreement contains events of default that are customary for a secured credit facility. If an event of default relating to bankruptcy or other insolvency events with respect to a borrower occurs, all obligations under the Amended Credit Agreement will immediately become due and payable. If any other event of default exists under the Amended Credit Agreement, the lenders may accelerate the maturity of the obligations outstanding under the Amended Credit Agreement and exercise other rights and remedies, including charging a default rate of interest equal to 2.00% per year above the rate that would otherwise be applicable. In addition, if any event of default exists under the Amended Credit Agreement, the lenders may commence foreclosure or other actions against the collateral.
Borrowing capacity on this Revolving Credit Facility was $99.5 million as of September 30, 2021, net of a $0.5 million letter of credit.
The 2025 Convertible Notes, 2026 Senior Notes, 2027 Convertible Note and Revolving Credit Facility include certain restrictions on the ability of Shift4 Payments, LLC to make loans, advances, or pay dividends to Shift4 Payments, Inc.
11.Other Consolidated Balance Sheet Components
Prepaid expenses and other current assets
Prepaid expenses and other current assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
December 31,
2020
|
Prepaid insurance
|
$
|
4.5
|
|
|
$
|
2.5
|
|
Prepaid merchant signing bonuses (a)
|
1.4
|
|
|
—
|
|
Other prepaid expenses (b)
|
5.8
|
|
|
6.5
|
|
Taxes receivable
|
1.1
|
|
|
1.2
|
|
Agent and employee loan receivables
|
0.2
|
|
|
0.3
|
|
Other current assets
|
0.2
|
|
|
1.0
|
|
Total prepaid expenses and other current assets
|
$
|
13.2
|
|
|
$
|
11.5
|
|
(a)Represents deal bonuses paid to merchants to obtain processing contracts, which are amortized over their contractual term of one year.
(b)Includes prepayments related to information technology, rent, tradeshows and conferences.
Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
December 31,
2020
|
Residuals payable
|
$
|
12.1
|
|
|
$
|
6.8
|
|
Accrued interest
|
9.2
|
|
|
3.6
|
|
Deferred employer social security tax pursuant to the CARES Act
|
3.0
|
|
|
3.0
|
|
Deferred tenant reimbursement allowance
|
2.8
|
|
|
3.1
|
|
Accrued payroll
|
2.3
|
|
|
2.8
|
|
Escrow payable
|
—
|
|
|
2.3
|
|
Accrued rent
|
1.5
|
|
|
1.5
|
|
Taxes payable
|
1.3
|
|
|
1.4
|
|
Restructuring accrual
|
1.5
|
|
|
1.4
|
|
Other current liabilities
|
3.7
|
|
|
4.2
|
|
Total accrued expenses and other current liabilities
|
$
|
37.4
|
|
|
$
|
30.1
|
|
12.Fair Value Measurement
U.S. GAAP defines a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted process in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
The Company determines the fair values of its assets and liabilities that are recognized or disclosed at fair value in accordance with the hierarchy described below. The following three levels of inputs may be used to measure fair value:
•Level 1—Quoted prices in active markets for identical assets or liabilities;
•Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities;
•Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include items where the determination of fair value requires significant management judgment or estimation.
The Company makes recurring fair value measurements of contingent liabilities arising from certain acquisitions using Level 3 unobservable inputs. These amounts relate to a change of control provision and expected earnout payments related to the number of existing point-of-sale merchants that convert to full acquiring merchants.
The contingent liability related to a change of control was measured on the acquisition date using a Monte Carlo simulation model based on expected possible valuations of the Company upon a change of control and is remeasured at each reporting date due to changes in management’s expectations regarding possible future valuations of the Company, including considerations of changes in results of the Company, guideline public company multiples, and expected volatility. The contingent liability related to change of control was settled for 915,503 shares of Class A common stock in conjunction with the IPO.
The contingent liabilities arising from expected earnout payments were measured on the acquisition date using a probability-weighted expected payment model and were remeasured periodically due to changes in management’s estimates of the number of existing point-of-sale merchants that will convert to full acquiring merchants. In determining the fair value of the contingent liabilities, management reviewed the current results of the acquired business, along with projected results for the remaining earnout period, to calculate the expected earnout payment to be made using the agreed upon formula as laid out in the respective acquisition agreement. The earnout liabilities were fully paid at March 31, 2021.
