ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the information presented in our unaudited condensed consolidated financial statements and the related notes and other financial data included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our Annual Report on Form 10-K/A (“Form 10-K/A”) for the fiscal year ended December 31, 2021, filed with the U.S. Securities and Exchange Commission (“SEC”) on November 8, 2022 (the “2021 Form 10-K/A”). In addition to historical information, the following discussion contains forward-looking statements, such as statements regarding our expectation for future performance, liquidity and capital resources, that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our expectations. Our actual results may differ materially from those contained in or implied by any forward-looking statements. Factors that could cause such differences include those identified below and those described in “Cautionary Note Regarding Forward-Looking Statements,” and “Risk Factors” in Part I, Item 1A. of our 2021 Form 10-K/A. We assume no obligation to update any of these forward-looking statements.
Certain prior year items within this Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” have been updated as a result of the restatement of the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021, as described in further detail in Note 2 to the accompanying unaudited condensed consolidated financial statements and Part I, Item 4. “Controls and Procedures.”
As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to:
•“we,” “us,” “our,” the “Company,” “Shift4” and similar references refer to Shift4 Payments, Inc. and, unless otherwise stated, all of its subsidiaries.
•“Continuing Equity Owners” refers collectively to our Founder and their respective permitted transferees who may redeem at each of their options, in whole or in part from time to time, their LLC Interests for, at our election, cash or newly-issued shares of Shift4 Payments, Inc.’s Class A common stock. Searchlight was a Continuing Equity Owner prior to May 24, 2022.
•“LLC Interests” refers to the common units of Shift4 Payments, LLC.
•“Founder” refers to Jared Isaacman, our Chief Executive Officer and the sole stockholder of Rook Holdings Inc. Our Founder is a Continuing Equity Owner and an owner of Class C common stock.
•“Rook” refers to Rook Holdings Inc., a Delaware corporation wholly-owned by our Founder and for which our Founder is the sole stockholder.
•“Searchlight” refers to Searchlight Capital Partners, L.P., a Delaware limited partnership, and certain funds affiliated with Searchlight. Searchlight was a Continuing Equity Owner prior to May 24, 2022.
Overview
We are a leading independent provider of payment acceptance and payment processing and technology solutions in the United States (“U.S.”) based on total volume of payments processed. We have also begun executing on our international expansion strategy, and we expect our international presence to continue to grow in the future. We have achieved our leadership position through decades of solving business and operational challenges facing our customers’ overall commerce needs. We distribute our services through our internal sales and support teams, as well as through our network of independent software vendors (“ISVs”) and value-added resellers (“VARs”). For our software partners, we offer a single integration to an end-to-end payments offering, a proprietary gateway and a robust suite of technology solutions to enhance the value of their software and simplify payment acceptance. For our merchants, we provide a seamless, unified consumer experience as an alternative to relying on multiple providers to accept card-based payments, while providing the digital tools necessary to provide their end-customers a seamless commerce experience.
At the heart of our business is our payments platform. Our payments platform is a full suite of integrated payment products and services that can be used across multiple channels (in-store, online, mobile and tablet-based) and industry verticals, including:
•end-to-end payment processing for a broad range of payment types;
•merchant acquiring;
•proprietary omni-channel gateway capable of multiple methods of mobile, contactless and QR code-based payments;
•complementary software integrations;
•full eCommerce capabilities, including web-store design, hosting, shopping cart management and fulfillment integrations;
•integrated and mobile POS solutions;
•security and risk management solutions; and
•reporting and analytical tools.
We also offer innovative technology solutions that go beyond payment processing. Some of our solutions are developed in-house, such as business intelligence and POS software, while others are powered by our network of complementary third-party applications. Our focus on innovation, combined with our product-driven culture, enables us to create scalable technology solutions that benefit from an extensive library of intellectual property.
In addition to our internal sales and support teams, we have a partner-based distribution approach. We market and sell our solutions through a diversified network of thousands of software partners, which consists of ISVs and VARs. ISVs are technology providers that develop commerce-enabling software suites with which they can bundle our payments platform. VARs are organizations that provide distribution support for ISVs and act as trusted and localized service providers to merchants by providing them with software and services. Together, our ISVs and VARs provide us immense distribution scale and provide our merchants with front-line service and support.
Our end-to-end payments offering combines our payments platform, including our proprietary gateway and breadth of software integrations, and our suite of technology solutions to create a compelling value proposition for our merchants. Our end-to-end payment volume was $20.6 billion and $13.5 billion for the three months ended September 30, 2022 and 2021, respectively, and $50.9 billion and $33.3 billion for the nine months ended September 30, 2022 and 2021, respectively. This end-to-end payment volume contributed 69% and 67% of gross revenue less network fees for the three months ended September 30, 2022 and 2021, respectively, and 70% and 66% of gross revenue less network fees for the nine months ended September 30, 2022 and 2021, respectively.
Our merchants range from small to medium sized businesses (“SMBs”) to large enterprises across numerous verticals including food and beverage, hospitality, stadiums and arenas, gaming, specialty retail, non-profits, eCommerce, and exciting technology companies. We expect our newest verticals, including stadiums and arenas, gaming, non-profits, and exciting technology companies, to contribute to our end-to-end payment volume significantly more in future periods than they have to date.
Recent Developments
Launch of SkyTab POS
During the three months ended September 30, 2022, we launched SkyTab POS, our next-generation restaurant POS system. SkyTab POS includes sleek, cutting-edge hardware and powerful performance; robust functionality, including integrated online ordering and payment, contactless/QR code ordering and payment, and built-in marketing tools and loyalty programs; powerful management tools such as advanced reporting and analytics, remote menu management, and labor scheduling; and various mobile solutions.
Distribution Insourcing & Residual Commission Buyouts
During the three and nine months ended September 30, 2022, we completed $298.8 million and $311.7 million, respectively, of residual commission buyouts with certain third-party distribution partners, pursuant to which we acquired their ongoing merchant relationships that subscribe to our end-to-end payments platform. These amounts include $298.5 million in residual commission buyouts executed under our mass strategic buyout program completed in the three months ended September 30, 2022 in support of our strategic initiative to insource our sales distribution network. Total consideration for the residual commission buyouts was comprised of a combination of cash, shares of our Class A common stock, and contingent liability earnouts.
Stock Repurchases
On December 16, 2021, our Board of Directors (the “Board”) authorized a stock repurchase program (the “December 2021 Program”), pursuant to which we were authorized to repurchase up to $100.0 million of shares of our Class A common stock through December 31, 2022. On May 11, 2022, the Board authorized a stock repurchase program (the “May 2022 Program”), pursuant to which we were authorized to repurchase up to an additional $100.0 million of shares of our Class A common stock through December 31, 2022, and on June 15, 2022, the Board authorized a stock repurchase program (the “June 2022 Program” and, together with the December 2021 Program and the May 2022 Program, the “Programs”), pursuant to which we were authorized to repurchase up to an additional $50.0 million of shares of our Class A common stock through December 31, 2022.
During the nine months ended September 30, 2022, we repurchased 3,887,191 shares of our Class A common stock for $184.4 million, including commissions paid, at an average price paid of $47.40 per share. During the three months ended September 30, 2022, we did not repurchase any shares of our Class A common stock. As of September 30, 2022, approximately $44.5 million remained available for future purchases under the Programs. See Note 17 to the accompanying unaudited condensed consolidated financial statements for more information.
Recent Acquisitions
Online Payments Group
On September 29, 2022, we acquired Online Payments Group for $125.9 million of total purchase consideration, net of cash acquired. Online Payments Group is European payment service provider with a world-class developer portal and checkout experience that we believe will accelerate our global eCommerce growth.
Restaurant Technology Partners
During the three months ended September 30, 2022, we acquired Pinnacle Hospitality Systems LLC (“Pinnacle”), FPOS Group, Inc. (“FPOS”), Retail Control Solutions, Inc. (“RCS”), and three other restaurant technology partners in separate transactions for $80.3 million of total purchase consideration, net of cash acquired.
These acquisitions enable the boarding of the restaurant technology partners’ customers on our end-to-end acquiring solution and empower our distribution partners to sign the restaurant technology partners’ customer accounts and leverage the combined expertise to handle all aspects of installation, service, and support.
The Giving Block
On February 28, 2022, we acquired The Giving Block for $106.9 million of total purchase consideration, net of cash acquired. The Giving Block is a cryptocurrency donation marketplace that we expect to accelerate our growth in the non-profit sector with significant cross-sell potential.
See Note 3 to the accompanying unaudited condensed consolidated financial statements for more information.
Pending Acquisitions
Finaro
On March 1, 2022, we entered into a definitive agreement to acquire Credorax, Inc. d/b/a Finaro (“Finaro”) for $200.0 million in cash on hand, 6,439,316 shares of our Class A common stock with a value of approximately $325.0 million as of March 1, 2022, determined by the volume weighted average price for the thirty trading days preceding the date of the agreement, and a performance-based earnout of up to $50.0 million in shares of our Class A common stock. Consummation of the merger is subject to regulatory approvals, which we expect to receive by the first quarter of 2023. Finaro is a cross-border eCommerce platform and bank specializing in solving complex payment problems for multi-national merchants that we believe will accelerate our growth in international markets.
Factors Impacting Our Business and Results of Operations
In general, our results of operations are impacted by factors such as the adoption of software solutions that are integrated with our payment solutions, continued investment in our core capabilities, ongoing pursuit of strategic acquisitions, and macro-level economic trends.
Increased adoption of software-integrated payments. We primarily generate revenue through fees assessed on end-to-end payment volume initiated through our internal sales team and our integrated software partners. These fees include volume-based payments, transaction fees and subscription fees for software and technology solutions. We expect to grow this volume by attracting new integrated software partners through our market-leading and innovative solutions. These integrated software partners have proven to be an effective and efficient way of acquiring new merchants and servicing these relationships.
Continued focus on converting our gateway-only customers to our end-to-end payments offering. Currently, a large percentage of our merchant base relies only on our proprietary gateway technology solution to process card-based payments. However, as more of these gateway-only merchants choose to also adopt our end-to-end payment solutions, our revenue per merchant and merchant retention are expected to increase given the fees we generate on end-to-end payment processing services are significantly higher than the per transaction fees we earn on gateway-only services.
Mix of our merchant base. We continue to experience a shift to higher average revenue and higher average volume per merchant. The revenue and volume contribution of each merchant within our portfolio is affected by several factors, including the amount of payment volume processed per merchant, the industry vertical in which the merchant operates, and the number of solutions implemented by the merchant. The size and sophistication of our average merchant continues to increase, and we may experience shifts in the average revenue per merchant and the weighted average pricing of the portfolio.
Ability to attract and retain software partners. While we have been increasing the size and scope of our internal sales and support teams, our partner-based distribution approach remains a pillar of our Shift4 Model. We work with our software partners who rely on our suite of payment-related technology solutions to simplify the commerce needs of their end clients. Our ability to attract and retain our software partners impacts our future growth and our ability to service our existing base of merchants. To this end, it is critical we maintain our product leadership through continued investment in innovative technology solutions as a means to ensure we retain our current software partners while attracting new software partners.
Investment in product, distribution and operations. We make significant investments in both new product development and existing product enhancements, such as mobile point-of-sale, cloud enablement for our software partners’ existing systems, and contactless payments, including QR code based mobile payment technologies. New product features and functionality are brought to market through varied distribution and promotional activities, including collaborative efforts with industry leading software providers, tradeshows, and customer conferences. Further, we will continue to invest in operational support in order to maintain service levels expected by our merchant customers. We believe these investments in product development and software integrations will lead to long-term growth and profitability.
Pursuit of strategic acquisitions. From time to time, we may pursue acquisitions as part of our ongoing growth strategy that includes adding complementary technology capabilities to service our base of customers and adding critical sales and support capabilities within a specific industry vertical or geography. While these acquisitions are intended to add long-term value, in the short term they may add redundant operating expenses or additional carrying costs until the underlying value is unlocked.
Impact of international operations. We are subject to foreign exchange risk due to fluctuations in exchange rates between the U.S. dollar and the foreign currencies of countries in which we operate. Additionally, international operations expose us to additional risks and subject us to international laws and regulations.
Economic conditions and resulting consumer spending trends. Changes in macro-level consumer spending trends, including as a result of the COVID-19 pandemic, inflation, and consumer confidence, could affect the amount of volume processed on our platform, thus resulting in fluctuations in our quarterly reported revenue. Our quarterly revenue is also impacted by seasonal, consumer spending habit patterns, which historically have resulted in higher volumes and revenue being reported in our second and third fiscal quarters.
TSYS outage. On August 21, 2021, Total System Services, Inc. (“TSYS”), a Global Payments Company and an important vendor to us, experienced a significant platform outage that resulted in the disruption of payment processing for our merchants (“TSYS outage”). TSYS is utilized by many major credit card issuers and payment processors, which meant the impact of the outage was felt by many card-accepting merchants and cardholders across the nation. In response to the TSYS outage, we distributed payments to both merchants and partners in order to alleviate the impact of the outage on their businesses. The following paragraphs describe how these payments are reflected in our accompanying unaudited condensed consolidated financial statements and disclosures.
In the third quarter of 2021, we distributed $22.4 million in payments to our merchants to approximate the lost revenues they experienced as a result of the TSYS outage. Under ASC 606, these payments were recorded as contra revenue, which is reflected as a reduction of “Gross revenue” in our unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021. These payments are considered nonrecurring and are therefore reflected as an adjustment when calculating Adjusted EBITDA. In addition, for the three and nine months ended September 30, 2021, gross revenue less network fees excludes the impact of the TSYS outage.
In the third quarter of 2021, we also distributed $2.3 million in payments to our partners to approximate their lost revenues and compensate them for the additional support required from them to manage the outage. Consistent with the treatment of our payments to our partners in the normal course of business, these payments are reflected as an increase to “Cost of sales” in our unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021. These payments are considered nonrecurring and are therefore reflected as an adjustment when calculating Adjusted EBITDA.
See Note 4 to the accompanying unaudited condensed consolidated financial statements for more information about the TSYS outage and Key performance indicators and non-GAAP measures for more information about Adjusted EBITDA and gross revenue less network fees.
Key Financial Definitions
The following briefly describes the components of revenue and expenses as presented in the accompanying unaudited Condensed Consolidated Statements of Operations.
Gross revenue consists primarily of payments-based revenue and subscription and other revenues:
Payments-based revenue includes fees for payment processing services and gateway services. Payment processing fees are primarily driven as a percentage of end-to-end payment volume. They may also have a fixed fee, a minimum monthly usage fee and a fee based on transactions. Gateway services, data encryption and tokenization fees are primarily driven by per transaction fees as well as monthly usage fees. In addition, the three and nine months ended September 30, 2021 include nonrecurring payments of $22.4 million we made to our merchants due to the TSYS outage, which were treated as contra revenue and as such reduced payments-based revenue.