The table below provides a reconciliation of the beginning and ending balances for the Level 3 contingent liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2021
|
|
2020
|
Balance at beginning of period
|
$
|
—
|
|
|
$
|
32.3
|
|
Additions (a)
|
—
|
|
|
1.7
|
|
Cash payments made for contingent
liabilities related to earnout
payments
|
(0.2)
|
|
|
(2.3)
|
|
Contingent liabilities related to change of
control settled with Class A common
stock and restricted stock units
|
—
|
|
|
(23.2)
|
|
Fair value adjustments
|
0.2
|
|
|
(7.6)
|
|
Balance at end of period
|
$
|
—
|
|
|
$
|
0.9
|
|
|
|
|
(a)During the three months ended March 31, 2020, certain employment compensation agreements were amended. Consequently, previously recorded deferred compensation liabilities of $1.9 million associated with these agreements, included within “Other noncurrent liabilities” on the Consolidated Balance Sheet at December 31, 2019, were derecognized and new liabilities of $1.7 million were recognized at fair value within “Other noncurrent liabilities” on the unaudited Condensed Consolidated Balance Sheets. These contingent liabilities were settled at the IPO for 89,842 restricted stock units.
|
Fair value adjustments are recorded within “General and administrative expenses” within the unaudited Condensed Consolidated Statements of Operations. There were no transfers into or out of Level 3 during the nine months ended September 30, 2021 and 2020.
The estimated fair value of the Company's outstanding debt using quoted prices from over-the-counter markets, considered Level 2 inputs, was as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
2025 Convertible Notes
|
$
|
690.0
|
|
|
$
|
835.4
|
|
|
$
|
690.0
|
|
|
$
|
843.9
|
|
2026 Senior Notes
|
450.0
|
|
|
470.8
|
|
|
450.0
|
|
|
468.0
|
|
2027 Convertible Notes
|
632.5
|
|
|
647.5
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
1,772.5
|
|
|
$
|
1,953.7
|
|
|
$
|
1,140.0
|
|
|
$
|
1,311.9
|
|
Other financial instruments not measured at fair value on the Company’s unaudited Condensed Consolidated Balance Sheets at September 30, 2021 and December 31, 2020 include cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, other noncurrent assets, accounts payable, and accrued expenses and other current liabilities as their estimated fair values reasonably approximate their carrying value as reported on the unaudited Condensed Consolidated Balance Sheets.
13.Income Taxes
The Company holds an economic interest in Shift4 Payments, LLC and consolidates its financial position and results. The remaining ownership of Shift4 Payments, LLC not held by the Company is considered a noncontrolling interest. Shift4 Payments, LLC is treated as a partnership for income tax reporting and its members, including the Company, are liable for federal, state, and local income taxes based on their share of the LLC’s taxable income. In addition, Shift4 Corporation and VenueNext, Inc., two operating subsidiaries of Shift4 Payments, LLC, are considered C-Corporations for U.S. federal, state and local income tax purposes. Taxable income or loss from Shift4 Corporation and VenueNext is not passed through to Shift4 Payments, LLC. Instead, it is taxed at the corporate level subject to the prevailing corporate tax rates.
The Company has assessed the realizability of the net deferred tax assets and in that analysis has considered the relevant positive and negative evidence available to determine whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The Company has recorded a full valuation allowance against the deferred tax assets at Shift4 Payments, Inc. as of September 30, 2021, which will be maintained until there is sufficient evidence to support the reversal of all or some portion of these allowances.
The Company’s effective tax rate was 7.8% and (6.7)% for the three months ended September 30, 2021 and 2020, respectively, and (6.4)% and (1.1)% for the nine months ended September 30, 2021 and 2020, respectively. The income tax expense for the three months ended September 30, 2021 was different than the U.S. federal statutory income tax rate of 21% primarily due to the loss allocated to the noncontrolling interest and changes in the valuation allowances in the United States. The income tax benefit for the nine months ended September 30, 2021 was different than the U.S. federal statutory income tax rate of 21% primarily due to the loss allocated to the noncontrolling interest, changes in the valuation allowances in the United States and the tax windfall related to vested equity-based compensation awards. The income tax benefit for the three and nine months ended September 30, 2020 was different than the U.S. federal statutory income tax rate of 21% primarily due to the loss allocated to the noncontrolling interest and changes in the valuation allowances in the United States. In addition, the nine months ended September 30, 2020 includes a tax benefit of $0.6 million for a net operating loss carryback at Shift4 Corporation which was allowed due to the CARES Act.
Tax Receivable Agreement
The Company expects to obtain an increase in its share of the tax basis in the net assets of Shift4 Payments, LLC as LLC Interests are redeemed from or exchanged by the Continuing Equity Owners at the option of the Company, determined solely by the Company’s independent directors. The Company intends to treat any redemptions and exchanges of LLC Interests as direct purchases of LLC Interests for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that it would otherwise pay in the future to various tax authorities. In connection with the Reorganization Transactions and the IPO, the Company entered into the Tax Receivable Agreement (“TRA”) with the Continuing Equity Owners.
The TRA provides for the payment by Shift4 Payments, Inc. of 85% of the amount of any tax benefits the Company actually realizes, or in some cases is deemed to realize, as a result of (i) increases in the Company’s share of the tax basis in the net assets of Shift4 Payments, LLC resulting from any redemptions or exchanges of LLC Interests, (ii) tax basis increases attributable to payments made under the TRA, and (iii) deductions attributable to imputed interest pursuant to the TRA. The Company expects to benefit from the remaining 15% of any of cash savings that it realizes.
The Company has not recognized any liability under the TRA after concluding it was not probable that such TRA Payments would be paid based on its estimates of future taxable income. No payments were made to the Continuing Equity Owners pursuant to the TRA during the three or nine months ended September 30, 2021. The amounts payable under the TRA will vary depending upon a number of factors, including the amount, character, and timing of the taxable income of Shift4 Payments, Inc. in the future. If the valuation allowance recorded against the deferred tax assets applicable to the tax attributes referenced above is released in a future period, the TRA liability may be considered probable at that time and recorded within earnings.
If all of the remaining Continuing Equity Owners were to exchange all of their LLC Units, the Company does not expect the deferred tax asset or TRA liability to vary substantially from the amounts reported in the 2020 Form 10-K. The actual amount of deferred tax assets and related liabilities are impacted by the timing of the exchanges, the valuation of Shift4 Corporation, the price of the Company’s shares of Class A common stock at the time of the exchange, and the tax rates then in effect.
14.Operating Lease Agreements
The Company has leases under noncancellable agreements which expire on various dates through November 30, 2030.
Total rent expense, which is included in “General and administrative expenses” in the unaudited Condensed Consolidated Statements of Operations, was $1.5 million and $4.4 million for the three and nine months ended September 30, 2021, respectively, and $1.3 million and $4.7 million for the three and nine months ended September 30, 2020, respectively.
The following are the future minimum rental payments required under the operating leases as of September 30, 2021:
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|
|
|
|
|
|
2021 (remaining three months)
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|
$
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1.6
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|
2022
|
|
4.9
|
|
2023
|
|
4.0
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|
2024
|
|
3.9
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|
2025
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|
3.4
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Thereafter
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|
6.9
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Total
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$
|
24.7
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The Company expects to receive future minimum lease payments for hardware provided under the Company’s SaaS agreements of $10.3 million from October 1, 2021 through September 30, 2022. See Note 8 for more information on the accounting for these operating leases.
15.Related Party Transactions
The Company has a service agreement with the Founder, including access to aircrafts and a property. Total expense for this service, which is included in “General and administrative expenses” in the unaudited Condensed Consolidated Statements of Operations, was $0.2 million and $0.7 million for the three and nine months ended September 30, 2021, respectively, and $0.2 million for the nine months ended September 30, 2020. There were no amounts outstanding at September 30, 2021 or December 31, 2020. On May 31, 2020, the Company amended the monthly fee and added services in this service agreement with the Founder.
Shift4 Payments, LLC incurred management fees to its respective shareholders, prior to the IPO, which is included in “Professional fees” in the unaudited Condensed Consolidated Statements of Operations, of $0.8 million for the nine months ended September 30, 2020.
The Company incurred $1.2 million and $1.0 million in costs associated with the September 2020 and December 2020 Follow-on Offerings, respectively, that were reimbursable by Searchlight, and were included in “Accounts receivable, net” in the Consolidated Balance Sheets at December 31, 2020. The total receivable of $2.2 million was paid in the first quarter of 2021. In the third quarter of 2021, the Company incurred $0.6 million in costs associated with a proposed Follow-on Offering that are reimbursable by Searchlight and included in "Accounts receivable, net" on the Company's unaudited Condensed Consolidated Balance Sheets at September 30, 2021.