Subscription and other revenues include software as a service (“SaaS”) fees for point-of-sale systems and terminals provided to merchants and our Shift4Shop eCommerce platform. Point-of-sale and terminal SaaS fees are assessed based on the type and quantity of equipment deployed to the merchant. Shift4Shop SaaS fees are based on the eCommerce platform chosen by the merchant. SaaS fees also include statement fees, fees for our proprietary business intelligence software, annual fees, regulatory compliance fees and other miscellaneous services such as help desk support and warranties on equipment. Subscription and other revenues also includes revenue derived from software license sales, hardware sales, third-party residuals and fees charged for technology support.
Cost of sales consists of interchange and processing fees, residual commissions, equipment and other costs of sales:
Interchange and processing fees represent payments to card issuing banks and assessments paid to card associations based on transaction processing volume. These also include fees incurred by third-parties for data transmission and settlement of funds, such as processors and sponsor banks.
Residual commissions represent monthly payments to third-party distribution partners. These costs are typically based on a percentage of payment-based revenue.
Equipment represents our costs of devices that are purchased by the merchant.
Other costs of sales includes amortization of capitalized software development costs, capitalized software, acquired technology and capitalized customer acquisition costs. It also includes incentives and shipping and handling costs related to the delivery of devices. Capitalized software development costs are amortized using the straight-line method on a product-by-product basis over the estimated useful life of the software. Capitalized software, acquired technology and capitalized customer acquisition costs are amortized on a straight-line basis in accordance with our accounting policies. In addition, the three and nine months ended September 30, 2021 include nonrecurring payments of $2.3 million we made to our partners related to the TSYS outage.
General and administrative expenses consist primarily of compensation, benefits and other expenses associated with corporate management, finance, human resources, shared services, information technology and other activities.
Revaluation of contingent liabilities represents adjustments to the fair value of contingent liabilities associated with acquisitions and residual commission buyouts.
Depreciation and amortization expense consists of depreciation and amortization expenses related to merchant relationships, trademarks and trade names, residual commission buyouts, equipment, leasehold improvements, other intangible assets, and property, plant and equipment. We depreciate and amortize our assets on a straight-line basis in accordance with our accounting policies. Leasehold improvements are depreciated over the lesser of the estimated life of the leasehold improvement or the remaining lease term. Maintenance and repairs, which do not extend the useful life of the respective assets, are charged to expense as incurred. Intangible assets are amortized on a straight-line basis over their estimated useful lives which range from two years to twenty years.
Professional fees consists of costs incurred for accounting, tax, legal, and consulting services.
Advertising and marketing expenses relate to costs incurred to participate in industry tradeshows and dealer conferences, advertising initiatives to build brand awareness, and expenses to fulfill loyalty program rewards earned by software partners.
Restructuring expenses relate to strategic initiatives we have taken that include, but are not limited to, severance or separation costs and other exit and disposal costs. These expenses are typically not reflective of our ongoing operations.
Transaction-related expenses relate to debt issuance or modification costs that are not capitalizable. These expenses are typically not reflective of our ongoing operations.
Loss on extinguishment of debt represents losses recorded for unamortized capitalized financing costs associated with debt prepayments.
Interest income primarily consists of interest income earned on our cash and cash equivalents.
Other income, net primarily consists of other non-operating items.
Change in TRA liability represents adjustments to the Tax Receivable Agreement (“TRA”) liability.
Interest expense consists of interest costs incurred on our borrowings and amortization of capitalized financing costs.
Income tax (provision) benefit represents federal, state and local taxes based on income in multiple domestic jurisdictions.
Net income (loss) attributable to noncontrolling interests arises from net income (loss) from the non-owned portion of businesses where we have a controlling interest but less than 100% ownership. This represents the noncontrolling interests in Shift4 Payments, LLC and its consolidated subsidiaries, which is comprised of the income (loss) allocated to Continuing Equity Owners as a result of their proportional ownership of LLC Interests.
Comparison of Results for the Three Months Ended September 30, 2022 and 2021
The following table sets forth the consolidated statements of operations for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | |
(in millions) | 2022 | 2021 | | $ change | | % change |
Payments-based revenue | $ | 509.0 | | | $ | 346.9 | | | $ | 162.1 | | | 46.7 | % |
Subscription and other revenues | 38.3 | | | 30.9 | | | 7.4 | | | 23.9 | % |
Gross revenue | 547.3 | | | 377.8 | | | 169.5 | | | 44.9 | % |
Network fees | (350.6) | | | (251.9) | | | (98.7) | | | 39.2 | % |
Other costs of sales (exclusive of depreciation and amortization expense shown separately below) | (61.0) | | | (61.5) | | | 0.5 | | | (0.8) | % |
General and administrative expenses | (74.1) | | | (48.1) | | | (26.0) | | | 54.1 | % |
Revaluation of contingent liabilities | 36.9 | | | — | | | 36.9 | | | NM |
Depreciation and amortization expense (a) | (28.9) | | | (15.0) | | | (13.9) | | | 92.7 | % |
Professional fees | (10.4) | | | (3.3) | | | (7.1) | | | 215.2 | % |
Advertising and marketing expenses | (5.6) | | | (3.5) | | | (2.1) | | | 60.0 | % |
Restructuring expenses | (0.1) | | | (0.1) | | | — | | | — | % |
| | | | | | | |
Income (loss) from operations | 53.5 | | | (5.6) | | | 59.1 | | | NM |
| | | | | | | |
Interest income | 3.5 | | | — | | | 3.5 | | | NM |
Other income, net | — | | | 0.2 | | | (0.2) | | | NM |
Change in TRA liability | (1.1) | | | — | | | (1.1) | | | NM |
Interest expense | (8.3) | | | (7.4) | | | (0.9) | | | 12.2 | % |
Income (loss) before income taxes | 47.6 | | | (12.8) | | | 60.4 | | | NM |
Income tax provision | (1.2) | | | (1.0) | | | (0.2) | | | 20.0 | % |
Net income (loss) | 46.4 | | | (13.8) | | | 60.2 | | | NM |
Net income (loss) attributable to noncontrolling interests | 3.3 | | | (4.6) | | | 7.9 | | | NM |
Net income (loss) attributable to Shift4 Payments, Inc. | $ | 43.1 | | | $ | (9.2) | | | $ | 52.3 | | | NM |
We have changed the presentation of this table relative to prior periods to remove the “Gross profit” line item and update the “Other costs of sales” line item to indicate it is exclusive of depreciation and amortization expense shown separately for the three months ended September 30, 2022 and 2021.
(a)Depreciation and amortization expense includes depreciation of equipment under lease of $8.2 million and $5.8 million for the three months ended September 30, 2022 and 2021, respectively.
Results for the three months ended September 30, 2021 include nonrecurring payments of $22.4 million we made to our merchants and $2.3 million we made to our software partners due to the TSYS outage. An additional $0.4 million of associated costs were incurred as a result of the outage. The TSYS outage payments and associated costs, which did not impact our results for the three months ended September 30, 2022, had the following impact on our results in our unaudited Condensed Consolidated Statements of Operations for the three months ended September 30, 2021:
•$22.4 million decrease to Payments-based revenue and Gross revenue;
•$2.3 million increase to Other costs of sales; and
•$25.1 million decrease to Loss from operations and Net loss.
See Factors Impacting Our Business and Results of Operations above and Note 4 to the accompanying unaudited condensed consolidated financial statements for more information about the TSYS outage.
Gross revenue
Gross revenue was $547.3 million for the three months ended September 30, 2022, compared to $377.8 million for the three months ended September 30, 2021, an increase of $169.5 million or 44.9%. Gross revenue is comprised of payments-based revenue and subscription and other revenues. Gross revenue for the three months ended September 30, 2021 includes $22.4 million in payments we made to merchants as a result of the TSYS outage, which were recorded as contra revenue.
Payments-based revenue was $509.0 million for the three months ended September 30, 2022, compared to $346.9 million for the three months ended September 30, 2021, an increase of $162.1 million or 46.7%. The increase in payments-based revenue was primarily driven by the increase in end-to-end payment volume of $7.1 billion, or 52.9%, for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, in addition to $22.4 million in payments we made to merchants in the third quarter of 2021 as a result of the TSYS outage, which were recorded as contra revenue.
Subscription and other revenues were $38.3 million for the three months ended September 30, 2022, compared to $30.9 million for the three months ended September 30, 2021, an increase of $7.4 million or 23.9%. The increase in subscription and other revenues was primarily driven by acquisitions, which collectively contributed $4.7 million more to subscription and other revenues in the three months ended September 30, 2022, compared to the three months ended September 30, 2021. In addition, hardware sales increased $2.9 million for the three months ended September 30, 2022, compared to the three months ended September 30, 2021.
Network fees
Network fees were $350.6 million for the three months ended September 30, 2022, compared to $251.9 million for the three months ended September 30, 2021, an increase of $98.7 million or 39.2%. This increase is correlated with the increase in end-to-end payment volume as described above.
Gross revenue less network fees was $196.7 million for the three months ended September 30, 2022, compared to $148.3 million for the three months ended September 30, 2021, an increase of $48.4 million or 32.6%. For the three months ended September 30, 2021, gross revenue less network fees excludes the $22.4 million impact of the TSYS outage to gross revenue. The increase in gross revenue less network fees was largely correlated with the increase in end-to-end payment volume. See “Key Performance Indicators and Non-GAAP Measures” below for a reconciliation of gross profit to gross revenue less network fees.
Other costs of sales
Other costs of sales was $61.0 million for the three months ended September 30, 2022, compared to $61.5 million for the three months ended September 30, 2021, a decrease of $0.5 million, or 0.8%. This decrease was primarily driven by:
•lower residual commissions, which decreased other costs of sales $7.3 million, primarily driven by the impact of residual commission buyouts completed during the third quarter of 2022; and
•payments to partners of $2.3 million due to the TSYS outage, which increased other costs of sales in the three months ended September 30, 2021 and were nonrecurring in nature;
partially offset by:
•higher equipment sales, which increased other costs of sales by $2.9 million;
•higher capitalized software development amortization, which increased other costs of sales $2.0 million;
•acquisitions, which collectively increased other costs of sales $1.5 million; and
•higher capitalized customer acquisition cost amortization, which increased other costs of sales $1.2 million, related to deal bonuses paid to third-party distribution partners to obtain processing contracts.
General and administrative expenses
General and administrative expenses were $74.1 million for the three months ended September 30, 2022, compared to $48.1 million for the three months ended September 30, 2021, an increase of $26.0 million or 54.1%. The increase was primarily driven by higher compensation and other employee-related expenses of $14.7 million in the three months ended September 30, 2022, compared to the three months ended September 30, 2021, as a result of our continued growth and expansion. In addition, our acquisitions collectively increased general and administrative expenses $6.0 million in the three months ended September 30, 2022.
Revaluation of contingent liabilities
Revaluation of contingent liabilities of $36.9 million for the three months ended September 30, 2022 is driven by a decrease in the contingent liability for The Giving Block in the three months ended September 30, 2022.
Depreciation and amortization expense
Depreciation and amortization expense was $28.9 million for the three months ended September 30, 2022, compared to $15.0 million for the three months ended September 30, 2021, an increase of $13.9 million or 92.7%. The increase was primarily driven by higher amortization of intangible assets of $10.5 million due to the significant residual commission buyouts completed in the three months ended September 30, 2022. In addition, depreciation and amortization expense increased due to higher depreciation for equipment under lease of $2.5 million in the three months ended September 30, 2022, compared to the three months ended September 30, 2021. Acquisitions collectively increased depreciation and amortization expense $0.8 million in the three months ended September 30, 2022.
Professional fees
Professional fees were $10.4 million for the three months ended September 30, 2022, compared to $3.3 million for the three months ended September 30, 2021, an increase of $7.1 million or 215.2%. The increase was primarily driven by higher acquisition-related costs.
Advertising and marketing expenses
Advertising and marketing expenses were $5.6 million for the three months ended September 30, 2022, compared to $3.5 million for the three months ended September 30, 2021, an increase of $2.1 million or 60.0%. The increase was primarily driven by our 4WARD conference held in the third quarter 2022 and an increase in sponsorship expenses, partially offset by $1.6 million of costs associated with the Inspiration4 seat in the three months ended September 30, 2021 that were nonrecurring in nature.
Interest income
Interest income was $3.5 million for the three months ended September 30, 2022, consisting primarily of interest income earned on our cash and cash equivalents. We had immaterial interest income for the three months ended September 30, 2021.
Change in TRA liability
The change in TRA liability resulted in $1.1 million of expense for the three months ended September 30, 2022. There was no corresponding expense for the three months ended September 30, 2021. See Note 13 in the notes to the accompanying unaudited condensed consolidated financial statements for more information on the TRA.
Interest expense
Interest expense was $8.3 million for the three months ended September 30, 2022, compared to $7.4 million for the three months ended September 30, 2021, an increase of $0.9 million or 12.2%. The increase was primarily driven by higher amortization of capitalized financing fees.
Income tax provision
The effective tax rate for the three months ended September 30, 2022 was 2.5%, compared to the effective tax rate for the three months ended September 30, 2021 of 7.8%.
The effective tax rate for the three months ended September 30, 2022 and 2021 was different than the U.S. federal statutory income tax rate of 21% primarily due to the income allocated to the noncontrolling interest, the full valuation allowances on Shift4 Payments, Inc. and certain corporate subsidiaries in the U.S., and the nontaxable adjustment related to the revaluation of contingent liabilities for The Giving Block.
Net income (loss) attributable to noncontrolling interests
Net income attributable to noncontrolling interests of Shift4 Payments, LLC was $3.3 million for the three months ended September 30, 2022, compared to a net loss attributable to noncontrolling interests of $4.6 million for the three months ended September 30, 2021.
Comparison of Results for the Nine Months Ended September 30, 2022 and 2021
The following table sets forth the consolidated statements of operations for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | |
(in millions) | 2022 | 2021 | | $ change | | % change |
Payments-based revenue | $ | 1,354.4 | | | $ | 887.6 | | | $ | 466.8 | | | 52.6 | % |
Subscription and other revenues | 101.5 | | | 80.5 | | | 21.0 | | | 26.1 | % |
Gross revenue | 1,455.9 | | | 968.1 | | | 487.8 | | | 50.4 | % |
Network fees | (927.8) | | | (608.4) | | | (319.4) | | | 52.5 | % |
Other costs of sales (exclusive of depreciation and amortization expense shown separately below) | (202.0) | | | (165.4) | | | (36.6) | | | 22.1 | % |
General and administrative expenses | (198.6) | | | (153.1) | | | (45.5) | | | 29.7 | % |
Revaluation of contingent liabilities | 37.2 | | | (0.2) | | | 37.4 | | | NM |
Depreciation and amortization expense (a) | (62.9) | | | (45.9) | | | (17.0) | | | 37.0 | % |
Professional fees | (24.3) | | | (13.0) | | | (11.3) | | | 86.9 | % |
Advertising and marketing expenses | (11.2) | | | (26.1) | | | 14.9 | | | (57.1) | % |
Restructuring expenses | (0.2) | | | (0.2) | | | — | | | — | % |
Transaction-related expenses | (1.4) | | | — | | | (1.4) | | | NM |
Income (loss) from operations | 64.7 | | | (44.2) | | | 108.9 | | | NM |
Loss on extinguishment of debt | — | | | (0.2) | | | 0.2 | | | NM |
Interest income | 4.9 | | | — | | | 4.9 | | | NM |
Other income, net | 0.3 | | | 0.2 | | | 0.1 | | | 50.0 | % |
Change in TRA liability | (1.1) | | | — | | | (1.1) | | | NM |
Interest expense | (24.6) | | | (20.2) | | | (4.4) | | | 21.8 | % |
Income (loss) before income taxes | 44.2 | | | (64.4) | | | 108.6 | | | NM |
Income tax benefit | 4.0 | | | 4.1 | | | (0.1) | | | (2.4) | % |
Net income (loss) | 48.2 | | | (60.3) | | | 108.5 | | | NM |
Net income (loss) attributable to noncontrolling interests | 2.3 | | | (21.5) | | | 23.8 | | | NM |
Net income (loss) attributable to Shift4 Payments, Inc. | $ | 45.9 | | | $ | (38.8) | | | $ | 84.7 | | | NM |
We have changed the presentation of this table relative to prior periods to remove the “Gross profit” line item and update the “Other costs of sales” line item to indicate it is exclusive of depreciation and amortization expense shown separately for the nine months ended September 30, 2022 and 2021.
(a)Depreciation and amortization expense includes depreciation of equipment under lease of $22.6 million and $15.4 million for the nine months ended September 30, 2022 and 2021, respectively.
Results for the nine months ended September 30, 2021 include nonrecurring payments of $22.4 million we made to our merchants and $2.3 million we made to our software partners due to the TSYS outage. An additional $0.4 million of associated costs were incurred as a result of the outage. The TSYS outage payments and associated costs, which did not impact our results for the nine months ended September 30, 2022, had the following impact on our results in our unaudited Condensed Consolidated Statements of Operations for the nine months ended September 30, 2021:
•$22.4 million decrease to Payments-based revenue and Gross revenue;
•$2.3 million increase to Other costs of sales; and
•$25.1 million decrease to Loss from operations and Net loss.
See Factors Impacting Our Business and Results of Operations above and Note 4 to the accompanying unaudited condensed consolidated financial statements for more information about the TSYS outage
Gross revenue
Gross revenue was $1,455.9 million for the nine months ended September 30, 2022, compared to $968.1 million for the nine months ended September 30, 2021, an increase of $487.8 million or 50.4%. Gross revenue is comprised of payments-based revenue and subscription and other revenues. The nine months ended September 30, 2021 includes $22.4 million in payments we made to merchants as a result of the TSYS outage, which were recorded as contra revenue.
Payments-based revenue was $1,354.4 million for the nine months ended September 30, 2022, compared to $887.6 million for the nine months ended September 30, 2021, an increase of $466.8 million or 52.6%. The increase in payments-based revenue was primarily driven by the increase in end-to-end payment volume of $17.6 billion, or 52.9%, for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, in addition to $22.4 million in payments we made to merchants in the third quarter of 2021 as a result of the TSYS outage, which were recorded as contra revenue.
Subscription and other revenues were $101.5 million for the nine months ended September 30, 2022, compared to $80.5 million for the nine months ended September 30, 2021, an increase of $21.0 million or 26.1%. The increase in subscription and other revenues was driven primarily by acquisitions, which collectively contributed $18.1 million more to subscription and other revenues in the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.
Network fees
Network fees were $927.8 million for the nine months ended September 30, 2022, compared to $608.4 million for the nine months ended September 30, 2021, an increase of $319.4 million or 52.5%. This increase is correlated with the increase in end-to-end payment volume as described above.
Gross revenue less network fees was $528.1 million for the nine months ended September 30, 2022, compared to $382.1 million for the nine months ended September 30, 2021, an increase of $146.0 million or 38.2%. For the nine months ended September 30, 2021, gross revenue less network fees excludes the $22.4 million impact of the TSYS outage to gross revenue. The increase in gross revenue less network fees was largely correlated with the increase in end-to-end payment volume. See “Key Performance Indicators and Non-GAAP Measures” below for a reconciliation of gross profit to gross revenue less network fees.
Other costs of sales
Other costs of sales was $202.0 million for the nine months ended September 30, 2022, compared to $165.4 million for the nine months ended September 30, 2021, an increase of $36.6 million, or 22.1%. This increase was primarily driven by:
•higher residual commissions, which increased other costs of sales $21.8 million, were driven by the growth in gross revenue less network fees, partially offset by the impact of residual commission buyouts;
•acquisitions, which collectively increased other costs of sales $8.4 million;
•higher variable costs associated with processing fees of $4.1 million;
•higher capitalized software development amortization, which increased other costs of sales $3.8 million; and
•higher capitalized customer acquisition cost amortization, which increased other costs of sales $3.6 million, related to deal bonuses paid to third-party distribution partners to obtain processing contracts;
partially offset by:
•higher than normal chargeback losses during the nine months ended September 30, 2021 driven by the business failure of one merchant causing $5.5 million in estimated unrecoverable chargeback transactions in 2021; and
•payments to partners of $2.3 million due to the TSYS outage, which increased other costs of sales in the nine months ended September 30, 2021 and were nonrecurring in nature.
General and administrative expenses
General and administrative expenses were $198.6 million for the nine months ended September 30, 2022, compared to $153.1 million for the nine months ended September 30, 2021, an increase of $45.5 million or 29.7%. The increase was primarily driven by higher compensation and other employee-related expenses of $21.7 million and higher insurance expenses of $2.8 million compared to the nine months ended September 30, 2021, as a result of our continued growth and expansion. In addition, our acquisitions collectively increased general and administrative expenses $13.5 million in the nine months ended September 30, 2022.
Revaluation of contingent liabilities
Revaluation of contingent liabilities of $37.2 million for the nine months ended September 30, 2022 is driven by a decrease in the contingent liability for The Giving Block in the nine months ended September 30, 2022.
Depreciation and amortization expense
Depreciation and amortization expense was $62.9 million for the nine months ended September 30, 2022, compared to $45.9 million for the nine months ended September 30, 2021, an increase of $17.0 million or 37.0%. The increase was primarily driven by higher amortization of intangible assets of $7.6 million due to the significant residual commission buyouts completed in the third quarter of 2022 and higher depreciation for equipment under lease of $7.2 million in the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. In addition, our acquisitions collectively increased depreciation and amortization expense $2.0 million in the nine months ended September 30, 2022.
Professional fees
Professional fees were $24.3 million for the nine months ended September 30, 2022, compared to $13.0 million for the nine months ended September 30, 2021, an increase of $11.3 million or 86.9%. The increase was primarily due to higher acquisition-related costs.
Advertising and marketing expenses
Advertising and marketing expenses were $11.2 million for the nine months ended September 30, 2022, compared to $26.1 million for the nine months ended September 30, 2021, a decrease of $14.9 million or 57.1%. The decrease was primarily driven by expenses in the nine months ended September 30, 2021 related to the integration of 3dcart and its rebranding as Shift4Shop and $3.7 million of costs associated with the Inspiration4 seat that were nonrecurring in nature. 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 was also the commander of the mission. The Company incurred a significant amount of nonrecurring expenses to integrate, rebrand and promote 3dcart to Shift4Shop in conjunction with the Inspiration4 announcement. This was partially offset by acquisitions, which collectively increased advertising and marketing expenses $2.5 million in the nine months ended September 30, 2022, in addition to our 4WARD conference held in the third quarter 2022 and an increase in sponsorship expenses.
Transaction-related expenses
Transaction-related expenses were $1.4 million for the nine months ended September 30, 2022. These expenses were associated with a consent solicitation for the 2026 Senior Notes in March 2022. See Note 10 in the notes to the accompanying unaudited condensed consolidated financial statements for more information.
Interest income
Interest income was $4.9 million for the nine months ended September 30, 2022, consisting primarily of interest income earned on our cash and cash equivalents. We had immaterial interest income for the nine months ended September 30, 2021.
Change in TRA liability
The change in TRA liability resulted in $1.1 million of expense for the nine months ended September 30, 2022. There was no corresponding expense for the nine months ended September 30, 2021. See Note 13 in the notes to the accompanying unaudited condensed consolidated financial statements for more information on the TRA.
Interest expense
Interest expense was $24.6 million for the nine months ended September 30, 2022, compared to $20.2 million for the nine months ended September 30, 2021, an increase of $4.4 million or 21.8%. The increase in interest expense was primarily driven by the issuance of the Convertible Senior Notes due 2027 (“2027 Convertible Notes”) in July 2021, as well as higher amortization of capitalized financing fees during the nine months ended September 30, 2022.
Income tax benefit (provision)
The effective tax rate for the nine months ended September 30, 2022 was (9.0)%, compared to the effective tax rate for the nine months ended September 30, 2021 of (6.4)%.
The effective tax rate for the nine months ended September 30, 2022 was different than the U.S. federal statutory income tax rate of 21% primarily due to the income allocated to the noncontrolling interest, the full valuation allowances on Shift4 Payments, Inc. and certain corporate subsidiaries in the U.S., the nontaxable adjustment related to the revaluation of contingent liabilities for The Giving Block, and a $6.4 million income tax benefit related to the valuation allowance release due to acquired deferred tax liabilities from The Giving Block. The effective tax rate 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, the full valuation allowances on Shift4 Payments, Inc. and certain corporate subsidiaries in the U.S., and the tax windfall related to vested equity-based compensation awards.
Net income (loss) attributable to noncontrolling interests
Net income attributable to noncontrolling interests of Shift4 Payments, LLC was $2.3 million for the nine months ended September 30, 2022, compared to net loss of $21.5 million for the nine months ended September 30, 2021.
Key Performance Indicators and Non-GAAP Measures
The following table sets forth our key performance indicators and non-GAAP measures for the periods presented.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2022 | | 2021 | | 2022 | | 2021 |
End-to-end payment volume | $ | 20,579.4 | | | $ | 13,457.2 | | | $ | 50,873.4 | | | $ | 33,277.9 | |
Gross revenue less network fees | 196.7 | | | 148.3 | | | 528.1 | | | 382.1 | |
EBITDA | 95.0 | | | 20.4 | | | 165.5 | | | 32.6 | |
Adjusted EBITDA | 85.4 | | | 55.8 | | | 195.3 | | | 123.2 | |
End-to-end payment volume
End-to-end payment volume is defined as the total dollar amount of payments that we deliver for settlement on behalf of our merchants. Included in end-to-end volume are dollars routed via our international payments platform and alternative payment methods, including cryptocurrency donations, plus volume we route to one or more third party merchant acquirers on behalf of strategic enterprise merchant relationships. This volume does not include volume processed through our legacy gateway-only offering.
Gross revenue less network fees, EBITDA and Adjusted EBITDA
We use supplemental measures of our performance which are derived from our consolidated financial information but which are not presented in our consolidated financial statements prepared in accordance with GAAP. These non-GAAP financial measures include: gross revenue less network fees, which includes interchange and assessment fees; earnings before interest, income taxes, depreciation, and amortization (“EBITDA”); and Adjusted EBITDA.
Gross revenue less network fees represents a key performance metric that management uses to measure changes in the mix and value derived from our customer base as we continue to execute our strategy to expand our reach to serve larger, complex merchants. For the three and nine months ended September 30, 2021, gross revenue less network fees excludes the impact of the payments to merchants, included in “Gross revenue,” and payments to partners and associated expenses due to the TSYS outage, included in “Cost of sales” in our unaudited Condensed Consolidated Statements of Operations. These are nonrecurring payments that occurred outside of our day-to-day operations, and we have excluded them in order to provide more useful information to investors in the evaluation of our performance period-over-period.
Adjusted EBITDA is the primary financial performance measure used by management to evaluate its business and monitor results of operations. Adjusted EBITDA represents EBITDA further adjusted for certain non-cash and other nonrecurring items that management believes are not indicative of ongoing operations. These adjustments include the TSYS outage and associated costs, acquisition, restructuring and integration costs, revaluation of contingent liabilities, change in TRA liability, equity-based compensation expense, and other nonrecurring items. The financial impact of certain elements of these activities is often large relative to the Company’s overall financial performance and can adversely affect the comparability of our operating results and investors’ ability to analyze the business from period to period.
We use non-GAAP financial measures to supplement financial information presented on a GAAP basis. We believe that excluding certain items from our GAAP results allows management to better understand our consolidated financial performance from period to period and better project our future consolidated financial performance as forecasts are developed at a level of detail different from that used to prepare GAAP-based financial measures. Moreover, we believe these non-GAAP financial measures provide our stakeholders with useful information to help them evaluate our operating results by facilitating an enhanced understanding of our operating performance and enabling them to make more meaningful period to period comparisons. There are limitations to the use of the non-GAAP financial measures presented in this Quarterly Report on Form 10-Q. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.
The non-GAAP financial measures are not meant to be considered as indicators of performance in isolation from, or as a substitute for, net income (loss) prepared in accordance with GAAP, and should be read only in conjunction with financial information presented on a GAAP basis. Reconciliations of gross revenue less network fees, EBITDA and Adjusted EBITDA to its most directly comparable GAAP financial measure are presented below. We encourage you to review the reconciliations in conjunction with the presentation of the non-GAAP financial measures for each of the periods presented. In future fiscal periods, we may exclude such items and may incur income and expenses similar to these excluded items.
Reconciliations of gross revenue less network fees, EBITDA and Adjusted EBITDA
The tables below provide reconciliations of gross profit to gross revenue less network fees and net income (loss) on a consolidated basis for the periods presented to EBITDA and Adjusted EBITDA.
Gross revenue less network fees:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2022 | | 2021 | | 2022 | | 2021 |
Gross revenue | $ | 547.3 | | | $ | 377.8 | | | $ | 1,455.9 | | | $ | 968.1 | |
Less: Network fees | (350.6) | | | (251.9) | | | (927.8) | | | (608.4) | |
Less: Other costs of sales (exclusive of depreciation of equipment under lease) | (61.0) | | | (61.5) | | | (202.0) | | | (165.4) | |
| 135.7 | | | 64.4 | | | 326.1 | | | 194.3 | |
Less: Depreciation of equipment under lease | (8.2) | | | (5.8) | | | (22.6) | | | (15.4) | |
Gross profit (a) (b) (c) | $ | 127.5 | | | $ | 58.6 | | | $ | 303.5 | | | $ | 178.9 | |
| | | | | | | |
Gross profit (a) (b) (c) | $ | 127.5 | | | $ | 58.6 | | | $ | 303.5 | | | $ | 178.9 | |
Add back: Other costs of sales (b) | 61.0 | | | 61.5 | | | 202.0 | | | 165.4 | |
Add back: Depreciation of equipment under lease | 8.2 | | | 5.8 | | | 22.6 | | | 15.4 | |
Add back: TSYS outage payments (c) | — | | | 22.4 | | | — | | | 22.4 | |
Gross revenue less network fees | $ | 196.7 | | | $ | 148.3 | | | $ | 528.1 | | | $ | 382.1 | |
| | | | | | | |
(a) The calculation of gross profit relative to prior periods was revised to include depreciation of equipment under lease. The table reflects the calculation of gross profit for all periods presented, including the differences from previously reported gross profit metrics that had excluded depreciation of equipment under lease. |
(b) The three and nine months ended September 30, 2021 include $2.3 million of nonrecurring payments to partners related to the TSYS outage. See Factors Impacting Our Business and Results of Operations above and Note 4 to the accompanying unaudited condensed consolidated financial statements for more information about the TSYS outage. |
(c) The three and nine months ended September 30, 2021 include $22.4 million of nonrecurring payments to merchants related to the TSYS outage. See Factors Impacting Our Business and Results of Operations above and Note 4 to the accompanying unaudited condensed consolidated financial statements for more information about the TSYS outage. |
EBITDA and Adjusted EBITDA:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2022 | | 2021 | | 2022 | | 2021 |
Net income (loss) | $ | 46.4 | | | $ | (13.8) | | | $ | 48.2 | | | $ | (60.3) | |
Interest expense | 8.3 | | | 7.4 | | | 24.6 | | | 20.2 | |
Interest income | (3.5) | | | — | | | (4.9) | | | — | |
Income tax provision (benefit) | 1.2 | | | 1.0 | | | (4.0) | | | (4.1) | |
Depreciation and amortization expense | 42.6 | | | 25.8 | | | 101.6 | | | 76.8 | |
EBITDA | 95.0 | | | 20.4 | | | 165.5 | | | 32.6 | |
Acquisition, restructuring and integration costs (a) | 13.0 | | | 4.0 | | | 23.5 | | | 32.8 | |
Revaluation of contingent liabilities (b) | (36.9) | | | — | | | (37.2) | | | 0.2 | |
Change in TRA liability (c) | 1.1 | | | — | | | 1.1 | | | — | |
Equity-based compensation (d) | 12.3 | | | 6.6 | | | 39.1 | | | 32.0 | |
TSYS outage payments and associated costs (e) | — | | | 25.1 | | | — | | | 25.1 | |
Other nonrecurring items (f) | 0.9 | | | (0.3) | | | 3.3 | | | 0.5 | |
Adjusted EBITDA | $ | 85.4 | | | $ | 55.8 | | | $ | 195.3 | | | $ | 123.2 | |
| | | | | | | |
(a) For the three months ended September 30, 2022, primarily consisted of $10.3 million of acquisition-related costs and a signing bonus of $2.0 million to our Chief Financial Officer. For the three months ended September 30, 2021, primarily consisted of $2.0 million of acquisition-related costs and $1.6 million of costs associated with the Inspiration4 seat. For the nine months ended September 30, 2022, primarily consisted of $19.1 million of acquisition-related costs, a signing bonus of $2.0 million to our Chief Financial Officer, and $1.4 million of transaction-related expenses associated with a consent solicitation for the 2026 Senior Notes in March 2022. For the nine months ended September 30, 2021, primarily consisted of $20.4 million of expenses related to the integration of 3dcart and its rebranding as Shift4Shop, $6.3 million of acquisition-related costs, and $3.7 million of costs associated with the Inspiration4 seat. |
(b) Represents the change in the valuation of the contingent liability for The Giving Block. |
(c) Represents adjustments to the TRA liability. See Note 13 in the notes to the accompanying unaudited condensed consolidated financial statements for more information on the TRA. |
(d) Represents equity-based compensation expense for RSUs, including employer taxes for vested RSUs. See Note 19 in the notes to the accompanying unaudited condensed consolidated financial statements for more information on equity-based compensation. |
(e) The three and nine months ended September 30, 2021 include nonrecurring payments of $22.4 million that we made to merchants and $2.3 million that we made to partners related to the TSYS outage, and other expenses incurred associated with the TSYS outage of $0.4 million. See Factors Impacting Our Business and Results of Operations above and Note 4 to the accompanying unaudited condensed consolidated financial statements for more information about the TSYS outage. |
(f) For the three months ended September 30, 2022, primarily consisted of a $0.5 million donation and $0.4 million of nonrecurring advertising and marketing expenses. For the nine months ended September 30, 2022, primarily consisted of $1.1 million of costs associated with an internal processing system disruption that required technical remediation, $0.8 million of nonrecurring advertising and marketing expenses, $0.5 million of legal and professional fees for one-time matters, a $0.5 million donation and $0.4 million of costs associated with an early retirement initiative completed in the first quarter of 2022. |
Liquidity and Capital Resources
Overview
We have historically sourced our liquidity requirements primarily with cash flow from operations and, when needed, with debt borrowings or equity transactions. The principal uses for liquidity have been debt service, capital expenditures (including research and development) and funds required to finance acquisitions.
We do not intend to pay cash dividends on our Class A common stock in the foreseeable future. Shift4 Payments, Inc. is a holding company that does not conduct any business operations of its own. As a result, Shift4 Payments, Inc.’s ability to pay cash dividends on its common stock, if any, is dependent upon cash dividends and distributions and other transfers from Shift4 Payments, LLC. The amounts available to Shift4 Payments, Inc. to pay cash dividends are subject to the covenants and distribution restrictions in its subsidiaries’ agreements governing its indebtedness, including covenants in such agreements providing that the payments of dividends or other distributions are subject to annual limitations based on our market capitalization.
The following table sets forth summary cash flow information for the periods presented.
| | | | | | | | | | | |
| Nine Months Ended September 30, |
(in millions) | 2022 | | 2021 |
Net cash provided by operating activities (a) | $ | 135.9 | | | $ | 6.3 | |
Net cash used in investing activities (a) | (483.0) | | | (142.7) | |
Net cash (used in) provided by financing activities | (211.4) | | | 496.7 | |
Effect of exchange rate changes on cash and cash equivalents | (0.3) | | | — | |
Change in cash and cash equivalents | $ | (558.8) | | | $ | 360.3 | |
(a) Amounts are restated for the nine months ended September 30, 2021. See Note 2 in the notes to the accompanying unaudited condensed consolidated financial statements for more information.
Operating activities
Net cash provided by operating activities consists of net income (loss) adjusted for certain non-cash items and changes in other assets and liabilities.
For the nine months ended September 30, 2022, net cash provided by operating activities of $135.9 million was primarily a result of:
•net income of $48.2 million adjusted for non-cash expenses, including depreciation and amortization of $101.6 million, equity-based compensation of $38.4 million, and revaluation of contingent liabilities of $(37.2) million;
partially offset by:
•an impact from working capital of $(24.5) million, which includes $19.9 million of additional funds deposited in our sponsor bank merchant settlement account to facilitate gross card transaction deposits for those customers we bill on a monthly, versus a daily basis, and $19.4 million of capitalized customer acquisition costs.
For the nine months ended September 30, 2021, net cash provided by operating activities of $6.3 million was primarily a result of:
•net loss of $60.3 million, which includes $25.1 million of nonrecurring payments to our merchants and partners due to the TSYS outage and associated costs incurred in the third quarter of 2021, adjusted for non-cash expenses, including depreciation and amortization of $76.8 million, equity-based compensation of $26.9 million, and provision for bad debts of $10.3 million;
partially offset by:
•an impact from working capital of $(48.6) million, which is primarily a result of $25.3 million of funds deposited in our sponsor bank merchant settlement account to facilitate gross card transaction deposits for those customers we bill on a monthly, versus a daily basis and $19.3 million of capitalized customer acquisition costs.
Investing activities
Net cash used in investing activities includes cash paid for acquisitions, purchases of future commission streams of our software partners, purchases of property, plant and equipment, purchases of equipment to be leased, capitalized software development costs, and investments in non-marketable securities.
Net cash used in investing activities was $483.0 million for the nine months ended September 30, 2022, an increase of $340.3 million compared to net cash used in investing activities of $142.7 million for the nine months ended September 30, 2021. This increase was primarily the result of:
•higher residual commission buyouts of $263.8 million as a result of our mass strategic buyout program completed in the three months ended September 30, 2022 in support of our strategic initiative to insource our sales distribution network;
•the acquisition of Online Payments Group in September 2022 for $125.9 million in aggregate purchase consideration, including $62.8 million in cash, net of cash acquired of $11.3 million;
•the acquisitions of Pinnacle, FPOS, RCS, and three other restaurant technology partners between July and August 2022 for $80.3 million in aggregate purchase consideration, including $59.9 million in cash, net of cash acquired of $3.2 million;
•the acquisition of The Giving Block in March 2022 for $106.9 million in aggregate purchase consideration, including $12.6 million in cash, net of cash acquired of $4.2 million; and
•higher capitalized software development costs of $18.7 million;
partially offset by:
•the acquisition of VenueNext in March 2021 for $68.5 million in aggregate purchase consideration, including $40.6 million in cash, net of cash acquired of $1.6 million;
•the investment in SpaceX of $27.5 million in the nine months ended September 30, 2021; and
•the acquisition of Postec in September 2021 for $14.0 million, net of cash acquired of $1.7 million.
Financing activities
Net cash used in financing activities was $211.4 million for the nine months ended September 30, 2022, a decrease of $708.1 million, compared to net cash provided by financing activities of $496.7 million for the nine months ended September 30, 2021. This decrease was primarily the result of:
•the net proceeds from the 2027 Convertible Notes during the nine months ended September 30, 2021 of $617.7 million;
•payments for the repurchase of common stock of $185.9 million during the nine months ended September 30, 2022 pursuant to the Programs; and
•payments associated with solicitation for the 2026 Senior Notes in March 2022 of $4.5 million;
partially offset by:
•lower employee taxes paid on vested RSUs of $99.1 million during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily the result of RSUs that vested in the nine months ended September 30, 2021 related to our IPO.
Convertible Notes, Senior Notes and Revolving Credit Facility
As of September 30, 2022 and December 31, 2021, we had $1,772.5 million total principal amount of debt outstanding, including $690.0 million of the Convertible Senior Notes due 2025 (“2025 Convertible Notes”), $632.5 million of 2027 Convertible Notes and $450.0 million of 2026 Senior Notes. See Note 10 to the accompanying unaudited condensed consolidated financial statements for more information about our debt.
On March 17, 2022, we announced the expiration of our Consent Solicitation Statement (the “Consent Solicitation Statement”), dated as of March 11, 2022, to amend the indenture related to the 2026 Senior Notes. In connection with the results of the Consent Solicitation Statement, we received the requisite consents to amend the indenture governing the 2026 Senior Notes and entered into a supplemental indenture to allow for the repurchase of capital stock as part of the Market Capitalization exception under the original indenture.
Revolving Credit Facility
The Revolving Credit Facility has a borrowing capacity of $99.5 million, net of a $0.5 million letter of credit. As of September 30, 2022, we had no outstanding borrowings under the Revolving Credit Facility.
Stock repurchases
On December 16, 2021, our Board authorized the December 2021 Program, pursuant to which we were authorized repurchase up to $100.0 million of shares of our Class A common stock through December 31, 2022. On May 11, 2022, the Board authorized the May 2022 Program, pursuant to which we were authorized to repurchase up to an additional $100.0 million of shares of our Class A common stock through December 31, 2022, and on June 15, 2022, the Board authorized the June 2022 Program pursuant to which we were authorized to repurchase up to an additional $50.0 million of shares of our Class A common stock through December 31, 2022.
In the nine months ended September 30, 2022, we repurchased 3,887,191 shares of Class A common stock for $184.4 million, including commissions paid, at an average price paid of $47.40 per share. As of September 30, 2022, approximately $44.5 million remained available for future purchases under the June 2022 Program. See Note 17 in the notes to the accompanying unaudited condensed consolidated financial statements for more information.
Cash Requirements
Our material cash requirements include the following contractual obligations.
Debt
As of September 30, 2022, we had $1,772.5 million of fixed rate debt outstanding with maturities beginning in 2025. Future interest payments associated with the outstanding debt total $109.5 million, with $24.0 million payable within twelve months.
Leases
As of September 30, 2022, we are obligated under non-cancellable operating leases for our premises, which expire through November 2030. Rent expense incurred under operating leases, which totaled $3.9 million for the nine months ended September 30, 2022, is included in “General and administrative expenses” in our accompanying unaudited Condensed Consolidated Statements of Operations.
Critical Accounting Estimates
Our discussion and analysis of our historical financial condition and results of operations for the periods described is based on our audited consolidated financial statements, and our accompanying unaudited condensed consolidated financial statements, each of which have been prepared in accordance with U.S. GAAP. The preparation of these historical financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions and judgments in certain circumstances that affect the reported amounts of assets, liabilities and contingencies as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. We evaluate our assumptions and estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Additionally, the full impact of the COVID-19 pandemic is unknown and cannot be reasonably estimated. However, we have made accounting estimates for our allowance for doubtful accounts, valuation of our contingent liabilities, other intangible assets and goodwill based on the facts and circumstances available as of the reporting date. Actual results may differ from these estimates under different assumptions or conditions.
We have provided a summary of our significant accounting policies in Note 1 in the notes to the accompanying unaudited condensed consolidated financial statements. The following critical accounting discussion pertains to accounting policies management believes are most critical to the portrayal of our historical financial condition and results of operations and that require significant, difficult, subjective or complex judgments. Other companies in similar businesses may use different estimation policies and methodologies, which may impact the comparability of our financial condition, results of operations and cash flows to those of other companies.
New accounting pronouncements
For information regarding new accounting pronouncements, and the impact of these pronouncements on our unaudited condensed consolidated financial statements, if any, refer to Note 1 in the notes to the accompanying unaudited condensed consolidated financial statements.