In February 2021, the Company accepted the transfer of the right to select a participant for one seat on board Inspiration4, the first all-civilian mission to space, from the Founder, who is also the commander of the mission. The right was transferred to the Company as a non-cash contribution and recorded at its estimated fair value of $2.1 million in “Additional paid-in capital” on the Company’s unaudited Condensed Consolidated Balance Sheets as of September 30, 2021, and expensed within “Advertising and marketing” on the Company's unaudited Condensed Consolidated Statements of Operations in March 2021 when the participant was selected for the mission through a contest held by the Company.
In the six months ended June 30, 2021, the Company incurred a significant amount of nonrecurring expenses to integrate, rebrand and promote 3dcart to Shift4Shop in conjunction with the Inspiration4 announcement. The Company leveraged this unique opportunity to deploy Shift4Shop and promote the Shift4 brand as a whole. A portion of these expenses represented a combined marketing and promotion effort designed to bring attention to both Shift4Shop and the Inspiration4 mission. Management performed a review of the expenses and determined that certain expenses, totaling $0.8 million for the six months ended June 30, 2021, respectively, were directly associated with the Inspiration4 mission and were reimbursed by the Founder. During the three months ended September 30, 2021, an additional $0.4 million of Inspiration4 expenses were incurred on behalf of the Founder, which, as of September 30, 2021, are recorded as "Accounts receivable" on the Company's unaudited Condensed Consolidated Balance Sheets.
Rook entered into a margin loan agreement in September 2020, (“September 2020 Margin Loan”), pursuant to which it pledged LLC Interests and shares of the Company’s Class A and Class B common stock (collectively, “Rook Units”) to secure a margin loan. The September 2020 Margin Loan was repaid in March 2021.
Rook entered into a margin loan agreement, replacing the September 2020 Margin Loan, in March 2021 (“March 2021 Margin Loan”), pursuant to which it pledged Rook Units to secure a margin loan. If Rook were to default on its obligations under the margin loan and fail to cure such default, the lender would have the right to exchange and sell up to 10,000,000 Rook units for an equal number of the Company’s Class A common stock to satisfy Rook’s obligation.
In March 2021, the Founder, through a wholly-owned special purpose vehicle (“SPV”), entered into a variable prepaid forward contract (“VPF Contract”) with an unaffiliated dealer (“Dealer”), covering approximately 2.0 million shares of the Company’s Class A common stock. The VPF Contract is scheduled to settle on specified dates in February, March and April 2023, at which time the actual number of shares of the Company’s Class A common stock to be delivered by the SPV will be determined based on the price of the Company’s Class A common stock on such dates relative to the forward floor price of $73.19 per share and the forward cap price of $137.24 per share, with the aggregate number not to exceed approximately 2.0 million shares, which is the number of shares of Company’s Class B common stock and LLC units pledged by Rook to secure its obligations under the contract. Subject to certain conditions, the SPV can also elect to settle the VPF Contract in cash and thereby retain full ownership of the pledged shares and units.
In September 2021, the Founder, through the SPV, entered into two VPF Contracts with a Dealer, one covering approximately 2.18 million shares of the Company’s Class A common stock and the other covering approximately 2.26 million shares of the Company’s Class A common stock. The VPF Contracts are both scheduled to settle on specified dates in June, July, August and September 2024, at which time the actual number of shares of the Company’s Class A common stock to be delivered by the SPV will be determined based on the price of the Company’s Class A common stock on such dates relative to the forward floor price of approximately $66.4240 per share and the forward cap price of approximately $112.09 per share for the contract covering approximately 2.18 million shares of the Company’s Class A common stock, and to the forward floor price of $66.4240 per share and the forward cap price of approximately $120.39 per share for the contract covering approximately 2.26 million shares of the Company’s Class A common stock, with the aggregate number not to exceed approximately 4.44 million shares, which is the aggregate number of shares of Company’s Class B common stock and their associated common units of Shift4 Payments, LLC pledged by the SPV to secure its obligations under the contracts. Subject to certain conditions, the SPV can also elect to settle the VPF Contracts in cash and thereby retain full ownership of the pledged shares and units.
If Rook were to default on its obligations under the VPF Contracts and fail to cure such default, the Dealer would have the right to exchange the pledged Class B stock and LLC interests for an equal number of the Company’s Class A common stock, and sell such Class A common stock to satisfy Rook’s obligation.
16.Commitments and Contingencies
From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm the Company’s business. In August 2021, TSYS, a Global Payments company and an important vendor to the Company, experienced a significant platform outage resulting in a payment processing service disruption that lasted for several hours. 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. The Company took steps to lessen the financial impact to its merchants and partners due to the TSYS outage and is seeking compensation through a variety of channels, including engaging with the responsible party. The Company is currently not aware of any other legal proceedings or claims that the Company believes will have a material adverse effect on its business, financial condition or operating results.
17.Redeemable Preferred Units
The redeemable preferred units earned a preferred dividend, which could be paid in cash or preferred units at a rate of 10.50% per annum, compounded quarterly.
During the nine months ended September 30, 2020, $2.1 million of preferred dividends were accrued and recognized as a reduction of “Members’ Deficit.” In connection with the Reorganization Transactions, the redeemable preferred units were converted into LLC Interests.
18.Stockholders’ Equity/Members’ Deficit
Structure prior to the Reorganization Transactions
Prior to the completion of the Reorganization Transactions, Shift4 Payments, LLC had LLC Interests outstanding in the form of Class A Common units and Class B Common units.
Immediately prior to the completion of the Reorganization Transactions, the LLC Interests of Shift4 Payments, LLC were beneficially owned as set forth below.
•Searchlight owned 28,889,790 Class A units, representing 52.3% economic interest in Shift4 Payments, LLC.
•Rook owned 25,829,016 Class A units, representing 46.7% economic interest in Shift4 Payments, LLC.
•A former equity owner owned 528,150 Class B units, representing 1.0% economic interest in Shift4 Payments, LLC.
Amendment and Restatement of Certificate of Incorporation
In connection with the Reorganization Transactions, the Company’s certificate of incorporation was amended and restated to, among other things, provide for the (i) authorization of 300,000,000 shares of Class A common stock with a par value of $ 0.0001 per share; (ii) authorization of 100,000,000 shares of Class B common stock with a par value of $ 0.0001 per share; (iii) authorization of 100,000,000 shares of Class C common stock with a par value of $ 0.0001 per share; and (iv) authorization of 20,000,000 shares of preferred stock with a par value of $ 0.0001 per share.
Holders of Class A common stock are entitled to one vote per share and holders of Class B and Class C common stock are entitled to ten votes per share. Holders of Class A, Class B, and Class C common stock will vote together as a single class on all matters presented to the Company’s stockholders for their vote of approval, except for certain amendments to the Company’s Certificate of Incorporation or as otherwise required by law. Holders of the Class A and Class C common stock are entitled to receive dividends, and upon the Company’s dissolution or liquidation, after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders of shares of Class A and Class C common stock will be entitled to receive pro rata the Company’s remaining assets available for distribution. Holders of the Company’s Class B common stock are not entitled to receive dividends and will not be entitled to receive any distributions upon dissolution or liquidation of the Company. Holders of Class A, Class B, and Class C common stock do not have pre-emptive or subscription rights, and there will be no redemption or sinking fund provisions applicable to any class of common stock. Holders of Class A and Class B common stock do not have conversion rights. Shares of Class C common stock can only be held by the Continuing Equity Owners or their permitted transferees, and if any such shares are transferred to any other person, they will automatically convert into shares of Class A common stock on a one-to-one basis.
Shares of Class B common stock will be issued in the future only to the extent necessary to maintain a one-to-one ratio between the number of LLC Interests held by the Continuing Equity Owners and the number of shares of Class B common stock issued to each of the Continuing Equity Owners. Shares of Class B common stock are transferable only together with an equal number of LLC Interests (subject to certain exceptions). Only permitted transferees of LLC Interests held by the Continuing Equity Owners will be permitted transferees of Class B common stock.
19.Noncontrolling Interests
Shift4 Payments, Inc. is the sole managing member of Shift4 Payments, LLC, and consolidates the financial results of Shift4 Payments, LLC. The noncontrolling interests balance represents the economic interest in Shift4 Payments, LLC held by the Continuing Equity Owners. The following table summarizes the ownership of LLC Interests in Shift4 Payments, LLC: