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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-248663

 

10,000,000 Shares

 

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Shift4 Payments, Inc.

Class A Common Stock

 

 

We are offering 2,000,000 shares of our Class A common stock and the selling stockholders identified in this prospectus are offering 8,000,000 shares of our Class A common stock. We will not receive any of the proceeds from the sale of shares by the selling stockholders in this offering.

Our Class A common stock is listed and traded on the New York Stock Exchange, or the NYSE, under the symbol “FOUR.” The last reported sale price of our Class A common stock on the NYSE on September 10, 2020 was $50.02 per share.

We have three classes of common stock outstanding: Class A common stock, Class B common stock and Class C common stock. Each share of our Class A common stock entitles its holder to one vote per share and each share of each of our Class B common stock and Class C common stock entitles its holder to ten votes per share on all matters presented to our stockholders generally. All shares of our Class B common stock and Class C common stock are held by Searchlight (as defined below) and our Founder (as defined below), which combined will represent approximately 94.7% of the voting power of our outstanding common stock after this offering (or approximately 94.3% if the underwriters exercise in full their option to purchase additional shares).

We are a holding company and our principal asset is a controlling equity interest in Shift4 Payments, LLC representing an aggregate 49.8% economic interest in Shift4 Payments, LLC (prior to giving effect to this offering). Of the remaining 50.2% economic interest in Shift4 Payments, LLC, 17.1% is owned by Searchlight through their ownership of LLC Interests and 33.1% is owned by our Founder through his ownership of LLC Interests, in each case, prior to giving effect to this offering.

We are the sole managing member of Shift4 Payments, LLC. We operate and control all of the business and affairs of Shift4 Payments, LLC and, through Shift4 Payments, LLC and its subsidiaries, conduct our business.

We are a “controlled company” within the meaning of the NYSE rules. See “Management—Controlled Company Exception.”

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, and will be subject to reduced disclosure and public reporting requirements. This prospectus complies with the requirements that apply to an issuer that is an emerging growth company.

 

 

Investing in our Class A common stock involves risks. See “Risk Factors” beginning on page 24 to read about factors you should consider before buying shares of our Class A common stock.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

     Per
Share
     Total  

Public offering price

   $ 48.50      $ 485,000,000  

Underwriting discounts and commissions(1)

   $ 1.81875      $ 18,187,500  

Proceeds, before expenses, to Shift4 Payments, Inc.

   $ 46.68125      $ 93,362,500  

Proceeds, before expenses, to the selling stockholders

   $ 46.68125      $ 373,450,000  

 

  (1)

We have agreed to reimburse the underwriters for certain expenses in connection with this offering. See “Underwriting.”

The underwriters have the option to purchase up to an additional 1,500,000 shares of Class A common stock from the selling stockholders at the public offering price less the underwriting discount within 30 days of the date of this prospectus.

The underwriters expect to deliver the shares of Class A common stock against payment in New York, New York on September 15, 2020.

 

 

 

Goldman Sachs & Co. LLC   Credit Suisse   Citigroup

 

 

 

BofA Securities   Morgan Stanley   RBC Capital Market   Evercore ISI
Raymond James   Truist Securities   Wolfe Capital Markets and Advisory
Citizens Capital Markets   Scotiabank   TD Securities   Telsey Advisory Group

Prospectus dated September 10, 2020.


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TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     24  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     60  

USE OF PROCEEDS

     62  

CAPITALIZATION

     63  

DIVIDEND POLICY

     64  

DILUTION

     65  

SELECTED HISTORICAL CONDENSED CONSOLIDATED FINANCIAL DATA

     68  

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

     70  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     78  

BUSINESS

     100  

MANAGEMENT

     120  

EXECUTIVE COMPENSATION

     127  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     134  

PRINCIPAL AND SELLING STOCKHOLDERS

     145  

DESCRIPTION OF CAPITAL STOCK

     147  

DESCRIPTION OF INDEBTEDNESS

     153  

SHARES ELIGIBLE FOR FUTURE SALE

     157  

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF CLASS A COMMON STOCK

     162  

UNDERWRITING

     166  

LEGAL MATTERS

     171  

EXPERTS

     171  

WHERE YOU CAN FIND MORE INFORMATION

     171  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

We, the selling stockholders and the underwriters have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any related free writing prospectuses. We, the selling stockholders and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered by this prospectus, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. Our business, financial condition, results of operations and prospectus may have changed since that date.

For investors outside the United States: We, the selling stockholders and the underwriters have not done anything that would permit this offering or the possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of Class A common stock and the distribution of this prospectus outside the United States. See “Underwriting.”

 

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BASIS OF PRESENTATION

IPO, Private Placement and Transactions

In connection with the completion of our initial public offering of our Class A common stock on June 9, 2020, in which we issued and sold 17,250,000 shares of our Class A common stock at an initial public price of $23.00 per share and sold $100.0 million of our Class C common stock at a price of $21.62 per share, which is equal to the $23.00 per share initial public price less underwriting discounts and commissions, in a private placement to Rook Holdings, Inc., which we refer to as the IPO and Private Placement, respectively, and we undertook certain organizational transactions, which we refer to collectively as the Transactions. See “IPO, Private Placement and Transactions” for a description of the IPO, Private Placement and Transactions.

Certain Definitions

As used in this prospectus, unless the context otherwise requires, references to:

 

   

“we,” “us,” “our,” the “Company,” “Shift4” and similar references refer: (1) following the consummation of the Transactions, including the IPO, to Shift4 Payments, Inc., and, unless otherwise stated, all of its subsidiaries, including Shift4 Payments, LLC and, unless otherwise stated, all of its subsidiaries, and (2) prior to the completion of the Transactions, including the IPO, to Shift4 Payments, LLC and, unless otherwise stated, all of its subsidiaries.

 

   

Blocker Companies” refers to certain direct and/or indirect owners of LLC Interests in Shift4 Payments, LLC, collectively, prior to the Transactions that are taxable as corporations for U.S. federal income tax purposes and each of which is an affiliate of Searchlight (as defined below).

 

   

Blocker Mergers” refers to the acquisition by Shift4 Payments, Inc. of LLC Interests held by the Blocker Shareholders, pursuant to one or more contributions by Blocker Shareholders of the equity interests in the Blocker Companies to Shift4 Payments, Inc., followed by one or more mergers, and in exchange for which Shift4 Payments, Inc. issued to the Blocker Shareholders shares of Class B common stock and Class C common stock.

 

   

Blocker Shareholders” refers to the owners of Blocker Companies, collectively, prior to the Transactions.

 

   

“Continuing Equity Owners” refers collectively to Searchlight, our Founder and their respective permitted transferees that own LLC Interests after the Transactions and who may redeem at each of their options, in whole or in part from time to time, their LLC Interests for, at our election (determined solely by our independent directors (within the meaning of the rules of the NYSE ) who are disinterested), cash or newly-issued shares of our Class A common stock as described in “Certain Relationships and Related Party Transactions— Shift4 LLC Agreement.”

 

   

“LLC Interests” refers to the common units of Shift4 Payments, LLC, including those that we purchased directly from Shift4 Payments, LLC with proceeds from our IPO and the Private Placement and the common units of Shift4 Payments, LLC that we acquired from the Former Equity Owners in connection with the consummation of the Transactions.

 

   

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.

 

   

“Former Equity Owner” refers to FPOS Holding Co., Inc. who exchanged its LLC Interests for shares of our Class A common stock (held by the Former Equity Owner either directly or indirectly) in connection with the consummation of the Transactions.

 

   

“Rook” refers to Rook Holdings Inc., a Delaware corporation wholly-owned by our Founder and for which our Founder is the sole stockholder.

 

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“RSU Holders” refers to certain current and former employees of Shift4 Payments, LLC who received restricted stock units, or RSUs, of Shift4 Payments, Inc. in connection with the IPO.

 

   

“Searchlight” refers to Searchlight Capital Partners, L.P., a Delaware limited partnership, and certain funds affiliated with Searchlight. Searchlight is a Continuing Equity Owner and an owner of Class C common stock (including any such fund or entity formed to hold shares of Class C common stock).

 

   

“selling stockholders” refers to selling stockholders named herein that intend to sell shares of our Class A common stock in this offering.

 

   

“Shift4 Payments LLC Agreement” refers to Shift4 Payments, LLC’s amended and restated limited liability company agreement, which became effective upon the consummation of the IPO.

Shift4 Payments, Inc. is a holding company and the sole managing member of Shift4 Payments, LLC, and its principal asset is LLC Interests.

Presentation of Financial Information

Shift4 Payments, LLC is the accounting predecessor of the issuer, Shift4 Payments, Inc., for financial reporting purposes. Shift4 Payments, Inc. became the audited financial reporting entity following the IPO. Accordingly, this prospectus contains the following historical financial statements:

 

   

Shift4 Payments, Inc. The historical condensed consolidated financial statements as of and for the six months ended June 30, 2020, as well as the balance sheets as of November 5, 2019 and December 31, 2019 included in this prospectus are those of Shift4 Payments, Inc. No other historical financial information of Shift4 Payments, Inc. has been included in this prospectus as it was incorporated in contemplation of the IPO, had no significant business transactions or activities prior to the IPO and had no significant assets or liabilities during the other periods presented in this prospectus.

 

   

Shift4 Payments, LLC. As Shift4 Payments, Inc. has no interest in any operations other than those of Shift4 Payments, LLC, the historical consolidated financial statements as of and for the years ended December 31, 2019 and December 31, 2018 and the condensed consolidated financial statements for the six months ended June 30, 2019, which are included in this prospectus are those of Shift4 Payments, LLC.

The unaudited pro forma financial information of Shift4 Payments, Inc. presented in this prospectus has been derived by the application of pro forma adjustments to the audited historical consolidated financial statements of Shift4 Payments, LLC and the unaudited historical condensed consolidated financial statements of Shift4 Payments, Inc. included elsewhere in this prospectus. In in the case of the unaudited pro forma consolidated statements of operations data, the pro forma adjustments give effect to this offering, the IPO, Private Placement and Transactions (as described in “IPO, Private Placement and Transactions”) as if all such transactions had occurred on January 1, 2019. See “Unaudited Pro Forma Condensed Consolidated Financial Information” for a complete description of the adjustments and assumptions underlying the pro forma financial information included in this prospectus.

Certain monetary amounts, percentages and other figures included in this prospectus have been subject to rounding adjustments. Percentage amounts included in this prospectus have not in all cases been calculated on the basis of such rounded figures, but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this prospectus may vary from those obtained by performing the same calculations using the figures in our consolidated financial statements included elsewhere in this prospectus. Certain other amounts that appear in this prospectus may not sum due to rounding.

Key Terms and Performance Indicators Used in this Prospectus; Non-GAAP Financial Measures

Throughout this prospectus, we use a number of key terms and provide a number of key performance indicators used by management. These key performance indicators are discussed in more detail in the section entitled

 

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“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key performance indicators and non-GAAP measures.” We define these terms as follows:

 

   

end-to-end payment volume, which we define as the total dollar amount of card payments that we authorize and settle on behalf of our merchants;

 

   

gross revenue less network fees, which includes interchange and assessment fees;

 

   

EBITDA, which we define as earnings before interest expense, income taxes, depreciation and amortization; and

 

   

adjusted EBITDA, which we define as EBITDA further adjusted for acquisition, restructuring and integration costs, equity-based compensation expense, management fees and other non-recurring items management believes are not indicative of ongoing operations.

We use non-GAAP financial measures to supplement financial information presented in accordance with generally accepted accounting principles in the United States, or GAAP. 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 prospectus. For example, 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. See “Prospectus Summary—Summary Historical and Pro Forma Condensed Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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TRADEMARKS

This prospectus includes our trademarks and trade names which are protected under applicable intellectual property laws and are our property. This prospectus also contains trademarks, trade names and service marks of other companies, which are the property of their respective owners. Solely for convenience, trademarks, trade names and service marks referred to in this prospectus may appear without the ®, or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent permitted under applicable law, our rights or the right of the applicable licensor to these trademarks, trade names and service marks. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

MARKET AND INDUSTRY DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry, competitive position and the markets in which we operate is based on information from independent industry and research organizations, other third-party sources and management estimates. Management estimates are derived from publicly available information released by independent industry analysts, such as The Nilson Report, the “Global payments 2018: A dynamic industry continues to break new ground” report by McKinsey & Company, or McKinsey, and other third-party sources, as well as data from our internal research, and are based on assumptions made by us upon reviewing such data, and our experience in, and knowledge of, such industry and markets, which we believe to be reasonable. In addition, projections, assumptions and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

This prospectus also contains information regarding feedback that originated from our customers, including those described in “Business—Customer Success Stories.” This information is based upon feedback collected by us. We encourage our customers to describe their experiences with our services. We also survey our customers from time to time regarding their experiences with us. In response to positive feedback received, we contacted certain of these customers to request their consent to use their story in this prospectus and, in some cases, requested further detail about their positive experience.

 

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IPO, PRIVATE PLACEMENT AND TRANSACTIONS

On June 9, 2020, we completed the IPO of 17,250,000 shares (including additional shares sold to the underwriters upon exercise in full of their option to purchase additional shares from us) of our Class A common stock at a price to the public of $23.00 per share. The shares began trading on the NYSE on June 5, 2020 under the symbol “FOUR.” The total net proceeds of the IPO received by the Company were $363.8 million, including proceeds resulting from the underwriters’ exercise in full of their option to purchase additional shares of our Class A common stock in connection with the IPO and after deducting underwriting discounts, commissions and offering expenses. We also completed a $100.0 million Private Placement of 4,625,346 shares of Class C common stock to Rook. The total net proceeds from the IPO and Private Placement were approximately $463.8 million. We used the net proceeds from the IPO and the Private Placement to purchase 23,324,537 LLC Interests directly from Shift4 Payments, LLC at a price per unit equal to the IPO price per share of Class A common stock in the IPO less the underwriting discounts and commissions and offering expenses. Shift4 Payments, LLC used the proceeds it received through Shift4 Payments, Inc. from the IPO and Private Placement to repay $59.8 million of required principal payments under the First Lien Term Loan Facility, to repay in full the $130.0 million outstanding under our Second Lien Term Loan Facility, to repay the $89.5 million outstanding borrowing under our Revolving Credit Facility and for general corporate purposes.

We completed the following organizational transactions in connection with the IPO and the Private Placement, which we refer to collectively with the IPO and the Private Placement as the Transactions:

 

   

we amended and restated the existing limited liability company agreement of Shift4 Payments, LLC to, among other things, (1) convert all existing ownership interests in Shift4 Payments, LLC (including redeemable preferred units) into 43,463,700 LLC Interests and (2) appoint Shift4 Payments, Inc. as the sole managing member of Shift4 Payments, LLC upon its acquisition of LLC Interests in connection with the IPO;

 

   

we amended and restated Shift4 Payments, Inc.’s certificate of incorporation to, among other things, provide (1) for Class A common stock, with each share of our Class A common stock entitling its holder to one vote per share on all matters presented to our stockholders generally, (2) for Class B common stock, with each share of our Class B common stock entitling its holder to ten votes per share on all matters presented to our stockholders generally, and that shares of our Class B common stock may only be held by Searchlight, our Founder and their respective permitted transferees as described in “Description of Capital Stock—Common Stock—Class B Common Stock” and (3) for Class C common stock, with each share of our Class C common stock entitling its holder to ten votes per share on all matters presented to our stockholders generally, and that shares of our Class C common stock may only be held by Searchlight, our Founder and their respective permitted transferees as described in “Description of Capital Stock—Common Stock—Class C Common Stock;”

 

   

the Former Equity Owner exchanged its LLC Interests for 528,150 shares of Class A common stock on a one-to-one basis;

 

   

we acquired, pursuant to the Blocker Mergers, the LLC Interests held by the Blocker Shareholders, affiliates of Searchlight, in exchange for shares of Class B common stock and Class C common stock;

 

   

we granted 4,630,884 RSUs to the RSU Holders in connection with the IPO;

 

   

we purchased 915,503 LLC Interests from Shift4 Payments, LLC in exchange for 915,503 shares of Class A common stock to be issued to P&W Enterprises, Inc., as satisfaction of Shift4 Payments, LLC’s existing obligation to P&W Enterprises, Inc.;

 

   

we used all of the net proceeds from the IPO to purchase 17,250,000 newly issued LLC Interests directly from Shift4 Payments, LLC at a price per unit equal to the $23.00 per share of Class A common stock initial public price in the IPO less the underwriting discounts and commissions;

 

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we used all of the net proceeds from the Private Placement to purchase 4,625,346 newly issued LLC Interests directly from Shift4 Payments, LLC at a price per unit equal to the $23.00 per share of Class A common stock initial public price in the IPO less underwriting discounts and commissions;

 

   

Shift4 Payments, LLC used the net proceeds from the sale of LLC Interests to Shift4 Payments, Inc. to repay certain existing indebtedness and the remainder for general corporate purposes; and

 

   

we entered into (1) the Stockholders Agreement with Searchlight and our Founder, (2) the Registration Rights Agreement with Searchlight and our Founder and (3) the Tax Receivable Agreement, or TRA, with Shift4 Payments, LLC, the Continuing Equity Owners and the Blocker Shareholders. For a description of the terms of the Stockholders Agreement, the Registration Rights Agreement and the Tax Receivable Agreement, see “Certain Relationships and Related Party Transactions.”

 

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PROSPECTUS SUMMARY

This summary highlights selected information included elsewhere in this prospectus. This summary does not contain all of the information that you should consider before deciding to invest in our Class A common stock. You should read the entire prospectus carefully, including the “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. Some of the statements in this prospectus constitute forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.”

Overview

We are a leading independent provider of integrated payment processing and technology solutions in the United States based on total volume of payments processed. We have achieved our leadership position through decades of solving complex business and operational challenges facing our customers: software partners and merchants. For our software partners, we offer a single integration to an end-to-end payments offering, a proprietary gateway and a robust suite of technology solutions to enhance the value of their software and simplify payment acceptance. For our merchants, we provide a seamless, unified consumer experience as an alternative to relying on multiple providers to accept payments and utilize technology in their businesses.

Merchants are increasingly adopting disparate software solutions to operate their businesses more effectively. The complexity of integrating a seamless payment solution across these software suites has grown exponentially. For example, a restaurant in the United States may use over a dozen disparate software systems to operate its business, manage interactions with its customers and accept payments. A large resort may operate an even greater number of software systems to enable online reservations, check-ins, restaurants, salon and spa, golf, parking and more. The scale and complexity of managing these software systems that are sourced from different providers while seamlessly accepting payments is challenging for merchants of any size.

Software partners are increasingly required to ensure that their solutions are integrated with a variety of applications to service merchants. For example, any software partner seeking to be adopted in a resort, such as an online reservation system or restaurant point-of-sale, or POS, must be able to integrate into that resort’s property management systems. These software integrations need to enable secure payment acceptance and also support additional services to manage the guest’s experience. Facilitating these integrations is both costly and time-consuming for software partners.

We integrate disparate software systems through a single point of connectivity. By partnering with us, every software provider receives the benefit of both a state-of-the-art payments platform and our library of over 350 established integrations with market-leading software suites. In turn, our merchants are able to simplify payment acceptance and streamline their business operations by reducing the number of vendors on which they rely.

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). We also offer innovative technology solutions that go beyond payment processing—some of which are developed in-house, such as business intelligence and POS software, while others are powered by our network of complementary third-party applications.

We employ a partner-centric distribution approach in which we market and sell our solutions through a diversified network of over 7,000 software partners, which consist of independent software vendors, or ISVs, and value-added resellers, or VARs. ISVs are technology providers that develop commerce-enabling software



 

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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. As of December 31, 2019, we served over 64,000 merchants who subscribe to our end-to-end payments offering, representing over $22.0 billion in end-to-end payment volume for the year ended December 31, 2019. As of June 30, 2020, we served over 66,000 merchants who subscribe to our end-to-end payments offering, representing approximately $10.4 billion in end-to-end payment volume for the six months ended June 30, 2020. This end-to-end payment volume contributed approximately 57% of gross revenue less network fees for both the year ended December 31, 2019 and the six months ended June 30, 2020. Additionally, in 2019 we served over 66,000 merchants representing over $185.0 billion in payment volume that relied on Shift4’s gateway or technology solutions but did not utilize our end-to-end payments offering.

Our merchants range from small-to-medium-sized businesses, or SMBs, to large enterprises across numerous verticals in which we have deep industry expertise, including food and beverage, lodging and leisure (which we collectively refer to as hospitality). In addition, our merchant base is highly diversified with no single merchant representing more than 1% of end-to-end payment volume for the year ended December 31, 2019 or the six months ended June 30, 2020.

We derive the majority of our revenue from fees paid by our merchants, which principally include a processing fee that is charged as a percentage of end-to-end payment volume. In cases where merchants subscribe only to our gateway, we generate revenue from transaction fees charged in the form of a fixed fee per transaction. We also generate subscription revenue from licensing subscriptions to our POS software, business intelligence tools, payment device management and other technology solutions, for which we typically charge flat subscription fees on a monthly basis. Our revenue is recurring in nature because of the mission-critical and embedded nature of the solutions we provide, the high switching costs associated with these solutions and the multi-year contracts we have with our customers. We also benefit from a high degree of operating leverage given the combination of our highly scalable payments platform and strong customer unit economics.

Our total revenue increased to $731.4 million for fiscal year ended December 31, 2019 from $560.6 million for fiscal year ended December 31, 2018 and increased to $341.2 million for the six months ended June 30, 2020 from $335.5 million for the six months ended June 30, 2019. We generated net loss of $58.1 million for fiscal year ended December 31, 2019 and net loss of $49.9 million for fiscal year ended December 31, 2018; and generated net loss of $80.2 million for the six months ended June 30, 2020 and net loss of $21.7 million for the six months ended June 30, 2019. Our gross revenue less network fees increased to $305.5 million for fiscal year ended December 31, 2019 from $252.7 million for fiscal year ended December 31, 2018, representing year-over-year growth of 20.9%; and our gross revenue less network fees increased to $146.5 million for the six months ended June 30, 2020 from $141.6 million for the six months ended June 30, 2019, representing growth of 3.4%. Our adjusted EBITDA increased to $103.8 million for fiscal year ended December 31, 2019 from $89.9 million for fiscal year ended December 31, 2018, representing year-over-year growth of 15.5%; and our adjusted EBITDA decreased to $32.3 million for the six months ended June 30, 2020 from $44.6 million for the six months ended June 30, 2019. The percentage of our total gross revenue less network fees derived from volume-based payments, subscription agreements and transaction fees was 56.7%, 26.5% and 14.6% for the fiscal year ended December 31, 2019, respectively, and 56.2%, 26.9% and 14.0% for the fiscal year ended December 31, 2018, respectively. The percentage of our total gross revenue less network fees derived from volume-based

payments, subscription agreements and transaction fees was 56.6%, 27.8% and 13.7% for the six months ended June 30, 2020, respectively, and 58.1%, 27.7% and 12.3% for the six months ended June 30, 2019, respectively.



 

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See “—Summary Historical and Pro Forma Condensed Consolidated Financial and Other Data” for a reconciliation of our non-GAAP measures to the most directly comparable financial measure calculated and presented in accordance with GAAP.

Our Shift4 Model

Our mission is to power the convergence of integrated payments and commerce-enabling software. Solving the complexity inherent to our software partners and merchants requires a specialized approach that combines a seamless customer experience with a secure, reliable and robust suite of payments and technology offerings.

 

 

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To achieve this mission, we strategically built our Shift4 Model on a three pillar foundation: (i) payments platform; (ii) technology solutions; and (iii) partner-centric distribution.

 

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Payments Platform

Our payments platform provides omni-channel card acceptance and processing solutions, including:

 

   

end-to-end payment processing for a broad range of payment types;

 

   

merchant acquiring;

 

   

proprietary omni-channel gateway capable of multiple methods of contactless QR code-based payments;

 

   

complementary software integrations;

 

   

integrated and mobile POS solutions;

 

   

security and risk management solutions; and

 

   

reporting and analytical tools.

For the year ended December 31, 2019, we processed over 3.5 billion transactions representing over $200.0 billion in payment volume across multiple payment types, including credit, debit, contactless card, EMV, mobile wallets and alternative payment methods. We continue to innovate and evolve our payments offering as new technology and payment methods are adopted by consumers.

Through our proprietary gateway, our payments platform is integrated with over 350 software suites including some of the largest and most recognized software providers in the world. In addition, we enable connectivity with the largest payment processors, alternative payment rails and over 100 payment devices. Our payments platform includes market-leading security features that help prevent consumer card data from entering the merchant’s environment.

Our merchants have the flexibility to subscribe to our payments platform in one of two ways: end-to-end payments or gateway. End-to-end payments merchants benefit from a single vendor solution for payment acceptance (including our proprietary gateway), devices, POS software solutions and a full suite of business intelligence tools. By consolidating these functions through a single, unified vendor solution, these merchants are able to reduce total spend on payment acceptance solutions and access gateway and technology solutions as value-added features. Gateway merchants benefit from interoperability with third-party payment processors. The flexibility in our model helps us attract software partners and merchants.

Technology Solutions

Our suite of technology solutions is designed to streamline our customers’ business operations, drive growth through strong consumer engagement and improve their business using rich transaction-level data.

 

   

Lighthouse 5 – Our cloud-based suite of business intelligence tools includes customer engagement, social media management, online reputation management, scheduling and product pricing, as well as extensive reporting and analytics.

 

   

Integrated Point-of-Sale (iPOS) – We provide purpose-built POS workstations pre-loaded with powerful, mission-critical software suites and integrated payment functionality. Our iPOS offering helps our merchants scale their business and improve operational efficiency while reducing total cost of ownership.

 

   

Mobile POS – Our mobile payments offering, Skytab, provides a complete feature set, including pay-at-the-table, order-at-the-table, delivery, customer feedback and email marketing, all of which are integrated with our proprietary gateway and Lighthouse 5.



 

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Marketplace – We enable seamless integrations into complementary third-party applications (such as online delivery services, payroll, timekeeping and other human resource services), reducing the number of vendors on which our merchants rely.

Partner-Centric Distribution

Our payments platform and technology solutions are delivered to our merchants through our partner-centric distribution network. Today, our network includes over 7,000 software partners, providing full coverage across the United States.

Our partner-centric distribution approach is designed to leverage the domain expertise and local relationships that our software partners have built with our merchants over years of doing business together. Our software partners are entrusted by merchants to guide software purchasing decisions and provide service and support. In turn, our software partners entrust us to provide innovative payment and technology solutions to help them continue to grow.

Our Key Differentiators

We believe that our Shift4 Model provides us with a competitive advantage and differentiated position in the market.

 

   

We are a pioneer in delivering innovative solutions. Since our founding, we have been at the forefront of developing and deploying new and innovative payments and technology solutions that are tailored to meet the demands of our customers as their business needs evolve, such as Skytab, Integrated POS, Tokenization and PCI-validated point-to-point encryption, or P2PE.

 

   

We have developed deep domain expertise and built specialized capabilities in the hospitality market. We believe that we have established a meaningful first-mover advantage in integrated payments and technology solutions for the hospitality market. With over 30 years of operating experience in the hospitality market, we have developed solutions that meet various use-cases in the hospitality industry. As a result, over 21,000 hotels and 125,000 restaurants in the United States use at least one of our products.

 

   

We maintain a privileged position as the last integration our software partners will ever need. We have over 350 integrations to market-leading software providers and we are integrated into a majority share of hotel property management systems in the United States. As a result, we simplify the operational complexity that our merchants face.

 

   

We control and integrate the most important parts of the payments value chain into a single point of access. We offer end-to-end processing, merchant acquiring, gateway, software integrations, POS solutions, security, reporting and analytical tools, enabling us to eliminate customer pain points around payment processing and device management. Integrating our payments platform into our software partners’ solutions enables them to deliver a comprehensive solution to their customers, with a single source of accountability and service.

 

   

We have a vision-driven, founder-led culture. Since our founding, we have focused on building an entrepreneurial and innovative culture that is deeply rooted in our philosophy of aligning our success with that of our software partners and merchants. Our founder-led team is able to draw on decades of experience in payments and software, which we believe is a key driver of our ability to innovate and disrupt our markets.



 

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Our Growth Strategy

Our growth strategy will continue to be driven by our ability to leverage our Shift4 Model to solve the most complex business challenges facing our customers. The key elements of this strategy include:

 

   

Continue to win new customers. We plan to continue enhancing our value proposition to empower our existing software partners to win new merchants. We also intend to expand our network of software partners across a variety of industry verticals in order to target new merchants.

 

   

Unlock substantial opportunity within existing merchant base. Significant upsell and cross-sell opportunities exist within our current base of merchants. We intend to drive adoption of our integrated end-to-end payments offering within our gateway merchant base, which increases our revenue per merchant and enhances merchant retention, resulting in stronger unit economics. In 2019 and in the six months ended June 30, 2020, the average integrated end-to-end merchant, or an end-to-end merchant who also utilizes our software, accounted for more than four times the gross profit than the average gateway merchant.

 

   

Continue enhancing our product portfolio with differentiated solutions. As merchants embrace simplicity and consolidate vendor relationships, we will continue to add new value-added features and functionality. This enables our merchants to deliver a higher quality experience to their consumers and increase their transaction volumes, benefitting both us and our merchants.

 

   

Leverage domain expertise in hospitality market to expand into adjacent verticals. Our access to leading hospitality businesses and industry thought leaders affords us an advantaged position of identifying emerging trends in adjacent areas and verticals that could result in attractive investment opportunities, such as specialty retail.

 

   

Leverage our relationships with global merchants to expand internationally. Our Shift4 Model serves a host of multinational hospitality brands that currently utilize our tokenization and POS software solutions internationally. We also have the opportunity to follow our customers as they expand into new geographic markets.

 

   

Monetize the robust data we capture through our Shift4 Model. We believe we have an opportunity to leverage data from the billions of transactions we process to develop unique insights that help identify trends in consumer behavior, as well as consumer and merchant preferences. We believe monetization of this data could represent a larger component of our business in the future.

 

   

Pursue strategic acquisitions. We may selectively pursue acquisitions to improve our competitive positioning within existing and new verticals, expand our customer base and enhance our software and technology capabilities.

Our Market and Trends Impacting the Industry

The convergence of payments and software is transforming global commerce. Our software partners and merchants are seeking a bundled integrated payment and software solution to introduce operating efficiencies and enhance consumer experiences. The market opportunity is large and growing. According to the January 2019 issue of The Nilson Report, purchase volume on cards in the United States is expected to reach $10.4 trillion by 2027 from $5.5 trillion in 2017, representing a compound annual growth rate, or CAGR, of approximately 7%. We leverage our Shift4 Model to capture a larger share of this market opportunity and to capitalize on the following trends defining our markets:

Trends Impacting Merchants

 

   

Merchants must leverage the power of software to compete



 

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Merchants are increasingly adopting multiple software suites

 

   

Increasing complexity of payments and the proliferation of frictionless and omni-channel commerce

 

   

Card-present verticals increasingly capture unique business insights

Trends Impacting ISVs

 

   

ISVs are integrating payments into their business models to remain competitive

 

   

ISVs struggle to integrate their software suites with the growing universe of third-party software applications

Searchlight Capital

Searchlight is a global private investment firm with over $7 billion in assets under management and offices in New York, London and Toronto. The firm manages capital through varied investment funds and special purpose partnerships. For additional information regarding Searchlight’s ownership in us after this offering, see “—Summary of the Transactions” and “Principal and Selling Stockholders.”

Recent Developments

COVID-19

The recent novel coronavirus, or COVID-19, pandemic and 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 materially impacted the restaurant and hospitality industries—verticals upon which we predominantly have focused on over the last decade.

In response to these developments, we have implemented measures to focus on the safety of our employees, including implementing remote working capabilities and to support our merchants as they shift to take-out and delivery operations, while at the same time seeking to mitigate the impact on our financial position and operations. We have also implemented new programs to help ease the burden for our merchants, encourage customers to support their local small businesses and restaurants and incentivize new merchants to enroll in our end-to-end payment platform. Specifically, we have:

 

   

established www.shift4.com/situation in an effort to share data to educate political leaders and advocacy groups as to where aid needs to be prioritized;

 

   

released a gift card funding campaign to encourage consumers to support their favorite bars/restaurants by purchasing a gift card through our Shift4Cares.com website; and

 

   

implemented temporary fee waivers on certain products from March 2020 through June 2020 that did not have a material impact on financial performance.

We believe we have sufficient liquidity to satisfy our cash needs, however, we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times. Our business was not significantly impacted by the COVID-19 pandemic until the latter part of March 2020, at which time our end-to-end payment volumes declined 70%. At that time, we took the following actions to increase liquidity and strengthen our financial position:

 

   

drew $68.5 million under our revolving credit facility in the first quarter of 2020, which was repaid as of June 30, 2020;

 

   

furloughed approximately 25% of our employees. As of mid-August 2020, we reinstated the majority of our workforce and are hiring in certain areas to accommodate new merchant onboarding;

 



 

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accelerated approximately $30 million of annual expense reduction plans related to prior acquisitions, including the Merchant Link Acquisition;

 

   

re-prioritized our capital projects to defer certain non-essential improvements;

 

   

instituted a company-wide hiring freeze, which has been lifted since August 2020; and

 

   

reduced salaries for management across the organization, which as of August 2020 were partially reinstated.

While we believe these actions will ensure that we can continue to support our employees, merchants and software partners through this crisis and will better position us for the recovery when that time comes, we are unable to accurately predict the ultimate impact that the COVID-19 pandemic will have on our operations going forward due to a number of factors, including:

 

   

uncertainties which will be dictated by the length of time that COVID-19 related disruptions continue and the severity of such disruptions;

 

   

the potential for additional outbreaks as government restrictions are relaxed and any further shelter-in-place or other government restrictions imposed as a result;

 

   

the impact of existing and future governmental regulations that might be imposed in response to the pandemic;

 

   

the impact of remote operations;

 

   

potential interruptions or impacts to our supply chain;

 

   

potential changes in consumer behavior, including the use of hotels, bars and restaurants; and

 

   

the deterioration in the economic conditions in the United States, which could have a significant impact on spending.

Since mid-March when shelter-in-place, social distancing, the closing of non-essential businesses and other restrictive measures were first put in place across the United States and our weekly gateway transactions decreased by approximately 75% from their pre-COVID-19 peak, we have seen a significant recovery in our end-to-end payment volumes and, for the trailing seven days leading up to June 30, 2020, end-to-end payment volumes were approximately 90% of pre-COVID-19 volumes in 2020 and as of the week beginning August 16, 2020, end-to-end payment volumes were approximately 230% of mid-March volumes, which were impacted similarly to gateway transactions by the COVID-19 pandemic.



 

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Shown below is our weekly end-to-end payment volume from the week beginning March 22, 2020, the lowest point since the COVID-19 pandemic, through the week beginning August 16, 2020:

LOGO

End-to-end payment volumes for June 2020 were $1,998 million, representing a 4% increase from June 2019. Additionally, July 2020 end-to-end payment volumes were 14% greater than July 2019 and August 2020 end-to-end payment volumes were 25% greater than August 2019. We have also seen our SkyTab merchant adoption increase 304% since mid-March 2020, with related volumes above the pre-COVID-19 peak. While end-to-end payment volumes for the six months ended June 30, 2020 have exceeded those for the six months ended June 30, 2019, the ultimate impact that the COVID-19 pandemic will have on our consolidated results of operations in the second half of 2020 remains uncertain. We will continue to evaluate the nature and extent of these potential impacts to our business, consolidated results of operations, and liquidity. See “Risk Factors—Business risks—The recent novel coronavirus, or COVID-19, global pandemic has had and is expected to continue to have a material adverse effect on our business and results of operations.”

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security, or CARES, Act was signed into law. The CARES Act provides a substantial stimulus and assistance package intended to address the impact of the COVID-19 pandemic, including tax relief and government loans, grants and investments. The CARES Act includes, among other things, provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified improvement property. Pursuant to the CARES Act, in June 2020, we submitted a carryback claim related to our net operating loss carryforward generated in 2018, which is expected to provide a cash tax savings of

$0.6 million and is reflected in the condensed consolidated financial statements for the six months ended June 30, 2020 included elsewhere in this prospectus. We will continue to monitor any effects that may result from the CARES Act or other government relief programs that are made available in the future.

 



 

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Initial Public Offering

On June 9, 2020, we completed our IPO, in which we issued and sold 17,250,000 shares of our 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 and an aggregate offering price of $396.8 million. Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC and Goldman Sachs & Co. LLC acted as representatives for the underwriters in the IPO. Upon completion of the IPO, we received net proceeds of approximately $363.8 million, after deducting the underwriting discounts and commissions of approximately $23.8 million and offering expenses of approximately $9.2 million. We used the net proceeds from the IPO and the Private Placement to purchase 23,324,537 LLC Interests directly from Shift4 Payments, LLC at a price per unit equal to the IPO price per share of Class A common stock in the IPO less the underwriting discounts and commissions. Shift4 Payments, LLC used the proceeds it received through Shift4 Payments, Inc. from the IPO and Private Placement to repay $59.8 million of required principal payments under the First Lien Term Loan Facility, to repay in full the $130.0 million outstanding under our Second Lien Term Loan Facility, to repay the $89.5 million outstanding borrowing under our Revolving Credit Facility and the remainder for general corporate purposes.

Repayment of Indebtedness

 

As of June 30, 2020, we had $450.0 million outstanding under the First Lien Term Loan Facility. Both the Second Lien Term Loan Facility and the Revolving Credit Facility were paid in full using the proceeds from the IPO and Private Placement in June 2020. As of June 30, 2020, we had no outstanding borrowings under the Revolving Credit Facility, which has borrowing capacity of $89.5 million, net of a $0.5 million letter of credit.

Summary Risk Factors

Participating in this offering involves substantial risk. Our ability to execute our strategy is also subject to certain risks. The risks described under the heading “Risk Factors” included elsewhere in this prospectus may cause us not to realize the full benefits of our strengths or may cause us to be unable to successfully execute all or part of our strategy. Some of the most significant challenges and risks we face include the following:

 

   

the recent novel coronavirus, or COVID-19, global pandemic has had and is expected to continue to have a material adverse effect on our business and results of operations;

 

   

substantial and increasingly intense competition worldwide in the financial services, payments and payment technology industries may adversely affect our overall business and operations;

 

   

potential changes in the competitive landscape, including disintermediation from other participants in the payments chain, could harm our business;

 

   

our ability to anticipate and respond to changing industry trends and the needs and preferences of our merchants and consumers may adversely affect our competitiveness or the demand for our products and services;

 

   

because we rely on third-party vendors to provide products and services, we could be adversely impacted if they fail to fulfill their obligations;

 

   

acquisitions create certain risks and may adversely affect our business, financial condition or results of operations;

 

   

we may not be able to continue to expand our share of the existing payment processing markets or expand into new markets which would inhibit our ability to grow and increase our profitability; and

 



 

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our Founder and Searchlight will continue to have significant influence over us after this offering, including control over decisions that require the approval of stockholders.

Before you invest in our Class A common stock, you should carefully consider all the information in this prospectus, including matters set forth under the heading “Risk Factors.”



 

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Ownership Structure

The diagram below depicts our organizational structure after giving effect to this offering, assuming no exercise by the underwriters of their option to purchase additional shares of Class A common stock.

 

LOGO

 

(1)

Our public stockholders will hold approximately 5.0% of the voting interest.

 

(2)

Jared Isaacman holds his LLC interests in Shift4 Payments, LLC and his Class B common stock and Class C common stock of Shift4 Payments, Inc. through a wholly owned corporation, Rook Holdings Inc., for which he is the sole stockholder.

Our Corporate Information

Shift4 Payments, Inc., the issuer of the Class A common stock in this offering, was incorporated as a Delaware corporation on November 5, 2019. Our corporate headquarters are located at 2202 N. Irving St., Allentown, PA 18109. Our telephone number is (888) 276-2108. Our principal website address is www.shift4.com. The information on any of our websites is deemed not to be incorporated in this prospectus or to be part of this prospectus.



 

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Shift4 Payments, Inc. is a holding company whose principal assets are the LLC interests it holds in Shift4 Payments, LLC.

 

Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of certain reduced reporting and other requirements that are otherwise generally applicable to public companies. As a result:

 

   

we are required to have only two years of audited financial statements and only two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosure;

 

   

we are not required to engage an auditor to report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act;

 

   

we are not required to comply with the requirement of the Public Company Accounting Oversight Board, or PCAOB, regarding the communication of critical audit matters in the auditor’s report on the financial statements;

 

   

we are not required to submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay,” “say-on-frequency” and “say-on-golden parachutes;” and

 

   

we are not required to comply with certain disclosure requirements related to executive compensation, such as the requirement to present a comparison of our Chief Executive Officer’s compensation to our median employee compensation.

We may take advantage of these reduced reporting and other requirements until the last day of our fiscal year following the fifth anniversary of the completion of our IPO, or such earlier time that we are no longer an emerging growth company. However, if certain events occur prior to the end of such period, including if we have more than $1.07 billion in annual revenue, have more than $700 million in market value of our Class A common stock held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period, we will cease to be an emerging growth company prior to the end of such period. We may choose to take advantage of some but not all of these reduced burdens. We have elected to adopt the reduced requirements with respect to our financial statements and the related selected financial data and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure, including in this prospectus.

In addition, the JOBS Act permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use this extended transition period.

As a result, the information that we provide to stockholders may be different than the information you may receive from other public companies in which you hold equity.



 

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The Offering

 

Issuer

Shift4 Payments, Inc.

 

Shares of Class A common stock offered by us

2,000,000 shares.

 

Shares of Class A common stock offered by the selling stockholders

8,000,000 shares (or 9,500,000 shares if the underwriters exercise in full their option to purchase additional shares).

 

Underwriters’ option to purchase additional shares of Class A common stock from the selling stockholders

The selling stockholders have granted the underwriters an option to purchase up to 1,500,000 additional shares of Class A common stock within 30 days of the date of this prospectus.

 

Shares of Class A common stock to be outstanding immediately after this offering

28,550,026 shares, representing approximately 5.3% of the combined voting power of all of Shift4 Payments, Inc.’s common stock (or 30,023,096 shares, representing approximately 5.7% of the combined voting power of all of Shift4 Payments, Inc.’s common stock if the underwriters exercise in full their option to purchase additional shares of Class A common stock), 64.2% of the economic interest in Shift4 Payments, Inc. and 35.7% of the indirect economic interest in Shift4 Payments, LLC (or 66.5% of the economic interest in Shift4 Payments, Inc. and 37.5% of the indirect economic interest in Shift4 Payments, LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

 

Shares of Class B common stock to be outstanding immediately after this offering

35,567,488 shares, representing approximately 65.4% of the combined voting power of all of Shift4 Payments, Inc.’s common stock (or 34,885,457 shares, representing approximately 65.8% of the combined voting power of all of Shift4 Payments, Inc.’s common stock if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and no economic interest in Shift4 Payments, Inc.

 

Shares of Class C common stock to be outstanding immediately after this offering

15,920,291 shares, representing approximately 29.3% of the combined voting power of all of Shift4 Payments, Inc.’s common stock (or 15,129,252 shares, representing approximately 28.5% of the combined voting power of all of Shift4 Payments, Inc.’s common stock if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and 35.8% of the economic interest in Shift4 Payments, Inc. and 19.9% of the indirect economic interest in Shift4 Payments, LLC (or 33.5% of the economic interest in Shift4 Payments, Inc. and 18.9% of the indirect economic interest in Shift4 Payments, LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

 

LLC Interests to be held by us immediately after this offering

44,470,317 LLC Interests, representing approximately 55.6% of the economic interest in Shift4 Payments, LLC (or 45,152,348 LLC Interests, representing approximately 56.4% of the economic interest in Shift4 Payments, LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock).


 

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LLC Interests to be held by the Continuing Equity Owners immediately after this offering

35,567,488 LLC Interests, representing approximately 44.4% of the economic interest in Shift4 Payments, LLC (or 34,885,457 LLC Interests, representing approximately 43.6% of the economic interest in Shift4 Payments, LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

 

Ratio of shares of Class A common stock and Class C common stock to LLC Interests

The Shift4 Payments LLC Agreement requires that we and Shift4 Payments, LLC at all times maintain a one-to-one ratio between the aggregate number of shares of Class A common stock and Class C common stock issued by us and the number of LLC Interests owned by us. Searchlight and our Founder together owns 100% of the outstanding shares of our Class C common stock.

 

Ratio of shares of Class B common stock to LLC Interests

The Shift4 Payments LLC Agreement requires that we and Shift4 Payments, LLC at all times maintain a one-to-one ratio between the number of shares of Class B common stock owned by Searchlight, our Founder and their respective permitted transferees and the number of LLC Interests owned by Searchlight, our Founder and their respective permitted transferees. Searchlight and our Founder together owns 100% of the outstanding shares of our Class B common stock.

 

Permitted holders of shares of Class B common stock

Only Searchlight, our Founder (through Rook) and the permitted transferees of Class B common stock as described in this prospectus are permitted to hold shares of our Class B common stock. Shares of Class B common stock are transferable to permitted transferees only together with an equal number of LLC Interests (subject to certain exceptions). See “Certain Relationships and Related Party Transactions—Shift4 LLC Agreement.”

 

Permitted holders of shares of Class C common stock

Only Searchlight, our Founder (through Rook) and the permitted transferees of Class C common stock as described in this prospectus are permitted to hold shares of our Class C common stock. If any such shares are transferred to any other person, they automatically convert into shares of Class A common stock. See “Certain Relationships and Related Party Transactions—Shift4 LLC Agreement.”

 

Voting rights

Holders of shares of our Class A common stock, our Class B common stock and Class C common stock vote together as a single class on all matters presented to stockholders for their vote or approval, except as otherwise required by law or our amended and restated certificate of incorporation. Each share of our Class A common stock entitles its holders to one vote per share, each share of each of our Class B common stock entitles its holders to ten votes per share and each share of our Class C common stock entitles its holders to ten votes per share on all matters presented to our stockholders generally. See “Description of Capital Stock.”


 

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Redemption rights of holders of LLC Interests

The Continuing Equity Owners may from time to time at each of their options require Shift4 Payments, LLC to redeem all or a portion of their LLC Interests (35,567,488 LLC Interests held by Continuing Equity Owners in the aggregate immediately after this offering (or 34,885,457 LLC Interests held by Continuing Equity Owners in the aggregate if the underwriters exercise in full their option to purchase additional shares of Class A common stock) in exchange for, at our election (determined solely by our independent directors (within the meaning of the rules of the NYSE) who are disinterested), newly-issued shares of our Class A common stock on a one-for-one basis or a cash payment equal to a volume weighted average market price of one share of our Class A common stock for each LLC Interest redeemed, in each case, in accordance with the terms of the Shift4 Payments LLC Agreement; provided that, at our election (determined solely by our independent directors (within the meaning of the rules of the NYSE) who are disinterested), we may effect a direct exchange by Shift4 Payments, Inc. of such Class A common stock or such cash, as applicable, for such LLC Interests. The Continuing Equity Owners may exercise such redemption right for as long as their LLC Interests remain outstanding. See “Certain Relationships and Related Party Transactions—Shift4 LLC Agreement.” Simultaneously with the payment of cash or shares of Class A common stock, as applicable, in connection with a redemption or exchange of LLC Interests pursuant to the terms of the Shift4 Payments LLC Agreement, a number of shares of our Class B common stock registered in the name of the redeeming or exchanging Continuing Equity Owner will be cancelled for no consideration on a one-for-one basis with the number of LLC Interests so redeemed or exchanged.

 

Use of proceeds

We estimate that we will receive net proceeds from this offering of approximately $92.2 million, after deducting estimated underwriting discounts and commissions and offering expenses. We will not receive any of the proceeds from the sale of Class A common stock by the selling stockholders in this offering. We intend to use the net proceeds from this offering to purchase 2,000,000 LLC Interests directly from Shift4 Payments, LLC at a price per unit equal to the public offering price per share of Class A common stock in this offering less underwriting discounts and commissions. We cannot specify with certainty all of the uses of the net proceeds that we will receive from this offering. Accordingly, we will have broad discretion in the application of these proceeds. Shift4 Payments, LLC intends to use the net proceeds from the sale of LLC Interests to Shift4 Payments, Inc. for general corporate purposes. See “Use of Proceeds.”

 

Dividend policy

We currently intend to retain all available funds and any future earnings to fund the development and growth of our business and to repay indebtedness, and therefore we do not anticipate declaring or paying any cash dividends on our Class A common stock in the foreseeable future. Holders of our Class B common stock are not



 

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entitled to participate in any dividends declared by our board of directors. Additionally, our ability to pay any cash dividends on our Class A common stock is limited by restrictions on the ability of Shift4 Payments, LLC and our other subsidiaries to pay dividends or make distributions under the terms of our Credit Facilities. Additionally, because we are a holding company, our ability to pay cash dividends on our Class A common stock depends on our receipt of cash distributions from Shift4 Payments, LLC and, through Shift4 Payments, LLC, cash distributions and dividends from our other direct and indirect wholly owned subsidiaries. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors, subject to compliance with contractual restrictions and covenants in the agreements governing our current and future indebtedness. Any such determination will also depend upon our business prospects, results of operations, financial condition, cash requirements and availability, industry trends and other factors that our board of directors may deem relevant. See “Dividend Policy.”

 

Controlled company exception

We are considered a “controlled company” for the purposes of the NYSE rules as Searchlight and our Founder have more than 50% of the voting power for the election of directors. See “Principal and Selling Stockholders.” As a “controlled company,” we are not subject to certain corporate governance requirements, including that: (1) a majority of our board of directors consists of “independent directors,” as defined under the NYSE rules; (2) we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; (3) we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and (4) we perform annual performance evaluations of the nominating and corporate governance and compensation committees. As a result, we may not have a majority of independent directors on our board of directors, an entirely independent nominating and corporate governance committee, an entirely independent compensation committee or perform annual performance evaluations of the nominating and corporate governance and compensation committees unless and until such time as we are required to do so.

 

Tax receivable agreement

We are party to the Tax Receivable Agreement with Shift4 Payments, LLC, the Continuing Equity Owners and the Blocker Shareholders that provides for the payment by Shift4 Payments, Inc. to the Continuing Equity Owners and the Blocker Shareholders of 85% of the amount of tax benefits, if any, that Shift4 Payments, Inc. actually realizes (or in some circumstances is deemed to realize) as a result of (1) increases in tax basis resulting from Shift4 Payments, Inc.’s purchase of LLC Interests directly and future redemptions funded by Shift4 Payments, Inc. or exchanges (or deemed exchanges in certain



 

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circumstances) of LLC Interests for Class A common stock or cash as described above under “—Redemption rights of holders of LLC Interests,” (2) our utilization of certain tax attributes of the Blocker Companies and (3) certain additional tax benefits attributable to payments made under the Tax Receivable Agreement. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement” for a discussion of the Tax Receivable Agreement.

 

Registration rights agreement

Pursuant to the Registration Rights Agreement, we will, subject to the terms and conditions thereof, agree to register the resale of the shares of our Class A common stock that are issuable to certain of the Continuing Equity Owners (including each of our executive officers) upon redemption or exchange of their LLC Interests and the shares of our Class A common stock that are issued to the Former Equity Owner in connection with the Transactions. See “Certain Relationships and Related Party Transactions—Registration Rights Agreement” for a discussion of the Registration Rights Agreement.

 

Lock-up release

Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC and Goldman Sachs & Co. LLC have agreed to release the restrictions under the lock-up agreements that were executed by the Continuing Equity Owners, including our Founder and Rook, in connection with the IPO, subject to the delivery and effectiveness of the lock-up agreements described under “Shares Eligible for Future Sale—Lock-Up Agreements.” See “Underwriting.”

 

Risk factors

See “Risk Factors” beginning on page 23 and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our Class A common stock.

 

Trading symbol

Our Class A common stock is listed and traded on the NYSE under the symbol “ FOUR.”

In this prospectus, unless otherwise indicated, the number of shares of Class A common stock outstanding and the other information based thereon reflects 28,550,026 shares of Class A common stock outstanding as of September 8, 2020 after giving effect to this offering and does not reflect:

 

   

35,567,488 shares of Class A common stock issuable upon exchange of 35,567,488 common units and the related shares of Class B common stock that will be held by the Continuing Equity Owners after giving effect to this offering, including in connection with any exercise of the underwriters’ option to purchase additional shares of Class A common stock from the selling stockholders;

 

   

15,920,291 shares of Class A Common Stock issuable upon exchange of shares of Class C Common Stock that will be held by the Continuing Equity Owners after giving effect to this offering, including in connection with any exercise of the underwriters’ option to purchase additional shares of Class A common stock from the selling stockholders;

 

   

1,119,116 shares of Class A common stock reserved for issuance under our 2020 Equity Plan, or 2020 Plan; and

 

   

4,630,884 shares of Class A common stock issuable upon vesting of all RSUs awarded.



 

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Summary Historical and Pro Forma Condensed Consolidated Financial and Other Data

The following tables present the summary historical consolidated financial and other data for Shift4 Payments, LLC and its subsidiaries and the summary pro forma condensed consolidated financial and other data for Shift4 Payments, Inc. Shift4 Payments, LLC is the predecessor of the issuer, Shift4 Payments, Inc., for financial reporting purposes. The summary consolidated statements of operations data and statements of cash flows data for the years ended December 31, 2018 and 2019 are derived from the audited consolidated financial statements of Shift4 Payments, LLC included elsewhere in this prospectus. The summary condensed consolidated statements of operations data and statements of cash flows data for the six months ended June 30, 2019 and 2020, and the summary condensed consolidated balance sheet data as of June 30, 2020 are derived from the unaudited condensed consolidated financial statements of Shift4 Payments, Inc. included elsewhere in this prospectus. The results of operations for the periods presented below are not necessarily indicative of the results to be expected for any future period, and the results for any interim period are not necessarily indicative of the results that may be expected for a full year. The information set forth below should be read together with the “Selected Historical Condensed Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the accompanying notes included elsewhere in this prospectus.

The summary historical financial data set forth below reflect the historical results of operations and the financial position of Shift4 Payments, Inc., including consolidation of its investment in Shift4 Payments, LLC, commencing June 5, 2020. Prior to June 5, 2020, the summary historical financial data set forth below represent the financial statements of Shift4 Payments, LLC. The summary historical financial data does not reflect what the financial position, results of operations or cash flows of Shift4 Payments, Inc. or Shift4 Payments, LLC would have been had these companies been stand-alone public companies for the periods presented.

As a result of the adoption of Accounting Standards Codification 606: Revenue from Contracts with Customers, or ASC 606, in 2019, the summary historical financial data for the year ended December 31, 2019 and the six months ended June 30, 2019 and 2020 is not comparable to the summary historical financial data for the year ended December 31, 2018. See Notes 2 and 4 to our consolidated financial statements for the year ended December 31, 2019 included elsewhere in this prospectus for more information about the adoption of ASC 606.

The summary unaudited pro forma condensed consolidated financial data of Shift4 Payments, Inc. presented below has been derived from our unaudited pro forma condensed consolidated financial information included elsewhere in this prospectus. The summary unaudited pro forma condensed consolidated statements of operations data for the year ended December 31, 2019 and the six months ended June 30, 2020 for Shift4 Payments, Inc. gives effect to the Transactions, including the consummation of the IPO and the Private Placement, and the use of proceeds therefrom, as described in “IPO, Private Placement and Transactions,” and this offering, as if all such transactions had occurred on January 1, 2019. The unaudited pro forma condensed consolidated financial information includes various estimates which are subject to material change and may not be indicative of what our operations or financial position would have been had this offering and the Transactions taken place on the dates indicated, or that may be expected to occur in the future. See “Unaudited Pro Forma Condensed Consolidated Financial Information” for a complete description of the adjustments and assumptions underlying the summary unaudited pro forma condensed consolidated financial information.



 

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    Shift4 Payments, LLC     Shift4
Payments,
Inc.
    Shift4 Payments, Inc.
Pro Forma
 
(in millions, except share and  per share amounts)   Year Ended
December 31,

(audited)
    Six Months
Ended
June 30,
    Six Months
Ended
June 30,
    Year Ended
December 31,
    Six Months
Ended
June 30,
 
    2018     2019     2019     2020     2019     2020  

Consolidated Statement of Operations:

           

Gross revenue

  $ 560.6     $ 731.4     $ 335.5     $ 341.2     $ 731.4     $ 341.2  

Cost of sales

    410.2       552.4       253.3       264.4       552.4       264.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    150.4       179.0       82.2       76.8       179.0       76.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General and administrative expenses

    83.7       124.4       52.6       111.5       144.5       59.0  

Depreciation and amortization expense

    40.4       40.2       19.6       20.9       40.2       20.9  

Professional fees

    7.4       10.4       3.8       2.9       10.4       2.9  

Advertising and marketing expenses

    6.1       6.3       2.8       2.1       6.3       2.1  

Restructuring expenses

    20.1       3.8       0.3       0.3       3.8       0.3  

Other operating (income)/expense, net

                      (12.4           (12.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    157.7       185.1       79.1       125.3       205.2       72.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

    (7.3     (6.1     3.1       (48.5     (26.2     4.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss on extinguishment of debt

                      (7.1            

Other income, net

    0.6       1.0       0.9       0.1       1.0       0.1  

Interest expense

    (47.0     (51.5     (25.2     (25.0     (31.5     (16.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (53.7     (56.6     (21.2     (80.5     (56.7     (11.9

Income tax benefit (provision)

    3.8       (1.5     (0.5     0.3       (1.5     0.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (49.9   $ (58.1   $ (21.7   $ (80.2   $ (58.2   $ (11.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to noncontrolling interests

 

    (1.0     (25.9     (5.1
       

 

 

   

 

 

   

 

 

 

Net loss attributable to Shift4 Payments, Inc.

 

  $ (79.2     (32.3     (6.5
       

 

 

   

 

 

   

 

 

 

Per Share Data:

           

Basic and diluted net loss per share

           

Class A net loss per share

 

  $ (0.03   $ (0.71   $ (0.14

Weighted-average shares used to compute net loss per share

 

    19,002,563       30,974,311       30,974,311  

Class C net loss per share

 

  $ (0.03   $ (0.71   $ (0.14

Weighted-average shares used to compute net loss per share

 

    20,139,163       15,920,291       15,920,291  


 

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     Shift4 Payments,
LLC
    Shift4
Payments,
LLC
    Shift4
Payments,
Inc.
 
     Year Ended
December 31,
    Six Months Ended
June 30,
 
(in millions)    2018     2019     2019     2020  

Consolidated Statements of Cash Flows:

        

Net cash provided by operating activities

   $ 25.5     $ 26.7     $ 22.9     $ 6.7  

Net cash used in investing activities

     (41.4     (98.8     (17.9     (16.7

Net cash provided by (used in) financing activities

     11.3       71.0       (4.6     250.3  

 

     Shift4 Payments, Inc.  
(in millions)    As of
June 30, 2020
 

Consolidated Balance Sheet:

  

Cash

   $ 244.0  

Total assets

     1,014.3  

Total liabilities

     543.7  

Retained deficit

     (257.6

Additional paid-in capital

     517.7  

Noncontrolling interests

     210.5  

Total stockholders’ equity

     470.6  

 

     Shift4 Payments, LLC      Shift4
Payments,
LLC
     Shift4
Payments,
Inc.
 
     Year Ended
December 31,
     Six Months Ended
June 30,
 
(in millions)    2018      2019      2019      2020  

End-to-end payment volume(1)

   $ 16,145.1      $ 22,125.2      $ 10,163.2      $ 10,386.1  

Gross revenue less network fees(2)

     252.7        305.5        141.6        146.5  

EBITDA(2)

     59.5        58.1        34.2        (19.7

Adjusted EBITDA(2)

     89.9        103.8        44.6        32.3  

 

(1)

End-to-end payment volume is defined as total dollar amount of card payments that we authorize and settle on behalf of our merchants. This volume does not include volume processed through our gateway only merchants. For a description of end-to-end payment volume, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key performance indicators and non-GAAP measures” and “Basis of Presentation—Key Terms and Performance Indicators Used in this Prospectus; Non-GAAP Financial Measures.”

 

(2)

We use supplemental measures of our performance which are derived from our consolidated financial information but which are not presented in our consolidated financial statements prepared in accordance with GAAP. These non-GAAP financial measures include gross revenue less network fees, which includes interchange and assessment fees; earnings before interest expense, income taxes, depreciation, and amortization, or EBITDA; and adjusted EBITDA. Gross revenue less network fees represents a key performance metric that management uses to measure changes in the mix and value derived from our customer base as we continue to execute our strategy to expand our reach to serve larger, complex merchants. Adjusted EBITDA is the primary financial performance measure used by management to evaluate its business and monitor results of operations.

Adjusted EBITDA represents EBITDA further adjusted for certain non-cash and other non-recurring items that management believes are not indicative of ongoing operations. These adjustments include acquisition, restructuring and integration costs, equity-based compensation expense, management fees and other non-recurring items.

We use non-GAAP financial measures to supplement financial information presented on a GAAP basis. We believe that excluding certain items from our GAAP results allows management to better understand our consolidated financial performance from period to period and better project our future consolidated financial performance as forecasts are developed at a level of detail different from that used to prepare GAAP-based financial measures. Moreover, we believe these non-GAAP financial measures provide our stakeholders with useful information to help them evaluate our operating results by facilitating an enhanced understanding of our operating performance and enabling them to make more meaningful period to period comparisons. There are limitations to the use of the



 

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non-GAAP financial measures presented in this prospectus. For example, 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 each 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.

The tables below provide reconciliations of gross profit to gross revenue less network fees and net loss on a consolidated basis for the periods presented to EBITDA and adjusted EBITDA.

Gross revenue less network fees:

 

     Year Ended
December 31,
     Six Months
Ended June 30,
 
(in millions)    2018      2019      2019      2020  

Gross profit

   $ 150.4      $ 179.0      $ 82.2      $ 76.8  

Add back: Other costs of sales

     102.3        126.5        59.4        69.7  
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross revenue less network fees

     252.7        305.5        141.6        146.5  
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA and adjusted EBITDA:

 

     Year Ended
December 31,
    Six Months
Ended June 30,
 
(in millions)    2018     2019     2019     2020  

Net loss

   $ (49.9   $ (58.1   $ (21.7   $ (80.2

Interest expense

     47.0       51.5       25.2       25.0  

Income tax (benefit) provision

     (3.8     1.5       0.5       (0.3

Depreciation and amortization expense

     66.2       63.2       30.2       35.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     59.5       58.1       34.2       (19.7

Acquisition, restructuring and integration costs(a)

     24.8       28.3       10.9       3.1  

Impact of adoption of ASC 606(b)

           14.0              

Equity-based compensation expense(c)

                       50.0  

Impact of lease modifications(d)

                       (12.4

Management fees(e)

     2.0       2.0       1.0       0.8  

Other nonrecurring items(f)

     3.6       1.4       (1.5     10.5  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $   89.9     $   103.8     $   44.6     $ 32.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

For the year ended December 31, 2018, consists primarily of restructuring expenses of $20.1 million. For the year ended December 31, 2019, consists primarily of adjustments to contingent liabilities of $15.5 million, one-time professional fees of $6.7 million, restructuring expenses of $3.8 million, and deferred compensation arrangements of $1.9 million. For the six months ended June 30, 2019, consists primarily of fair value adjustments to contingent liabilities of $6.8 million, deferred compensation arrangements of $1.5 million, and one-time professional fees of $0.8 million. For the six months ended June 30, 2020, consists primarily of change of control liabilities as a result of the IPO of $11.0 million offset by fair value adjustments to contingent liabilities of $(7.0) million and deferred compensation arrangements of $(2.1) million. See notes to our consolidated financial statements included elsewhere in this prospectus for more information on these restructuring expenses and contingent liability adjustments.

 

(b)

Effective January 1, 2019, we adopted ASC 606: Revenue from Contracts with Customers. As a result of the adoption of ASC 606, the cost of equipment deployed to new merchants in 2019 is expensed when shipped within “Cost of Sales” in our consolidated statements of operations. Previously, the cost of equipment deployed to new merchants was capitalized as an acquisition cost and amortized over the estimated life of a customer and the amortization was included in the depreciation and amortization expense used to calculate EBITDA. The impact on EBITDA as a result of the ASC 606 adoption was $14.0 million. In order to provide comparability to our 2018 adjusted EBITDA, the impact of $14.0 million is included as a component of adjusted EBITDA for the year ended December 31, 2019.



 

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(c)

Represents the equity-based compensation expense for restricted stock units that vest ratably over time and are not subject to continued service, as well as the restricted stock units that vest ratably over time and are subject to continued employment. See the notes to our consolidated financial statements included elsewhere in this prospectus for more information on equity-based compensation.

 

(d)

Effective June 30, 2020, we modified the terms and conditions of our SaaS arrangements and updated operational procedures. As a result, beginning June 30, 2020, hardware provided under our SaaS agreements is accounted for as an operating lease, whereas prior to June 30, 2020, these arrangements were accounted for as sales-type leases. This adjustment represents the one-time cumulative impact of modifying the contracts effective June 30, 2020. Prior to amending the terms, the sales-type lease accounting treatment impacted EBITDA and adjusted EBITDA negatively by $8.6 million for the six months ended June 30, 2020, and $6.3 million for the six months ended June 30, 2019.

 

(e)

Represents fees to the Continuing Equity Owners for consulting and managing services through the date of the IPO. These fees are not required to be paid subsequent to the IPO. See the notes to our consolidated financial statements included elsewhere in this prospectus for more information about these related party transactions.

 

(f)

For the year ended December 31, 2018, primarily consists of a one-time accrual of $2.3 million for cumulative unremitted sales and use tax related to years 2017 and prior. For the six months ended June 30, 2020, primarily consists of a $7.1 million loss on extinguishment of debt associated with the debt pre-payments and $1.6 million for temporary fee waivers given on certain products from March 2020 through June 2020 as a result of COVID-19. See the notes to our consolidated financial statements included elsewhere in this prospectus for more information on the loss on extinguishment of debt.



 

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RISK FACTORS

Investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this prospectus, including our consolidated financial statements and the related notes, before deciding to invest in our Class A common stock. The occurrence of any of the events described below could harm our business, financial condition, results of operations, liquidity or prospects. In such an event, the market price of our Class A common stock could decline, and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business.

Business risks

The recent novel coronavirus, or COVID-19, global pandemic has had and is expected to continue to have a material adverse effect on our business and results of operations.

In late 2019, COVID-19 was first detected in Wuhan, China. In March 2020, the World Health Organization declared COVID-19 a global pandemic, and governmental authorities around the world have implemented measures to reduce the spread of COVID-19. These measures, including “shelter-in-place” orders suggested or mandated by governmental authorities or otherwise elected by companies as a preventive measure, have adversely affected workforces, customers, consumer sentiment, economies, and financial markets, and, along with decreased consumer spending, have led to an economic downturn in the United States.

Numerous state and local jurisdictions, including in markets where we operate, have imposed, and others in the future may impose, “shelter-in-place” orders, quarantines, travel restrictions, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. For example, the federal and state governments in the United States have imposed social distancing measures and restrictions on movement, only allowing essential businesses to remain open. Such orders or restrictions have resulted in the temporary closure of many of our merchant operations, work stoppages, slowdowns and delays, mandatory remote operations, travel restrictions and cancellation of events, among other effects, any of which may materially impact our business and results of operations.

As a result of the COVID-19 pandemic, we experienced a significant decrease in our payments volumes and expect the impact of shelter-in-place orders and other government measures to continue to significantly impact our business, results of operations and cash flows for the foreseeable future. As result of the COVID-19 pandemic, many of our hospitality merchants have experienced an 80% or greater decline in transaction volumes from pre-COVID-19 levels and many of our restaurant merchants are limited to take-out or delivery business only.

Since the COVID-19 pandemic began, we:

 

   

drew $68.5 million under our revolving credit facility in the first quarter of 2020, which was repaid as of June 30, 2020;

 

   

furloughed approximately 25% of our employees. As of mid-August 2020, we reinstated the majority of our workforce and are hiring in certain areas to accommodate new merchant onboarding;

 

   

accelerated approximately $30 million of annual expense reduction plans related to previous acquisitions;

 

   

re-prioritized our capital projects;

 

   

instituted a company-wide hiring freeze, which has been lifted since August 2020; and

 

   

reduced salaries for management across the organization, which as of August 2020 were partially reinstated.

Due to the uncertainty of the COVID-19 pandemic, we will continue to assess the situation, including abiding by any government-imposed restrictions, market by market. We are unable to accurately predict the ultimate impact that the COVID-19 pandemic will have on our operations going forward due to uncertainties that will be dictated by the length of time that such disruptions continue, which will, in turn, depend on the currently unknowable

 

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duration and severity of the COVID-19 pandemic, the impact of governmental regulations that might be imposed in response to the pandemic, the impact of remote operations, the speed and extent to which normal economic and operating conditions will resume and overall changes in consumer behavior. In particular, even as our merchants re-open and adapt their operations, we cannot accurately predict the ongoing impact of government regulations and changing consumer behavior on our business. While we have not seen a meaningful degradation in new merchant sign-ups or an increase in existing merchant attrition as a result of the COVID-19 pandemic, it is possible that those business trends change if economic hardship across the country forces merchant closures. Any significant reduction in consumer visits to, or spending at, our merchants, would result in a loss of revenue to us. In particular, we cannot accurately forecast the potential impact of additional outbreaks as government restrictions are relaxed, further shelter-in-place or other government restrictions implemented in response to such outbreaks, the impact that weather has on merchants as a result of such restrictions, or the impact on the ability of our merchants to remain in business as a result of the ongoing pandemic, which could result in additional chargeback or merchant receivable losses, any future outbreak or any government restrictions related thereto.

In addition, the global deterioration in economic conditions, which may have an adverse impact on discretionary consumer spending, could also impact our business. For instance, consumer spending may be negatively impacted by general macroeconomic conditions, including a rise in unemployment, and decreased consumer confidence resulting from the COVID-19 pandemic. Changing consumer behaviors as a result of the COVID-19 pandemic may also have a material impact on our payments-based revenue for the foreseeable future, particularly for the hospitality and restaurant industries, verticals upon which we have predominantly focused on over the last decade.

In the past, governments have taken unprecedented actions in an attempt to address and rectify these extreme market and economic conditions by providing liquidity and stability to financial markets. If these actions are not successful, the return of adverse economic conditions may cause a material impact on our ability to raise capital, if needed, on a timely basis and on acceptable terms or at all.

To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, such as those relating to our liquidity, indebtedness and our ability to comply with the covenants contained in the agreements that govern our indebtedness.

Substantial and increasingly intense competition worldwide in the financial services, payments and payment technology industries may adversely affect our overall business and operations.

The financial services, payments and payment technology industries are highly competitive, and our payment services and solutions compete against all forms of financial services and payment systems, including cash and checks and electronic, mobile, e-commerce and integrated payment platforms. Many of the areas in which we compete are evolving rapidly with changing and disruptive technologies, shifting user needs, and frequent introductions of new products and services. We compete against a wide range of businesses with varying roles within the payments value chain. If we are unable to differentiate ourselves from our competitors and drive value for our customers, we may not be able to compete effectively. Our competitors may introduce their own value-added or other innovative services or solutions more effectively than we do, which could adversely impact our current competitive position and prospects for growth. Our competitors also may be able to offer and provide services that we do not offer. We also compete against new entrants that have developed alternative payment systems, e-commerce payment systems, payment systems for mobile devices and customized integrated software payment solutions. Failure to compete effectively against any of these competitive threats could adversely affect our business, financial condition or results of operations. In addition, some of our competitors are larger and/or have greater financial resources than us, enabling them to maintain a wider range of product offerings, mount extensive promotional campaigns and be more aggressive in offering products and services at lower rates, which may adversely affect our business, financial condition or results of operations.

 

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Potential changes in competitive landscape, including disintermediation from other participants in the payments chain, could harm our business.

We expect the competitive landscape will continue to change in a variety of ways, including:

 

   

rapid and significant changes in technology, resulting in new and innovative payment methods and programs, that could place us at a competitive disadvantage and reduce the use of our products and services;

 

   

competitors, including third-party processors (such as Chase Paymentech, Elavon, Fiserv, Global Payments and Worldpay) and integrated payment providers (such as Adyen, Lightspeed POS, Shopify and Square), merchants, governments and/or other industry participants may develop products and services that compete with or replace our value-added products and services, including products and services that enable payment networks and banks to transact with consumers directly;

 

   

participants in the financial services, payments and payment technology industries may merge, create joint ventures, or form other business combinations that may strengthen their existing business services or create new payment services that compete with our services; and

 

   

new services and technologies that we develop may be impacted by industry-wide solutions and standards related to migration to Europay, Mastercard and Visa, or EMV, standards, including chip technology, tokenization and other safety and security technologies.

Certain competitors could use strong or dominant positions in one or more markets to gain a competitive advantage against us, such as by integrating competing platforms or features into products they control such as search engines, web browsers, mobile device operating systems or social networks; by making acquisitions; or by making access to our platform more difficult. Further, current and future competitors could choose to offer a different pricing model or to undercut prices in the market or our prices in an effort to increase their market share. Failure to compete effectively against any of these or other competitive threats could adversely affect our business, financial condition or results of operations.

Our ability to anticipate and respond to changing industry trends and the needs and preferences of our merchants and consumers may adversely affect our competitiveness or the demand for our products and services.

The financial services, payments and payments technology industries are subject to rapid technological advancements, resulting in new products and services, including mobile payment applications and customized integrated software payment solutions, and an evolving competitive landscape, as well as changing industry standards and merchant and consumer needs and preferences. We expect that new services and technologies applicable to the financial services, payments and payment technology industries will continue to emerge and external factors such as the COVID-19 pandemic may accelerate such emergence. These changes may limit the competitiveness of and demand for our services. Also, our merchants continue to adopt new technology for business. We must anticipate and respond to these changes in order to remain competitive within our relative markets. In addition, failure to develop value-added services that meet the needs and preferences of our merchants could adversely affect our ability to compete effectively in our industry. Any new solution we develop or acquire might not be introduced in a timely or cost-effective manner and might not achieve the broad market acceptance necessary to generate significant revenue. In addition, these solutions could become subject to legal or regulatory requirements, which could prohibit or slow the development and provision of such new solutions and/or our adoption thereof. Furthermore, our merchants’ potential negative reaction to our products and services can spread quickly through social media and damage our reputation before we have the opportunity to respond. Improving and enhancing the functionality, performance, reliability, design, security and scalability of our platform is expensive, time-consuming and complex, and to the extent we are not able to do so in a manner that responds to our merchants’ evolving needs, our business, financial condition and results of operations will be adversely affected. If we are unable to anticipate or respond to technological or industry standard changes on a timely basis, our ability to remain competitive could be adversely affected.

 

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Because we rely on third-party vendors to provide products and services, we could be adversely impacted if they fail to fulfill their obligations.

We depend on third-party vendors for certain products and services, including components of our computer systems, software, data centers and telecommunications networks, to conduct our business. Any changes in these systems that degrade the functionality of our products and services, impose additional costs or requirements on it, or give preferential treatment to competitors’ services, including their own services, could materially and adversely affect usage of our products and services. For example, we are dependent on our relationship with a single third-party processor for services such as merchant authorization, processing, risk and chargeback monitoring accounting and clearing and settlement for the transactions we service. In the event our agreement with our third-party processor is terminated, or if upon its expiration we are unable to renew the contract on terms favorable to us, or at all, it may be difficult for us to replace these services which may adversely affect our operations and profitability.

We also rely on third parties for specific software and devices used in providing our products and services. Some of these organizations and service providers provide similar services and technology to our competitors, and we do not have long-term or exclusive contracts with them.

Our systems and operations or those of our merchants and software partners could be exposed to damage or interruption from, among other things, fire, natural disaster, power loss, telecommunications failure, unauthorized entry, computer viruses, denial-of-service attacks, acts of terrorism, human error, vandalism or sabotage, financial insolvency, bankruptcy and similar events. For example, the extent to which the COVID-19 pandemic may impact our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 pandemic and the actions to contain COVID-19 or treat its impact, among others. In addition, we may be unable to renew our existing contracts with our most significant merchants and software and partners or our merchants and software partners may stop providing or otherwise supporting the products and services we obtain from them, and we may not be able to obtain these or similar products or services on the same or similar terms as our existing arrangements, if at all. The failure of our third-party vendors to perform their obligations and provide the products and services we obtain from them in a timely manner for any reason could adversely affect our operations and profitability due to, among other consequences:

 

   

loss of revenues;

 

   

loss of merchants and software partners;

 

   

loss of merchant and cardholder data;

 

   

fines imposed by payment networks;

 

   

harm to our business or reputation resulting from negative publicity;

 

   

exposure to fraud losses or other liabilities;

 

   

additional operating and development costs; or

 

   

diversion of management, technical and other resources.

Acquisitions create certain risks and may adversely affect our business, financial condition or results of operations.

We have acquired businesses and may continue to make acquisitions of businesses or assets in the future. The acquisition and integration of businesses or assets involve a number of risks. These risks include valuation (determining a fair price for the business or assets), integration (managing the process of integrating the acquired business’ people, products, technology and other assets to extract the value and synergies projected to be realized in connection with the acquisition), regulation (obtaining regulatory or other government approvals that may be necessary to complete the acquisition) and due diligence (including identifying risks to the prospects of the

 

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business, including undisclosed or unknown liabilities or restrictions to be assumed in the acquisition). In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill, and other intangible assets. We are required to test goodwill and any other intangible assets with an indefinite life for possible impairment on an annual basis, or more frequently when circumstances indicate that impairment may have occurred. We are also required to evaluate amortizable intangible assets and fixed assets for impairment if there are indicators of a possible impairment. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based on this impairment assessment process, which could adversely affect our results of operations. See “—Financial risks—Our balance sheet includes significant amounts of goodwill and intangible assets. The impairment of a significant portion of these assets would negatively affect our business, financial condition or results of operations.”

In addition, to the extent we pursue acquisitions outside of the United States, these potential acquisitions often involve additional or increased risks including:

 

   

managing geographically separated organizations, systems and facilities;

 

   

integrating personnel with diverse business backgrounds and organizational cultures;

 

   

complying with non-U.S. regulatory and other legal requirements;

 

   

addressing financial and other impacts to our business resulting from fluctuations in currency exchange rates and unit economics across multiple jurisdictions;

 

   

enforcing intellectual property rights outside of the United States;

 

   

difficulty entering new non-U.S. markets due to, among other things, consumer acceptance and business knowledge of these markets; and

 

   

general economic and political conditions. See “—Business risks—Global economic, political and other conditions may adversely affect trends in consumer, business and government spending, which may adversely impact the demand for our services and our revenue and profitability.”

The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more of our combined businesses and the possible loss of key personnel. The diversion of management’s attention and any delays or difficulties encountered in connection with acquisitions and their integration could adversely affect our business, financial condition or results of operations.

Health concerns arising from the outbreak of a health epidemic or pandemic may have an adverse effect on our business.

In addition to the COVID-19 pandemic, our business could be materially and adversely affected by the outbreak of a widespread health epidemic or pandemic, including arising from various strains of avian flu or swine flu, such as H1N1, particularly if located in the United States. The occurrence of such an outbreak or other adverse public health developments could materially disrupt our business and operations. Such events could also significantly impact our industry and cause a temporary closure of our merchants’ businesses, which could have a material adverse effect on our business, financial condition and results of operations.

Furthermore, other viruses may be transmitted through human contact, and the risk of contracting viruses could cause consumers to avoid gathering in public places or patronizing certain businesses, which could adversely affect payment volumes. We could also be adversely affected if government authorities impose mandatory closures, seek voluntary closures, impose restrictions on operations of our merchants’ businesses, or restrict the import or export of hardware and equipment. Even if such measures are not implemented and a virus or other disease does not spread significantly, the perceived risk of infection or health risk may adversely affect our business and operating results.

 

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We may not be able to continue to expand our share of the existing payment processing markets or expand into new markets which would inhibit our ability to grow and increase our profitability.

Our future growth and profitability depend upon the growth of the markets in which we currently operate and our ability to increase our penetration and service offerings within these markets, as well as the emergence of new markets for our services and our ability to successfully expand into these new markets. It is difficult to attract new merchants because of potential disadvantages associated with switching payment processing vendors, such as transition costs, business disruption and loss of accustomed functionality. There can be no assurance that our efforts to overcome these factors will be successful, and this resistance may adversely affect our growth. A merchant’s payment processing activity with us may also decrease for a variety of reasons, including the merchant’s level of satisfaction with our products and services, the effectiveness of our support services, pricing of our products and services, the pricing and quality of competing products or services, the effects of global economic conditions (including as a result of the COVID-19 pandemic), or reductions in the consumer spending levels.

Our expansion into new markets is also dependent upon our ability to adapt our existing technology and offerings or to develop new or innovative applications to meet the particular service needs of each new market. In order to do so, we will need to anticipate and react to market changes and devote appropriate financial and technical resources to our development efforts, and there can be no assurance that we will be successful in these efforts.

Furthermore, we may expand into new geographical markets, including foreign countries, in which we do not currently have any operating experience. We cannot assure you that we will be able to successfully continue such expansion efforts due to our lack of experience in such markets and the multitude of risks associated with global operations, including the possibility of needing to obtain appropriate regulatory approval.

Our services and products must integrate with a variety of operating systems, software, device and web browsers, and our business may be materially and adversely affected if we are unable to ensure that our services interoperate with such operating systems, device, software and web browsers.

We are dependent on the ability of our products and services to integrate with a variety of operating systems, software and devices, such as the POS terminals we provide to merchants, as well as web browsers that we do not control. Any changes in these systems that degrade the functionality of our products and services, impose additional costs or requirements on us, or give preferential treatment to competitive services, could materially and adversely affect usage of our products and services. In addition, system integrators may show insufficient appetite to enable our products and services to integrate with a variety of operating systems, software and devices. In the event that it is difficult for our merchants to access and use our products and services, our business, financial condition, results of operations and prospects may be materially and adversely affected.

We depend, in part, on our merchant and software partner relationships and strategic partnerships with various institutions to operate and grow our business. If we are unable to maintain these relationships and partnerships, our business may be adversely affected.

We depend, in part, on our merchant and software partner relationships and partnerships with various institutions to operate and grow our business. We rely on the growth of our merchant and other strategic relationships, and our ability to maintain these relationships and other distribution channels, to support and grow our business. If we fail to maintain these relationships, or if our software partners or other strategic partners fail to maintain their brands or decrease the size of their branded networks, our business may be adversely affected. In addition, our contractual arrangements with our merchants and other strategic partners vary in length, and may also allow for early termination upon the occurrence of certain events. There can be no assurance that we will be able to renew these contractual arrangements on similar terms or at all. The loss of merchant or software partner relationships could adversely affect our business, financial condition or results of operations.

We rely on our sponsor bank to provide sponsorship to card and other payment networks and treasury services. If our sponsor bank stops providing sponsorship and treasury services, we would need to find one or more other

 

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financial institutions to provide those services. If we are unable to find a replacement institution, we may no longer be able to provide processing services to certain merchants, which could adversely affect our business, financial condition or results of operations. In the event of a chargeback, merchant bankruptcy or other failure to fund, or other intervening failure in the payment network system, we may be unable to recoup certain payments, which could adversely affect our business, financial condition or results of operations.

A significant number of our merchants are small- and medium-sized businesses and small affiliates of large companies, which can be more difficult and costly to retain than larger enterprises and may increase the impact of economic fluctuations on us.

We market and sell our products and services to, among others, SMBs. To continue to grow our revenue, we must add merchants, sell additional services to existing merchants and encourage existing merchants to continue doing business with us. However, retaining SMBs can be more difficult than retaining large enterprises, as SMB merchants:

 

   

often have higher rates of business failure and more limited resources;

 

   

may have decisions related to the choice of payment processor dictated by their affiliated parent entity; and

 

   

are more able to change their payment processors than larger organizations dependent on our services.

SMBs are typically more susceptible to the adverse effects of economic fluctuations, including as a result of the COVID-19 pandemic. Adverse changes in the economic environment or business failures of our SMB merchants may have a greater impact on us than on our competitors who do not focus on SMBs to the extent that we do. As a result, we may need to attract and retain new merchants at an accelerated rate or decrease our expenses to reduce negative impacts on our business, financial condition and results of operations.

Global economic, political and other conditions may adversely affect trends in consumer, business and government spending, which may adversely impact the demand for our services and our revenue and profitability.

The financial services, payments and payment technology industries in which we operate depend heavily upon the overall level of consumer, business and government spending. A sustained deterioration in general economic conditions (including distress in financial markets and turmoil in specific economies around the world), in particular as a result of the COVID-19 pandemic, may adversely affect our financial performance by reducing the number or average purchase amount of transactions we process. See “—The recent novel coronavirus, or COVID-19, global pandemic has had and is expected to continue to have a material adverse effect on our business and results of operations.” A reduction in the amount of consumer spending or credit card transactions could result in a decrease of our revenue and profits.

Adverse economic trends may accelerate the timing, or increase the impact of, risks to our financial performance. These trends could include:

 

   

declining economies and the pace of economic recovery can change consumer spending behaviors, on which the majority of our revenue is dependent;

 

   

low levels of consumer and business confidence typically associated with recessionary environments, and those markets experiencing relatively high unemployment, may result in decreased spending by cardholders;

 

   

budgetary concerns in the United States and other countries around the world could affect the United States and other sovereign credit ratings, which could impact consumer confidence and spending;

 

   

financial institutions may restrict credit lines to cardholders or limit the issuance of new cards to mitigate cardholder credit concerns;

 

   

uncertainty and volatility in the performance of our merchants’ businesses, particularly SMBs, may make estimates of our revenues and financial performance less predictable;

 

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cardholders or merchants may decrease spending for value-added services we market and sell; and

 

   

government intervention, including the effect of laws, regulations and government investments in our merchants, may have potential negative effects on our business and our relationships with our merchants or otherwise alter their strategic direction away from our products and services.

In addition, the banking industry remains subject to consolidation regardless of overall economic conditions. In times of economic distress, various financial institutions in the markets we serve have been acquired or merged with and into other financial institutions, including those with which we partner. If a current referral partner of ours is acquired by another bank, the acquiring bank may seek to terminate our agreement and impose its own merchant services program on the acquired bank. We may be unable to retain our banking relationships post-acquisition, or may have to offer financial concessions to do so, which could adversely affect our results of operations or growth.

We may in the future offer merchant acquiring and processing services in geographies outside of the United States, including potentially in the European Union or the United Kingdom. In such circumstances, we may become subject to additional European Union and United Kingdom financial regulatory requirements and we could become subject to risks associated with the ongoing uncertainty surrounding the future relationship between the United Kingdom and the European Union (including any resulting economic downturn) following the United Kingdom’s exit from the European Union (Brexit) on January 31, 2020. We are subject to risks associated with operations in international markets, including changes in foreign governmental policies and requirements applicable to our business, including the presence of more established competitors and our lack of experience in such non-U.S. markets. In addition, any future partners in non-U.S. jurisdictions, may also be acquired, reorganized or otherwise disposed of in the event of further market turmoil or losses in their loan portfolio that result in such financial institutions becoming less than adequately capitalized. Our revenue derived from these and other non-U.S. operations will be subject to additional risks, including those resulting from social and geopolitical instability and unfavorable political or diplomatic developments, all of which could adversely affect our business, financial condition or results of operations.

In the event we expand internationally, we may face challenges due to the presence of more established competitors and our lack of experience in such non-U.S. markets. If we are unable to successfully manage these risks relating to the international expansion of our business, it could adversely affect our business, financial condition or results of operations.

We are subject to governmental regulation and other legal obligations, particularly related to privacy, data protection and information security, and consumer protection laws across different markets where we conduct our business. Our actual or perceived failure to comply with such obligations could harm our business.

In the United States and other jurisdictions in which our services are used, we are subject to various consumer protection laws (including laws on disputed transactions) and related regulations. If we are found to have breached any consumer protection laws or regulations in any such market, we may be subject to enforcement actions that require us to change our business practices in a manner which may negatively impact our revenue, as well as expose ourselves to litigation, fines, civil and/or criminal penalties and adverse publicity that could cause our customers to lose trust in us, negatively impacting our reputation and business in a manner that harms our financial position.

As part of our business, we collect personally identifiable information, also referred to as personal data, and other potentially sensitive and/or regulated data from our consumers and the merchants we work with. Laws and regulations in the United States and around the world restrict how personal information is collected, processed, stored, transferred, used and disclosed, as well as set standards for its security, implement notice requirements regarding privacy practices, and provide individuals with certain rights regarding the use, disclosure and sale of their protected personal information. Several foreign jurisdictions, including the EU and the United Kingdom, have laws and regulations which are more restrictive in certain respects than those in the United States. For

 

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example, the EU General Data Protection Regulation, or GDPR, which came into force on May 25, 2018, implemented stringent operational requirements for the use of personal data. The European regime also includes directives which, among other things, require EU member states to regulate marketing by electronic means and the use of web cookies and other tracking technology. Each EU member state has transposed the requirements of these directives into its own national data privacy regime, and therefore the laws may differ between jurisdictions. These are also under reform and are expected to be replaced by a regulation which should provide consistent requirements across the EU.

The GDPR introduced more stringent requirements (which will continue to be interpreted through guidance and decisions over the coming years) and require organizations to erase an individual’s information upon request, implement mandatory data breach notification requirements, additional new obligations on service providers and strict protections on how data may be transferred outside of the EU. The European Union Court of Justice recently struck down a permitted personal data transfer mechanism between the EU and the United States, which may lead to uncertainty about the legal basis for other personal data transfers to the United States or interruption of such transfers. Specifically, on July 16, 2020, the Court of Justice of the EU invalidated Decision 2016/1250 on the adequacy of the protection provided by the EU-U.S. Privacy Shield Framework. To the extent that we were previously relying on the EU-U.S. Privacy Shield Framework to transfer data from the EU to the U.S., we will not be able to do so in the future, which could increase our costs and limit our ability to process personal data from the EU. In the event any court blocks personal data transfers to or from a particular jurisdiction on the basis that certain or all such transfer mechanisms are not legally adequate, this could give rise to operational interruption in the performance of services for customers, greater costs to implement alternative data transfer mechanisms that are still permitted, regulatory liabilities or reputational harm.

A UK version of the GDPR is expected to take effect on January 1, 2021 after the end of the Brexit transition period (during which the EU GDPR continues to apply). If our privacy or data security measures fail to comply with applicable current or future laws and regulations, we may be subject to litigation, regulatory investigations, enforcement notices requiring us to change the way we use personal data or our marketing practices. For example, under the GDPR we may be subject to fines of up to €20 million or up to 4% of the total worldwide annual group turnover of the preceding financial year (whichever is higher). We may also be subject to other liabilities, as well as negative publicity and a potential loss of business.

In the United States, both the federal and various state governments have adopted or are considering, laws, guidelines or rules for the collection, distribution, use and storage of information collected from or about consumers or their devices. For example, California enacted the California Consumer Privacy Act, or CCPA, which became enforceable by the California Attorney General on July 1, 2020, requires new disclosures to California consumers, imposes new rules for collecting or using information about minors, and affords consumers new abilities to opt out of certain disclosures of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The effects of the CCPA, forthcoming implementing regulations, and uncertainties about the scope and applicability of exemptions that may apply to our business, are potentially significant and may require us to modify our data collection or processing practices and policies and to incur substantial costs and expenses in an effort to comply.

Restrictions on the collection, use, sharing or disclosure of personally identifiable information or additional requirements and liability for security and data integrity could require us to modify our solutions and features, possibly in a material manner, could limit our ability to develop new services and features and could subject us to increased compliance obligations and regulatory scrutiny.

Our inability to protect our systems and data from continually evolving cybersecurity risks, security breaches or other technological risks could affect our reputation among our merchants and consumers and may expose us to liability.

We are subject to a number of legal requirements, contractual obligations and industry standards regarding security, data protection and privacy and any failure to comply with these requirements, obligations or standards could have an adverse effect on our reputation, business, financial condition and operating results.

 

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In conducting our business, we process, transmit and store sensitive business information and personally identifiable information about our merchants, consumers, sales and financial institution partners, vendors, and other parties. This information may include account access credentials, credit and debit card numbers, bank account numbers, social security numbers, driver’s license numbers, names and addresses and other types of sensitive business or personal information. Some of this information is also processed and stored by our merchants, software and financial institution partners, third-party service providers to whom we outsource certain functions and other agents, which we refer to collectively as our associated third parties. We have certain responsibilities to payment networks and their member financial institutions for any failure, including the failure of our associated third parties, to protect this information.

In addition, as a provider of security-related solutions to merchants and other business customers, our products and services may themselves be targets of cyber-attacks that attempt to sabotage or otherwise disable them, or the defensive and preventative measures we take ultimately may not be able to effectively detect, prevent, or protect against or otherwise mitigate losses from all cyber-attacks. Despite significant efforts to create security barriers against such threats, it is virtually impossible for us to eliminate these risks entirely. Any such breach could compromise our networks, creating system disruptions or slowdowns and exploiting security vulnerabilities of our products. Additionally, the information stored on our networks could be accessed, publicly disclosed, lost, or stolen, which could subject us to liability and cause us financial harm. These breaches, or any perceived breach, may also result in damage to our reputation, negative publicity, loss of key partners, merchants and sales, increased costs to remedy any problem, and costly litigation, and may therefore adversely impact market acceptance of our products and seriously affect our business, financial condition or results of operations.

We have previously been the target of malicious third-party attempts to identify and exploit system vulnerabilities, and/or penetrate or bypass our security measures, in order to gain unauthorized access to our networks and systems or those of third parties associated with us. If these attempts are successful it could lead to the compromise of sensitive, business, personal or confidential information. While we proactively employ multiple methods at different layers of our systems to defend against intrusion and attack and to protect our data, we cannot be certain that these measures or sufficient to counter all current and emerging technology threats.

Our computer systems and the computer systems of our merchants and software partners have been, and could be in the future, subject to breaches, and our data protection measures may not prevent unauthorized access. While we believe the procedures and processes we have implemented to handle an attack are adequate, the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and are often difficult to detect. In addition, increased remote operations creates an additional risk of attack while decreasing our ability to monitor. Threats to our systems and associated third party systems can originate from human error, fraud or malice on the part of employees or third parties, or simply from accidental technological failure. Computer viruses and other malware can be distributed and could infiltrate our systems or those of associated third parties. In addition, denial of service or other attacks could be launched against us for a variety of purposes, including to interfere with our services or create a diversion for other malicious activities. Our defensive measures may not prevent unplanned downtime, unauthorized access or unauthorized use of sensitive data. While we maintain cyber errors and omissions insurance coverage that covers certain aspects of cyber risks, our insurance coverage may be insufficient to cover all losses. Further, while we select our associated third parties carefully, we do not control their actions. Any problems experienced by these third parties, including those resulting from breakdowns or other disruptions in the services provided by such parties or cyber-attacks and security breaches, could adversely affect our ability to service our merchants or otherwise conduct our business.

We could also be subject to liability for claims relating to misuse of personal information, such as unauthorized marketing purposes and violation of consumer protection or data privacy laws. We cannot provide assurance that the contractual requirements related to security and privacy that we impose on our service providers who have access to merchant and consumer data will be followed or will be adequate to prevent the unauthorized use or disclosure of data. In addition, we have agreed in certain agreements to take certain protective measures to ensure the confidentiality of merchant and consumer data. The costs of systems and procedures associated with such protective measures may increase and could adversely affect our ability to compete effectively. Any failure to

 

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adequately enforce or provide these protective measures could result in liability, protracted and costly litigation, governmental and card network intervention and fines and, with respect to misuse of personal information of our merchants and consumers, lost revenue and reputational harm.

Any type of security breach, attack or misuse of data, whether experienced by us or an associated third party, could harm our reputation or deter existing or prospective merchants from using our services, increase our operating expenses in order to contain and remediate the incident, expose us to unbudgeted or uninsured liability, disrupt our operations (including potential service interruptions), divert management focus away from other priorities, increase our risk of regulatory scrutiny, result in the imposition of penalties and fines under state, federal and foreign laws or by payment networks and adversely affect our continued payment network registration and financial institution sponsorship. As set out above, fines under the GDPR, including for inadequate security, can reach €20 million or up to 4% of the total worldwide annual group turnover of the preceding financial year, whichever is higher. Further, if we were to be removed from networks’ lists of Payment Card Industry Data Security Standard, compliant service providers, our existing merchants, sales and financial institution partners or other third parties may cease using or referring our services. Also, prospective merchants, sales partners, financial institution partners or other third parties may choose to terminate their relationship with us, or delay or choose not to consider us for their processing needs, and the payment networks on which we rely could refuse to allow us to continue processing through their networks.

We may experience failures in our processing systems due to software defects, computer viruses and development delays, which could damage customer relations and expose us to liability.

Our core business depends heavily on the reliability of our processing systems, including the security of the applications and systems we develop and license to our customers, in addition to the security of the processing system of our sponsor bank. Software defects or vulnerabilities, a system outage, or other failures could adversely affect our business, financial condition or results of operations, including by damaging our reputation or exposing us to third-party liability. Payment network rules and certain governmental regulations allow for possible penalties if our products and services do not meet certain operating standards. To successfully operate our business, we must be able to protect our systems from interruption, including from events that may be beyond our control. Events that could cause system interruptions include fire, natural disaster, unauthorized entry, power loss, telecommunications failure, computer viruses, terrorist acts and war. Although we have taken steps to protect against data loss and system failures, we still face the risk that we may lose critical data or experience system failures. To help protect against these events, we perform a portion of disaster recovery operations ourselves, as well as utilize select third parties for certain operations. To the extent we outsource any disaster recovery functions, we are at risk of the merchant’s unresponsiveness or other failures in the event of breakdowns in our systems. In addition, our property and business interruption insurance may not be adequate to compensate us for all losses or failures that may occur.

Our products and services are based on sophisticated software and computing systems that are constantly evolving. We often encounter delays and cost overruns in developing changes implemented to our systems. In addition, the underlying software may contain undetected errors, viruses or defects. Defects in our software products and errors or delays in our processing of electronic transactions could result in additional development costs, diversion of technical and other resources from our other development efforts, loss of credibility with current or potential merchants, harm to our reputation or exposure to liability claims. In addition, we rely on technologies supplied to us by third parties that may also contain undetected errors, viruses or defects that could adversely affect our business, financial condition or results of operations. Although we attempt to limit our potential liability for warranty claims through disclaimers in our software documentation and limitation of liability provisions in our licenses and other agreements with our merchants and software partners, we cannot assure that these measures will be successful in limiting our liability. Additionally, we and our merchants and software partners are subject to payment network rules. If we do not comply with payment network requirements or standards, we may be subject to fines or sanctions, including suspension or termination of our registrations and licenses necessary to conduct business. We have experienced high growth rates in payment transaction volumes

 

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over the past years and expect growth to continue for the coming years; however, despite the implementation of architectural changes to safeguard sufficient future processing capacity on our payments platform, in the future the payments platform could potentially reach the limits of the number of transactions it is able to process, resulting in longer processing time or even downtime. Our efforts to safeguard sufficient future processing capacity are time-consuming, involve significant technical risk and may divert our resources from new features and products, and there can be no guarantee that these efforts will succeed. Furthermore, any efforts to further scale the platform or increase its complexity to handle a larger number or more complicated transactions could result in performance issues, including downtime. A failure to adequately scale our payments platform could therefore materially and adversely affect our business, financial condition or results of operations.

Degradation of the quality of the products and services we offer, including support services, could adversely impact our ability to attract and retain merchants and software partners.

Our merchants and software partners expect a consistent level of quality in the provision of our products and services. The support services we provide are a key element of the value proposition to our merchants and software partners. If the reliability or functionality of our products and services is compromised or the quality of those products or services is otherwise degraded, or if we fail to continue to provide a high level of support, we could lose existing merchants and software partners and find it harder to attract new merchants and software partners. If we are unable to scale our support functions to address the growth of our merchant and partner network, or our employees in alternative work locations are unable to adequately support customers, the quality of our support may decrease, which could adversely affect our ability to attract and retain merchants and software partners.

A significant natural disaster could have a material and adverse effect on our business. Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems at our headquarters or data centers could result in lengthy interruptions in access to or functionality of our platform or could result in related liabilities.

Increased customer attrition could cause our financial results to decline.

We experience attrition in customer credit and debit card processing volume resulting from several factors, including business closures, transfers of merchants’ accounts to our competitors, unsuccessful contract renewal negotiations and account closures that we initiate for various reasons, such as heightened credit risks, unacceptable card types or businesses, or contract breaches by customers. In addition, if a software partner switches to another payment processor, terminates our services, internalizes payment processing functions that we perform, merges with or is acquired by one of our competitors, or shuts down or becomes insolvent, we may no longer receive new merchant referrals from the software partner, and we risk losing existing merchants that were originally enrolled by the software partner. We cannot predict the level of attrition in the future and it could increase. Our software partners, most of which are not exclusive, are an important source of new business. Higher than expected attrition could adversely affect our business, financial condition or results of operations. If we are unable to renew our customer contracts on favorable terms, or at all, our business, financial condition or results of operations could be adversely affected.

Fraud by merchants or others could adversely affect our business, financial condition or results of operations.

We may be liable for certain fraudulent transactions or credits initiated by merchants or others. Examples of merchant fraud include merchants or other parties knowingly using a stolen or counterfeit credit, debit or prepaid card, card number, or other credentials to record a false sales or credit transaction, processing an invalid card or intentionally failing to deliver the merchandise or services sold in an otherwise valid transaction. Criminals are using increasingly sophisticated methods to engage in illegal activities such as counterfeiting and fraud. Failure to effectively manage risk and prevent fraud could increase our chargeback liability or cause us to incur other liabilities. It is possible that incidents of fraud could increase in the future. Increases in chargebacks or other liabilities could adversely affect our business, financial condition or results of operations.

 

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Our risk management policies and procedures may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk.

We operate in a rapidly changing industry. Accordingly, our risk management policies and procedures may not be fully effective to identify, monitor and manage all risks our business encounters. In addition, when we introduce new services, focus on new business types, or begin to operate in markets where we have a limited history of fraud loss, we may be less able to forecast and reserve accurately for those losses. If our policies and procedures are not fully effective or we are not successful in identifying and mitigating all risks to which we are or may be exposed, we may suffer uninsured liability, harm to our reputation or be subject to litigation or regulatory actions that could adversely affect our business, financial condition or results of operations.

Our business depends on strong and trusted brands, and damage to our reputation, or the reputation of our partners, could adversely affect our business, financial condition or results of operations.

We market our products and services under our brands and we must protect and grow the value of our brands to continue to be successful in the future. If an incident were to occur that damages our reputation, the value of our brands could be adversely affected and our business could be damaged.

Our ability to recruit, retain and develop qualified personnel is critical to our success and growth.

All of our businesses function at the intersection of rapidly changing technological, social, economic and regulatory environments that require a wide range of expertise and intellectual capital. For us to successfully compete and grow, we must recruit, retain and develop personnel who can provide the necessary expertise across a broad spectrum of intellectual capital needs. In addition, we must develop, maintain and, as necessary, implement appropriate succession plans to assure we have the necessary human resources capable of maintaining continuity in our business. For instance, we are highly dependent on the expertise of our Founder and Chief Executive Officer, Jared Isaacman. The market for qualified personnel is competitive and we may not succeed in recruiting additional personnel or may fail to effectively replace current personnel who depart with qualified or effective successors. In addition, from time to time, there may be changes in our management team that may be disruptive to our business. If our management team, including any new hires that we make, fails to work together effectively and to execute our plans and strategies on a timely basis, our business could be harmed. Our effort to retain and develop personnel may also result in significant additional expenses, which could adversely affect our profitability. We cannot assure that key personnel, including our executive officers, will continue to be employed or that we will be able to attract and retain qualified personnel in the future. Failure to recruit, retain or develop qualified personnel could adversely affect our business, financial condition or results of operations.

We incur chargeback liability when our merchants refuse to or cannot reimburse chargebacks resolved in favor of their customers. Any increase in chargebacks not paid by our merchants may adversely affect our business, financial condition or results of operations.

In the event a dispute between a cardholder and a merchant is not resolved in favor of the merchant, the transaction is normally charged back to the merchant and the purchase price is credited or otherwise refunded to the cardholder. If we are unable to collect such amounts from the merchant’s account or reserve account, if applicable, or if the merchant refuses or is unable, due to closure, bankruptcy or other reasons, to reimburse us for a chargeback, we are responsible for the amount of the refund paid to the cardholder. The risk of chargebacks is typically greater with those merchants that promise future delivery of goods and services rather than delivering goods or rendering services at the time of payment (for example in the hospitality and auto rental industries, both of which we support), as well as “card not present” transactions in which consumers do not physically present cards to merchants in connection with the purchase of goods and services, such as e-commerce, telephonic and mobile transactions. We may experience significant losses from chargebacks in the future. Any increase in chargebacks not paid by our merchants could have a material adverse effect on our business, financial condition or results of operations. We have policies and procedures to monitor and manage merchant-related credit risks and often mitigate such risks by requiring collateral, such as cash reserves, and monitoring transaction activity.

 

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Notwithstanding our policies and procedures for managing credit risk, it is possible that a default on such obligations by one or more of our merchants could adversely affect our business, financial condition or results of operations.

We expend significant resources pursuing sales opportunities, and if we fail to close sales after expending significant time and resources to do so, our business, financial condition and results of operations could be adversely affected.

The initial installation and set-up of many of our services often involve significant resource commitments by our merchants, particularly those with larger operational scale. Potential merchants generally commit significant resources to an evaluation of available services and may require us to expend substantial time, effort and money educating them as to the value of our services. We incur substantial costs in order to obtain each new customer. We may expend significant funds and management resources during a sales cycle and ultimately fail to close the sale. Our sales cycle may be extended due to our merchants’ budgetary constraints or for other reasons. If we are unsuccessful in closing sales after expending significant funds and management resources or we experience delays or experience greater than anticipated costs, it could have a material adverse effect on our business, financial condition and results of operations.

There may be a decline in the use of cards as a payment mechanism for consumers or adverse developments with respect to the card industry in general.

If consumers do not continue to use credit or debit cards as a payment mechanism for their transactions, if there continues to be a reduction in “card present” transactions as a result of the COVID-19 pandemic, or if there is a change in the mix of payments between cash, credit cards and debit cards and other emerging means of payment our business could be adversely affected. Consumer credit risk may make it more difficult or expensive for consumers to gain access to credit facilities such as credit cards. Regulatory changes may result in financial institutions seeking to charge their customers additional fees for use of credit or debit cards. Such fees may result in decreased use of credit or debit cards by cardholders. In order to consistently increase and maintain our profitability, consumers and businesses must continue to use electronic payment methods that we process, including credit and debit cards. If consumers and businesses do not continue to use credit, debit or prepaid cards as a payment mechanism for their transactions or if there is a change in the mix of payments between cash, alternative currencies and technologies, credit, debit and prepaid cards, or the corresponding methodologies used for each, which is adverse to us, it could have a material adverse effect on our business, financial condition and results of operations.

Increases in card network fees and other changes to fee arrangements may result in the loss of merchants or a reduction in our earnings.

From time to time, card networks, including Visa and Mastercard, increase the fees that they charge processors. We could attempt to pass these increases along to our merchants, but this strategy might result in the loss of merchants to our competitors who do not pass along the increases. If competitive practices prevent us from passing along the higher fees to our merchants in the future, we may have to absorb all or a portion of such increases, which may increase our operating costs and reduce our earnings. In addition, regulators are subjecting interchange and other fees to increased scrutiny, and new regulations could require greater pricing transparency of the breakdown in fees or fee limitations, which could lead to increased price-based competition, lower margins and higher rates of merchant attrition and affect our business, financial condition or results of operations.

In addition, in certain of our markets, card issuers pay merchant acquirers such as us fees based on debit card usage in an effort to encourage debit card use. If these card issuers discontinue this practice, our revenue and margins in these jurisdictions could be adversely affected.

 

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If we fail to comply with the applicable requirements of payment networks, they could seek to fine us, suspend us or terminate our registrations. If our merchants or sales partners incur fines or penalties that we cannot collect from them, we may have to bear the cost of such fines or penalties.

In order to provide our transaction processing services, several of our subsidiaries are registered with Visa and Mastercard and other payment networks as members or as service providers for members. Visa, Mastercard, and other payment networks, set the rules and standards with which we must comply. The termination of our member registration or our status as a certified service provider, or any changes in network rules or standards, including interpretation and implementation of the rules or standards, that increase the cost of doing business or limit our ability to provide transaction processing services to or through our merchants or partners, could adversely affect our business, financial condition or results of operations.

As such, we and our merchants are subject to payment network rules that could subject us or our merchants to a variety of fines or penalties that may be levied by such networks for certain acts or omissions by us or our merchants. The rules of card networks are set by their boards, which may be influenced by card issuers, and some of those issuers are our competitors with respect to these processing services. Many banks directly or indirectly sell processing services to merchants in direct competition with us. These banks could attempt, by virtue of their influence on the networks, to alter the networks’ rules or policies to the detriment of non-members including certain of our businesses. The termination of our registrations or our status as a service provider or a merchant processor, or any changes in network rules or standards, including interpretation and implementation of the rules or standards, that increase the cost of doing business or limit our ability to provide transaction processing services to our merchants, could adversely affect our business, financial condition or results of operations. If a merchant fails to comply with the applicable requirements of card networks, it could be subject to a variety of fines or penalties that may be levied by card networks. If we cannot collect the amounts from the applicable merchant, we may have to bear the cost of the fines or penalties, resulting in lower earnings for us. The termination of our registration, or any changes in card network rules that would impair our registration, could require us to stop providing payment processing services relating to the affected card network, which would adversely affect our ability to conduct our business.

Many of our key components are procured from a single or limited number of suppliers. Thus, we are at risk of shortage, price increases, tariffs, changes, delay, or discontinuation of key components, which could disrupt and materially and adversely affect our business.

Many of the key components used to manufacture our products, such as our POS systems, come from limited or single sources of supply. In addition, in some cases, we rely only on one manufacturer to fabricate, test, and assemble our products. In general, our contract manufacturers fabricate or procure components on our behalf, subject to certain approved procedures or supplier lists, and we do not have firm commitments from all of these manufacturers to provide all components, or to provide them in quantities and on timelines that we may require.

Due to our reliance on the components and products produced by suppliers such as these, we are subject to the risk of shortages and long lead times in the supply of certain components or products. We are still in the process of identifying alternative manufacturers for the assembly of our products and for many of the single-sourced components used in our products. In the case of off-the-shelf components, we are subject to the risk that our suppliers may discontinue or modify them, or that the components may cease to be available on commercially reasonable terms, or at all. We have in the past experienced, and may in the future experience, component shortages or delays or other problems in product assembly, and the availability of these components or products may be difficult to predict. For example, our manufacturers may experience temporary or permanent disruptions in their manufacturing operations due to equipment breakdowns, labor strikes or shortages, natural disasters, component or material shortages, cost increases, acquisitions, insolvency, changes in legal or regulatory requirements, or other similar problems.

Additionally, various sources of supply-chain risk, including strikes or shutdowns at delivery ports or loss of or damage to our products while they are in transit or storage, intellectual property theft, losses due to tampering,

 

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issues with quality or sourcing control, failure by our suppliers to comply with applicable laws and regulation, potential tariffs or other trade restrictions, or other similar problems could limit or delay the supply of our products or harm our reputation. In the event of a shortage or supply interruption from suppliers of these components, we may not be able to develop alternate sources quickly, cost-effectively, or at all. Any interruption or delay in manufacturing or component supply, any increases in component costs, or the inability to obtain these parts or components from alternate sources at acceptable prices and within a reasonable amount of time, would harm our ability to provide our products to sellers on a timely basis. This could harm our relationships with our sellers, prevent us from acquiring new sellers, and materially and adversely affect our business.

Cost savings initiatives may not produce the savings expected and may negatively impact our other initiatives and efforts to grow our business.

We are consistently exploring measures aimed at improving our profitability and maintaining flexibility in our capital resources, including the introduction of cost savings initiatives. In response to the COVID-19 pandemic, we furloughed approximately 25% of our employees, accelerated expense reduction plans related to previous acquisitions, limited discretionary spending, re-prioritized our capital projects, instituted a company-wide hiring freeze and reduced salaries for management. As of mid-August, the majority of furloughed employees were reinstated (with additional hiring in certain areas to accommodate new merchant onboarding), the hiring freeze was lifted and management salary reductions were partially reinstated. We expect to continue to take measures to improve our profitability and cash flows from operating activities. However, there can be no assurance that the cost control measures will be successful. In addition, these and any future spending reductions, if any, may negatively impact our other initiatives or our efforts to grow our business, which may negatively impact our future results of operations and increase the burden on existing management, systems, and resources.

Our operating results and operating metrics are subject to seasonality and volatility, which could result in fluctuations in our quarterly revenues and operating results or in perceptions of our business prospects.

We have experienced in the past, and expect to continue to experience, seasonal fluctuations in our revenue, which can vary by region. For instance, our revenue has historically been strongest in our second and third quarters and weakest in our first quarter. Some variability results from seasonal retail events and the number of business days in a month or quarter. We also experience volatility in certain other metrics, such as number of transactions processed and payment processing volumes. Volatility in our key operating metrics or their rates of growth could result in fluctuations in financial condition or results of operations and may lead to adverse inferences about our prospects, which could result in declines in our stock price.

Financial risks

Our balance sheet includes significant amounts of goodwill and intangible assets. The impairment of a significant portion of these assets would negatively affect our business, financial condition or results of operations.

As a result of our prior acquisitions, a significant portion of our total assets consists of intangible assets (including goodwill). Goodwill and intangible assets, net of amortization, together accounted for approximately 81% and 61% of the total assets on our balance sheet as of December 31, 2019 and June 30, 2020, respectively. To the extent we engage in additional acquisitions we may recognize additional intangible assets and goodwill. We evaluate goodwill for impairment annually at October 1 and whenever events or circumstances make it more likely than not that impairment may have occurred. Under current accounting rules, any determination that impairment has occurred would require us to record an impairment charge, which would adversely affect our earnings. An impairment of a significant portion of goodwill or intangible assets could adversely affect our business, financial condition or results of operations.

 

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Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our debt obligations.

We have substantial indebtedness. As of June 30, 2020, we had approximately $450.0 million of total debt outstanding under our Credit Facilities. Our substantial indebtedness could have adverse consequences, including:

 

   

increasing our vulnerability to adverse economic, industry or competitive developments;

 

   

requiring a substantial portion of cash flow from operations to be dedicated to the payments on our indebtedness, reducing our ability to use cash flow to fund our operations, capital expenditures and future business opportunities;

 

   

making it more difficult for us to satisfy our obligations with respect to our indebtedness, including restrictive covenants and borrowing conditions, which could result in an event of default under the agreements governing such indebtedness;

 

   

restricting us from making strategic acquisitions or causing us to make nonstrategic divestitures;

 

   

making it more difficult for us to obtain network sponsorship and clearing services from financial institutions or to obtain or retain other business with financial institutions;

 

   

limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions, and general corporate or other purposes; and

 

   

limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who, therefore, may be able to take advantage of opportunities that our leverage prevents us from exploiting.

Successful execution of our business strategy is dependent in part upon our ability to manage our capital structure to reduce interest expense and enhance free cash flow generation. As of June 30, 2020, we had $450.0 million outstanding under the First Lien Term Loan facility. The Second Lien Term Loan Facility and the Revolving Credit Facility were fully repaid as of June 30, 2020. The Revolving Credit Facility had remaining capacity of $89.5 million as of June 30, 2020, net of a $0.5 million letter of credit. We may not be able to refinance our Credit Facilities or our other existing indebtedness at or prior to their maturity at attractive rates of interest because of our high levels of debt, debt incurrence restrictions under our debt agreements or because of adverse conditions in credit markets generally.

In addition, $450.0 million of our debt outstanding at June 30, 2020 is at a variable rate of interest and is not subject to an interest rate hedge. The condition of the financial and credit markets and prevailing interest rates have fluctuated in the past and are likely to fluctuate in the future. In addition, developments in our business and operations could lead to a ratings downgrade for us or our subsidiaries. As a result, as of June 30, 2020, the impact of a 100 basis point increase in interest rates would increase our annual interest expense by approximately $4.5 million.

Any such fluctuation in the financial and credit markets, or in the rating of us or our subsidiaries, may impact our ability to access debt markets in the future or increase our cost of current or future debt, which could adversely affect our business, financial condition or results of operations.

Restrictions imposed by our Credit Facilities and our other outstanding indebtedness may materially limit our ability to operate our business and finance our future operations or capital needs.

The terms of our Credit Facilities restrict us and our restricted subsidiaries, which currently includes all of our operating subsidiaries, from engaging in specified types of transactions. These covenants restrict our ability, and that of our restricted subsidiaries, to, among other things:

 

   

incur indebtedness;

 

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create liens;

 

   

engage in mergers or consolidations;

 

   

make investments, loans and advances;

 

   

pay dividends and distributions and repurchase capital stock;

 

   

sell assets;

 

   

engage in certain transactions with affiliates;

 

   

enter into sale and leaseback transactions;

 

   

make certain accounting changes; and

 

   

make prepayments on junior indebtedness.

In addition, the credit agreements governing our Credit Facilities contain a springing maximum total leverage ratio financial covenant and customary financial covenants based on various leverage and interest coverage ratios. See “Description of Indebtedness.” A breach of any of these covenants, or any other covenant in the documents governing our Credit Facilities, could result in a default or event of default under our Credit Facilities. In the event of any event of default under our Credit Facilities, the applicable lenders or agents could elect to terminate borrowing commitments and declare all borrowings and loans outstanding thereunder, together with accrued and unpaid interest and any fees and other obligations, to be immediately due and payable. In addition, or in the alternative, the applicable lenders or agents could exercise their rights under the security documents entered into in connection with our Credit Facilities. We have pledged substantially all of our assets as collateral securing our Credit Facilities and any such exercise of remedies on any material portion of such collateral would likely materially adversely affect our business, financial condition or results of operations.

If we were unable to repay or otherwise refinance these borrowings and loans when due, and the applicable lenders proceeded against the collateral granted to them to secure that indebtedness, we may be forced into bankruptcy or liquidation. In the event the applicable lenders accelerate the repayment of our borrowings, we may not have sufficient assets to repay that indebtedness. Any acceleration of amounts due under our Credit Facilities or other outstanding indebtedness would also likely have a material adverse effect on us.

Accelerated funding programs increase our working capital requirements and expose us to incremental credit risk, and if we are unable to access or raise sufficient liquidity to address these funding programs we may be exposed to additional competitive risk.

In response to demand from our merchants and competitive offerings, we offer certain of our merchants various accelerated funding programs, which are designed to enable qualified participating merchants to receive their deposits from credit card transactions in an expedited manner. These programs increase our working capital requirements and expose us to incremental credit risk related to our merchants, which could constrain our ability to raise additional capital to fund our operations and adversely affect our growth, financial condition and results of operations. Our inability to access or raise sufficient liquidity to address our needs in connection with the anticipated expansion of such advance funding programs could put us at a competitive disadvantage by restricting our ability to offer programs to all of our merchants similar to those made available by various of our competitors.

Our results of operations may be adversely affected by changes in foreign currency exchange rates.

Revenue and profit generated by our non-U.S. operations will increase or decrease compared to prior periods as a result of changes in foreign currency exchange rates. In addition, we may become subject to exchange control regulations that restrict or prohibit the conversion of our other revenue currencies into U.S. dollars. Any of these factors could decrease the value of revenues and earnings we derive from our non-U.S. operations and adversely affect our business.

 

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While we currently have limited diversification in foreign currency, we may seek to reduce our exposure to fluctuations in foreign currency exchange rates through the use of hedging arrangements. To the extent that we hedge our foreign currency exchange rate exposure, we forgo the benefits we would otherwise experience if foreign currency exchange rates changed in our favor. No strategy can completely insulate us from risks associated with such fluctuations and our currency exchange rate risk management activities could expose us to substantial losses if such rates move materially differently from our expectations.

New or revised tax regulations or their interpretations, or becoming subject to additional foreign or U.S. federal, state or local taxes that cannot be passed through to our merchants or partners, could reduce our net income.

We are subject to tax laws in each jurisdiction where we do business. Changes in tax laws or their interpretations could decrease the amount of revenues we receive, the value of any tax loss carry-forwards and tax credits recorded on our balance sheet and the amount of our cash flow, and adversely affect our business, financial condition or results of operations.

Additionally, companies in the electronic payments industry, including us, may become subject to incremental taxation in various tax jurisdictions. Taxing jurisdictions have not yet adopted uniform positions on this topic. If we are required to pay additional taxes and are unable to pass the tax expense through to our merchants, our costs would increase and our net income would be reduced.

If we cannot pass along increases in interchange and other fees from payment networks to our merchants, our operating margins would be reduced.

We pay interchange, assessment, transaction and other fees set by the payment networks to such networks and, in some cases, to the card issuing financial institutions for each transaction we process. From time to time, the payment networks increase the interchange fees and other fees that they charge payment processors and the financial institution sponsors. At their sole discretion, our financial institution sponsors have the right to pass any increases in interchange and other fees on to us and they have consistently done so in the past. We are generally permitted under the contracts into which we enter, and in the past we have been able to, pass these fee increases along to our merchants through corresponding increases in our processing fees. However, if we are unable to pass through these and other fees in the future, it could have a material adverse effect on our business, financial condition and results of operations.

Legal and regulatory risks

Failure to comply with the U.S. Foreign Corrupt Practices Act, or the FCPA, anti-money laundering, economic and trade sanctions regulations, and similar laws could subject us to penalties and other adverse consequences.

We may operate our business in foreign countries where companies often engage in business practices that are prohibited by U.S. and other regulations applicable to us. We are subject to anti-corruption laws and regulations, including the FCPA and other laws that prohibit the making or offering of improper payments to foreign government officials and political figures, including anti-bribery provisions enforced by the Department of Justice and accounting provisions enforced by the SEC. These laws prohibit improper payments or offers of payments to foreign governments and their officials and political parties by the United States and other business entities for the purpose of obtaining or retaining business. We have implemented policies, procedures, systems, and controls designed to identify and address potentially impermissible transactions under such laws and regulations; however, there can be no assurance that all of our employees, consultants and agents, including those that may be based in or from countries where practices that violate U.S. or other laws may be customary, will not take actions in violation of our policies, for which we may be ultimately responsible.

 

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In addition, we are contractually required to comply with anti-money laundering laws and regulations, including the Bank Secrecy Act, as amended by the USA PATRIOT Act of 2001, or the BSA. Among other things, the BSA requires subject entities to develop and implement risk-based anti-money laundering programs, report large cash transactions and suspicious activity, and maintain transaction records.

We are also subject to certain economic and trade sanctions programs that are administered by the Department of Treasury’s Office of Foreign Assets Control, or OFAC, which prohibit or restrict transactions to or from or dealings with specified countries, their governments, and in certain circumstances, their nationals, and with individuals and entities that are specially-designated nationals of those countries, narcotics traffickers, and terrorists or terrorist organizations. Other entities may be subject to additional foreign or local sanctions requirements in other relevant jurisdictions.

Similar anti-money laundering and counter terrorist financing and proceeds of crime laws apply to movements of currency and payments through electronic transactions and to dealings with persons specified in lists maintained by the country equivalents to OFAC lists in several other countries and require specific data retention obligations to be observed by intermediaries in the payment process. Our businesses in those jurisdictions are subject to those data retention obligations.

Failure to comply with any of these laws and regulations or changes in this regulatory environment, including changing interpretations and the implementation of new or varying regulatory requirements by the government, may result in significant financial penalties, reputational harm or change the manner in which we currently conduct some aspects of our business, which could adversely affect our business, financial condition or results of operations.

Failure to protect, enforce and defend our intellectual property rights may diminish our competitive advantages or interfere with our ability to market and promote our products and services.

Our trademarks, trade names, trade secrets, patents, know-how, proprietary technology and other intellectual property are important to our future success. We believe our trademarks and trade names are widely recognized and associated with quality and reliable service. While it is our policy to protect and defend our intellectual property rights vigorously, we cannot predict whether the steps we take to protect our intellectual property will be adequate to prevent infringement, misappropriation, dilution or other potential violations of our intellectually property rights. We also cannot guarantee that others will not independently develop technology with the same or similar functions to any proprietary technology we rely on to conduct our business and differentiate ourselves from our competitors. Unauthorized parties may also attempt to copy or obtain and use our technology to develop applications with the same functionality as our solutions, and policing unauthorized use of our technology and intellectual property rights is difficult and may not be effective. Furthermore, we may face claims of infringement of third-party intellectual property rights that could interfere with our ability to market and promote our brands, products and services. Any litigation to enforce our intellectual property rights or defend ourselves against claims of infringement of third-party intellectual property rights could be costly, divert attention of management and may not ultimately be resolved in our favor. Moreover, if we are unable to successfully defend against claims that we have infringed the intellectual property rights of others, we may be prevented from using certain intellectual property or may be liable for damages, which in turn could materially adversely affect our business, financial condition or results of operations.

While software and other of our proprietary works may be protected under copyright law, we have chosen not to register any copyrights in these works, and instead, primarily rely on protecting our software as a trade secret. In order to bring a copyright infringement lawsuit in the United States, the copyright must be registered with the United States Copyright Office. Accordingly, the remedies and damages available to us for unauthorized use of our software may be limited.

We attempt to protect our intellectual property and proprietary information by requiring all of our employees, consultants and certain of our contractors to execute confidentiality and invention assignment agreements.

 

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However, we may not obtain these agreements in all circumstances, and individuals with whom we have these agreements may not comply with their terms. The assignment of intellectual property rights under these agreements may not be self-executing or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property. In addition, we may not be able to prevent the unauthorized disclosure or use of our technical know-how or other trade secrets by the parties to these agreements despite the existence generally of confidentiality agreements and other contractual restrictions. Monitoring unauthorized uses and disclosures is difficult and we do not know whether the steps we have taken to protect our proprietary technologies will be effective.

In addition, we use open-source software in connection with our proprietary software and expect to continue to use open-source software in the future. Some open-source licenses require licensors to provide source code to licensees upon request, or prohibit licensors from charging a fee to licensees. While we try to insulate our proprietary code from the effects of such open-source license provisions, we cannot guarantee we will be successful. Accordingly, we may face claims from others claiming ownership of, or seeking to enforce the license terms applicable to such open-source software, including by demanding release of the open-source software, derivative works or our proprietary source code that was developed or distributed with such software. These claims could also result in litigation, require us to purchase a costly license or require us to devote additional research and development resources to change our software, any of which would have a negative effect on our business and results of operations. In addition, if the license terms for the open-source code change, we may be forced to re-engineer our software or incur additional costs.

Our existing patents may not be valid, and we may not be able to obtain and enforce additional patents to protect our proprietary rights from use by potential competitors. Companies with other patents could require us to stop using or pay to use required technology.

We have applied for, and intend to continue to apply for, patents relating to our proprietary software and technology. Such applications may not result in the issuance of any patents, and any patents now held or that may be issued may not provide adequate protection from competition. Furthermore, because the issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, it is possible that patents issued or licensed to us may be challenged successfully and found to be invalid or unenforceable. In that event, any competitive advantage that such patents might provide would be lost. If we are unable to secure or to continue to maintain patent coverage, our technology could become subject to competition from the sale of similar competing products.

Competitors may also be able to design around our patents. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection. If these developments were to occur, we could face increased competition. In addition, filing, prosecuting, maintaining, defending and enforcing patents on our software and technology in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States.

Failure to comply with, or changes in, laws, regulations and enforcement activities may adversely affect the products, services and markets in which we operate.

We, our merchants and certain third party partners are subject to laws, regulations and industry standards that affect the electronic payments industry in the many countries in which our services are used. In particular, certain merchants and software partners and our sponsor bank are subject to numerous laws and regulations applicable to banks, financial institutions, and card issuers in the United States and abroad, and, consequently, we are at times affected by these foreign, federal, state, and local laws and regulations. There may be changes to the laws, regulation and standards that affect our operations in substantial and unpredictable ways at the federal and state level in the United States and in other countries in which our services are used. Changes to laws, regulations and standards, including interpretation and enforcement of such laws, regulations and standards could increase the

 

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cost of doing business or otherwise change how or where we want to do business. In addition, changes to laws, regulations and standards could affect our merchants and software partners and could result in material effects on the way we operate or the cost to operate our business.

In addition, the U.S. government has increased its scrutiny of a number of credit card practices, from which some of our merchants derive significant revenue. Regulation of the payments industry, including regulations applicable to us, our merchants and software partners, has increased significantly in recent years. Failure to comply with laws and regulations applicable to our business may result in the suspension or revocation of licenses or registrations, the limitation, suspension or termination of services or the imposition of consent orders or civil and criminal penalties, including fines which could adversely affect our business, financial condition or results of operations.

We are also subject to U.S. financial services regulations, a myriad of consumer protection laws, including economic sanctions, laws and regulations, anticorruption laws, escheat regulations and privacy and information security regulations. Changes to legal rules and regulations, or interpretation or enforcement of them, could have a negative financial effect on us. Any lack of legal certainty exposes our operations to increased risks, including increased difficulty in enforcing our agreements in those jurisdictions and increased risks of adverse actions by local government authorities, such as expropriations. In addition, certain of our alliance partners are subject to regulation by federal and state authorities and, as a result, could pass through some of those compliance obligations to us, which could adversely affect our business, financial condition or results of operations.

In particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, significantly changed the U.S. financial regulatory system. Among other things, Title X of the Dodd-Frank Act established the Consumer Financial Protection Bureau, or CFPB, which regulates consumer financial products and services, including some offered by certain of our merchants. Regulation, examination and enforcement actions from the CFPB may require us to adjust our activities and may increase our compliance costs.

Separately, under the Dodd-Frank Act, debit interchange fees that a card issuer receives and which are established by a payment network for an electronic debit transaction are regulated by the Board of Governors of the Federal Reserve System, or the Federal Reserve, and must be “reasonable and proportional” to the cost incurred by the card issuer in authorizing, clearing, and settling the transaction. The Federal Reserve has capped debit interchange rates for card issuers operating in the United States with assets of $10 billion or more at the sum of $0.21 per transaction and an ad valorem component of 5 basis points to reflect a portion of the card issuer’s fraud losses plus, for qualifying card issuers, an additional $0.01 per transaction in debit interchange for fraud prevention costs. Regulations such as these could result in the need for us to make capital investments to modify our services to facilitate our existing merchants’ and potential merchants’ compliance and reduce the fees we are able to charge our merchants. These regulations also could result in greater pricing transparency and increased price-based competition leading to lower margins and higher rates of merchant attrition. Furthermore, the requirements of the regulations could result in changes in our merchants’ business practices, which could change the demand for our services and alter the type or volume of transactions that we process on behalf of our merchants.

From time to time we are subject to various legal proceedings which could adversely affect our business, financial condition or results of operations.

We are involved in various litigation matters from time to time. Such matters can be time-consuming, divert management’s attention and resources and cause us to incur significant expenses. Our insurance or indemnities may not cover all claims that may be asserted against us, and any claims asserted against us, regardless of merit or eventual outcome, may harm our reputation. If we are unsuccessful in our defense in these litigation matters, or any other legal proceeding, we may be forced to pay damages or fines, enter into consent decrees or change our business practices, any of which could adversely affect our business, financial condition or results of operations.

 

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Risks related to our organizational structure

Our principal asset is our interest in Shift4 Payments, LLC, and, as a result, we depend on distributions from Shift4 Payments, LLC to pay our taxes and expenses, including payments under the TRA. Shift4 Payments, LLC’s ability to make such distributions may be subject to various limitations and restrictions.

We are a holding company and have no material assets other than our ownership of LLC Interests. As of June 30, 2020, we owned 49.8% of the economic interest in Shift4 Payments, LLC. As such, we have no independent means of generating revenue or cash flow, and our ability to pay our taxes and operating expenses or declare and pay dividends in the future, if any, are dependent upon the financial results and cash flows of Shift4 Payments, LLC and distributions we receive from Shift4 Payments, LLC. There can be no assurance that our subsidiaries will generate sufficient cash flow to distribute funds to us or that applicable state law and contractual restrictions, including negative covenants in our debt instruments, will permit such distributions. Although Shift4 Payments, LLC is not currently subject to any debt instruments or other agreements that would restrict its ability to make distributions to Shift4 Payments, Inc., the terms of our Credit Facilities and other outstanding indebtedness restrict the ability of our subsidiaries to pay dividends to Shift4 Payments, LLC.

Shift4 Payments, LLC reports as a partnership for U.S. federal income tax purposes and, as such, generally is not subject to any entity-level U.S. federal income tax. Instead, any taxable income of Shift4 Payments, LLC is allocated to holders of LLC Interests, including us. Accordingly, we incur income taxes on our allocable share of any net taxable income of Shift4 Payments, LLC. Under the terms of the Shift4 Payments LLC Agreement, Shift4 Payments, LLC is obligated to make tax distributions to holders of LLC Interests, including us. In addition to tax expenses, we also incur expenses related to our operations, including payments under the TRA, which we expect could be significant. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.” We intend, as its managing member, to cause Shift4 Payments, LLC to make cash distributions to the owners of LLC Interests in an amount sufficient to (1) fund all or part of their tax obligations in respect of taxable income allocated to them and (2) cover our operating expenses, including payments under the TRA. However, Shift4 Payments, LLC’s ability to make such distributions may be subject to various limitations and restrictions, such as restrictions on distributions that would either violate any contract or agreement to which Shift4 Payments, LLC is then a party, including debt agreements, or any applicable law, or that would have the effect of rendering Shift4 Payments, LLC insolvent. If we do not have sufficient funds to pay tax or other liabilities or to fund our operations (including as a result of an acceleration of our obligations under the TRA), we may have to borrow funds, which could materially adversely affect our liquidity and financial condition and subject us to various restrictions imposed by any such lenders. To the extent that we are unable to make timely payments under the TRA for any reason, such payments generally will be deferred and will accrue interest until paid; provided, however, that nonpayment for a specified period may constitute a material breach of a material obligation under the TRA and therefore accelerate payments due under the TRA. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement” and “Certain Relationships and Related Party Transactions— Shift4 LLC Agreement—Distributions.” In addition, if Shift4 Payments, LLC does not have sufficient funds to make distributions, our ability to declare and pay cash dividends will also be restricted or impaired. See “—Risks related to the offering and ownership of our Class A common stock” and “Dividend Policy.”

Under the Shift4 Payments LLC Agreement, we expect Shift4 Payments, LLC, from time to time, to make distributions in cash to its equityholders, in amounts sufficient to cover the taxes on their allocable share of taxable income of Shift4 Payments, LLC. As a result of (i) potential differences in the amount of net taxable income indirectly allocable to us and to Shift4 Payments, LLC’s other equityholders, (ii) the lower tax rate applicable to corporations as opposed to individuals and (iii) the favorable tax benefits that we anticipate from (a) future purchases or redemptions of LLC Interests from the Continuing Equity Owners, (b) payments under the Tax Receivable Agreement and (c) the acquisition of interests in Shift4 Payments, LLC from its equityholders, we expect that these tax distributions may be in amounts that exceed our tax liabilities. Our board of directors will determine the appropriate uses for any excess cash so accumulated, which may include, among other uses, the payment of obligations under the Tax Receivable Agreement and the payment of other expenses. We have no obligation to distribute such cash (or other available cash) to our stockholders. No adjustments to the exchange ratio for LLC Interests and corresponding shares of Class A common stock will be made as a result of any cash

 

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distribution by us or any retention of cash by us. To the extent we do not distribute such excess cash as dividends on our Class A common stock or otherwise take ameliorative actions between LLC Interests and shares of Class A common stock and instead, for example, hold such cash balances, or lend them to Shift4 Payments, LLC, this may result in shares of our Class A common stock increasing in value relative to the value of LLC Interests. The holders of LLC Interests may benefit from any value attributable to such cash balances if they acquire shares of Class A common stock in exchange for their LLC Interests, notwithstanding that such holders may previously have participated as holders of LLC Interests in distributions that resulted in such excess cash balances.

The TRA with the Continuing Equity Owners and the Blocker Shareholders requires us to make cash payments to them in respect of certain tax benefits to which we may become entitled, and we expect that the payments we are required to make will be substantial.

Under the TRA, we are required to make cash payments to the Continuing Equity Owners and the Blocker Shareholders equal to 85% of the tax benefits, if any, that we actually realize, or in certain circumstances are deemed to realize, as a result of (1) the increases in our share of the tax basis of assets of Shift4 Payments, LLC resulting from any redemptions of LLC Interests from the Continuing Equity Owners as described under “Certain Relationships and Related Party Transactions—Shift4 LLC Agreement—Common Unit Redemption Right,” (2) our utilization of certain tax attributes of the Blocker Companies and (3) certain other tax benefits related to our making payments under the TRA. The payment obligations under the TRA are obligations of Shift4 Payments, Inc. and we expect that the amount of the cash payments that we are required to make under the TRA will be significant. Any payments made by us to the Continuing Equity Owners and the Blocker Shareholders under the TRA will not be available for reinvestment in our business and will generally reduce the amount of overall cash flow that might have otherwise been available to us. The payments under the TRA are not conditioned upon continued ownership of us by the exchanging Continuing Equity Owners. Furthermore, our future obligation to make payments under the TRA could make us a less attractive target for an acquisition, particularly in the case of an acquirer that cannot use some or all of the tax benefits that are the subject of the TRA. For more information, see “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.” The actual increase in tax basis, as well as the amount and timing of any payments under the TRA, will vary depending upon a number of factors, including the timing of redemptions by the Continuing Equity Owners, the price of shares of our Class A common stock at the time of the exchange, the extent to which such exchanges are taxable, the amount of gain recognized by such holders of LLC Interests, the amount and timing of the taxable income allocated to us or otherwise generated by us in the future, the portion of our payments under the Tax Receivable Agreement constituting imputed interest and the federal and state tax rates then applicable.

Our organizational structure, including the TRA, confers certain benefits upon the Continuing Equity Owners and the Blocker Shareholders that will not benefit holders of our Class A common stock to the same extent that it will benefit the Continuing Equity Owners and the Blocker Shareholders.

Our organizational structure, including the TRA, confers certain benefits upon the Continuing Equity Owners and the Blocker Shareholders that will not benefit the holders of our Class A common stock to the same extent that it will benefit the Continuing Equity Owners and the Blocker Shareholders. We entered into the TRA with Shift4 Payments, LLC, the Continuing Equity Owners and the Blocker Shareholders in connection with the completion of the IPO, which provides for the payment by Shift4 Payments, Inc. to the Continuing Equity Owners and the Blocker Shareholders of 85% of the amount of tax benefits, if any, that Shift4 Payments, Inc. actually realizes, or in some circumstances is deemed to realize, as a result of (1) the increases in the tax basis of assets of Shift4 Payments, LLC resulting from any redemptions of LLC Interests from the Continuing Equity Owners as described under “Certain Relationships and Related Party Transactions—Shift4 LLC Agreement—Common Unit Redemption Right” (2) our utilization of certain tax attributes of the Blocker Companies and (3) certain other tax benefits related to our making payments under the TRA. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.” Although Shift4 Payments, Inc. will retain 15% of the amount of such tax benefits, this and other aspects of our organizational structure may adversely impact the future trading market for the Class A common stock.

 

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In certain cases, payments under the TRA to the Continuing Equity Owners and the Blocker Shareholders may be accelerated or significantly exceed any actual benefits we realize in respect of the tax attributes subject to the TRA.

The TRA provides that upon certain mergers, asset sales, other forms of business combinations or other changes of control or if, at any time, we elect an early termination of the TRA, then our obligations, or our successor’s obligations, under the TRA to make payments would be based on certain assumptions, including an assumption that we would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the TRA.

As a result of the foregoing, (1) we could be required to make payments under the TRA that are greater than the specified percentage of any actual benefits we ultimately realize in respect of the tax benefits that are subject to the TRA and (2) if we elect to terminate the TRA early, we would be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the TRA. The maximum TRA liability in the event of an early termination would be approximately $437.3 million, subject to the timing of such early termination, negotiation and certain assumptions, which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits. In these situations, our obligations under the TRA could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. There can be no assurance that we will be able to fund or finance our obligations under the TRA.

We will not be reimbursed for any payments made to the Continuing Equity Owners or the Blocker Shareholders under the TRA in the event that any tax benefits are disallowed.

Payments under the TRA will be based on the tax reporting positions that we determine, and the U.S. Internal Revenue Service, or the IRS, or another tax authority may challenge all or part of the tax basis increases or other tax benefits we claim, as well as other related tax positions we take, and a court could sustain such challenge. If the outcome of any such challenge would reasonably be expected to materially affect a recipient’s payments under the TRA, then we will not be permitted to settle such challenge without the consent (not to be unreasonably withheld or delayed) of Searchlight and Rook. The interests of the Continuing Equity Owners and the Blocker Shareholders in any such challenge may differ from or conflict with our interests and your interests, and Searchlight and Rook may exercise their consent rights relating to any such challenge in a manner adverse to our interests and your interests. We will not be reimbursed for any cash payments previously made to the Continuing Equity Owners or the Blocker Shareholder under the TRA in the event that any tax benefits initially claimed by us and for which payment has been made to a Continuing Equity Owner or the Blocker Shareholder are subsequently challenged by a taxing authority and are ultimately disallowed. Instead, any excess cash payments made by us to a Continuing Equity Owner or the Blocker Shareholder will be netted against any future cash payments that we might otherwise be required to make to such Continuing Equity Owner or such Blocker Shareholder, as applicable, under the terms of the TRA. However, we might not determine that we have effectively made an excess cash payment to a Continuing Equity Owner or the Blocker Shareholder for a number of years following the initial time of such payment and, if any of our tax reporting positions are challenged by a taxing authority, we will not be permitted to reduce any future cash payments under the TRA until any such challenge is finally settled or determined. Moreover, the excess cash payments we previously made under the TRA could be greater than the amount of future cash payments against which we would otherwise be permitted to net such excess. As a result, payments could be made under the TRA significantly in excess of any tax savings that we realize in respect of the tax attributes with respect to a Continuing Equity Owner or the Blocker Shareholder that are the subject of the TRA.

 

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Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our results of operations and financial condition.

We are subject to taxes by the U.S. federal, state, local and foreign tax authorities. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:

 

   

allocation of expenses to and among different jurisdictions;

 

   

changes in the valuation of our deferred tax assets and liabilities;

 

   

expected timing and amount of the release of any tax valuation allowances;

 

   

tax effects of stock-based compensation;

 

   

costs related to intercompany restructurings;

 

   

changes in tax laws, tax treaties, regulations or interpretations thereof; or

 

   

lower than anticipated future earnings in jurisdictions where we have lower statutory tax rates and higher than anticipated future earnings in jurisdictions where we have higher statutory tax rates.

In addition, we may be subject to audits of our income, sales and other taxes by U.S. federal, state, and local and foreign taxing authorities. Outcomes from these audits could have an adverse effect on our operating results and financial condition.

If we were deemed to be an investment company under the Investment Company Act of 1940, as amended, or the 1940 Act, including as a result of our ownership of Shift4 Payments, LLC, applicable restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.

Under Sections 3(a)(1)(A) and (C) of the 1940 Act, a company generally will be deemed to be an “investment company” for purposes of the 1940 Act if (1) it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities or (2) it engages, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We do not believe that we are an “investment company,” as such term is defined in either of those sections of the 1940 Act.

We and Shift4 Payments, LLC conduct our operations so that we will not be deemed an investment company. As the sole managing member of Shift4 Payments, LLC, we control and operate Shift4 Payments, LLC. On that basis, we believe that our interest in Shift4 Payments, LLC is not an “investment security” as that term is used in the 1940 Act. However, if we were to cease participation in the management of Shift4 Payments, LLC, or if Shift4 Payments, LLC itself becomes an investment company, our interest in Shift4 Payments, LLC could be deemed an “investment security” for purposes of the 1940 Act.

If it were established that we were an unregistered investment company, there would be a risk that we would be subject to monetary penalties and injunctive relief in an action brought by the SEC, that we would be unable to enforce contracts with third parties and that third parties could seek to obtain rescission of transactions undertaken during the period it was established that we were an unregistered investment company. If we were required to register as an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.

 

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Risks related to the offering and ownership of our Class A common stock

Searchlight and our Founder will continue to have significant influence over us after this offering, including control over decisions that require the approval of stockholders.

Upon consummation of this offering, Searchlight and our Founder will control, in the aggregate, approximately 94.7% of the voting power represented by all our outstanding classes of stock. As a result, Searchlight and our Founder will continue to exercise significant influence over all matters requiring stockholder approval, including the election and removal of directors and the size of our board, any amendment of our amended and restated certificate of incorporation or bylaws and any approval of significant corporate transactions (including a sale of substantially all of our assets), and will continue to have significant control over our management and policies.

Our Founder, an affiliate of our Founder and affiliates of Searchlight are members of our board of directors. These board members are designees of Searchlight and our Founder and can take actions that have the effect of delaying or preventing a change of control of us or discouraging others from making tender offers for our shares, which could prevent stockholders from receiving a premium for their shares. These actions may be taken even if other stockholders oppose them. The concentration of voting power with Searchlight and our Founder may have an adverse effect on the price of our Class A common stock. The interests of Searchlight and our Founder may not be consistent with your interests as a stockholder.

Searchlight and their respective affiliates engage in a broad spectrum of activities. In the ordinary course of their business activities, Searchlight and their respective affiliates may engage in activities where their interests conflict with our interests or those of our stockholders. Searchlight may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. In addition, Searchlight may have an interest in us pursuing acquisitions, divestitures and other transactions that, in its judgment, could enhance its investment, even though such transactions might involve risks to you.

The multiple class structure of our common stock has the effect of concentrating voting power with our Founder and Searchlight, which will limit your ability to influence the outcome of important transactions, including a change in control.

Our Class B common stock and Class C common stock each have ten votes per share, and our Class A common stock, which is the stock we are offering by means of this prospectus, has one vote per share. Upon the closing of this offering, Jared Isaacman, our Founder, Chief Executive Officer and a member of our board of directors will control approximately 56.0% of the voting power of our outstanding capital stock; and Searchlight will hold approximately 38.7% of the voting power of our outstanding capital stock. Accordingly, upon the closing of this offering, our Founder and Searchlight will together hold all of the issued and outstanding shares of our Class B common stock and Class C common stock and therefore, individually or together, will be able to significantly influence matters submitted to our stockholders for approval, including the election of directors, amendments of our organizational documents and any merger, consolidation, sale of all or substantially all of our assets or other major corporate transactions. Our Founder and Searchlight, individually or together, may vote in a way with which you disagree and which may be adverse to your interests. This concentrated control may have the effect of delaying, preventing or deterring a change in control of our company, could deprive our stockholders of an opportunity to receive a premium for their capital stock as part of a sale of our company and might ultimately affect the market price of our Class A common stock. Future transfers by the holders of Class B common stock and Class C common stock will generally result in those shares converting into shares of Class A common stock, subject to limited exceptions. For information about our multiple class structure, see the section titled “Description of Capital Stock.”

 

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We cannot predict the effect our multiple class structure may have on the market price of our Class A common stock.

We cannot predict whether our multiple class structure will result in a lower or more volatile market price of our Class A common stock, in adverse publicity, or other adverse consequences. For example, certain index providers have announced restrictions on including companies with multiple-class share structures in certain of their indices. In July 2017, FTSE Russell announced that it plans to require new constituents of its indices to have greater than 5% of the company’s voting rights in the hands of public stockholders, and S&P Dow Jones announced that it will no longer admit companies with multiple-class share structures to certain of its indices. Affected indices include the Russell 2000 and the S&P 500, S&P MidCap 400, and S&P SmallCap 600, which together make up the S&P Composite 1500. Also in 2017, MSCI, a leading stock index provider, opened public consultations on their treatment of no-vote and multi-class structures and temporarily barred new multi-class listings from certain of its indices and in October 2018, MSCI announced its decision to include equity securities “with unequal voting structures” in its indices and to launch a new index that specifically includes voting rights in its eligibility criteria. Under such announced policies, the multiple class structure of our common stock would make us ineligible for inclusion in certain indices and, as a result, mutual funds, exchange-traded funds and other investment vehicles that attempt to track those indices would not invest in our Class A common stock. These policies are relatively new and it is unclear what effect, if any, they will have on the valuations of publicly-traded companies excluded from such indices, but it is possible that they may depress valuations, as compared to similar companies that are included. Given the sustained flow of investment funds into passive strategies that seek to track certain indices, exclusion from certain stock indices would likely preclude investment by many of these funds and could make our Class A common stock less attractive to other investors. As a result, the market price of our Class A common stock could be adversely affected.

We are a “controlled company” within the meaning of the NYSE rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You may not have the same protections afforded to stockholders of companies that are subject to such corporate governance requirements.

Searchlight and our Founder have more than 50% of the voting power for the election of directors, and, as a result, we are considered a “controlled company” for the purposes of the NYSE. As such, we qualify for, and intend to rely on, exemptions from certain corporate governance requirements, including the requirements to have a majority of independent directors on our board of directors, an entirely independent nominating and corporate governance committee, an entirely independent compensation committee or to perform annual performance evaluations of the nominating and corporate governance and compensation committees.

The corporate governance requirements and specifically the independence standards are intended to ensure that directors who are considered independent are free of any conflicting interest that could influence their actions as directors. We currently utilize certain exemptions afforded to a “controlled company.” As a result, we are not subject to certain corporate governance requirements, including that a majority of our board of directors consists of “independent directors,” as defined under the rules of the NYSE. In addition, we are not required to have a nominating and corporate governance committee or compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities or to conduct annual performance evaluations of the nominating and corporate governance and compensation committees.

Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE. Our status as a controlled company could make our Class A common stock less attractive to some investors or otherwise harm our stock price.

Certain provisions of Delaware law and antitakeover provisions in our organizational documents could delay or prevent a change of control.

Certain provisions of Delaware law and our amended and restated certificate of incorporation and amended and restated bylaws may have an antitakeover effect and may delay, defer, or prevent a merger, acquisition, tender

 

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offer, takeover attempt or other change of control transaction that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by our stockholders. These provisions provide for, among other things:

 

   

a multi-class common stock structure;

 

   

a classified board of directors with staggered three-year terms;

 

   

the ability of our board of directors to issue one or more series of preferred stock;

 

   

advance notice for nominations of directors by stockholders and for stockholders to include matters to be considered at our annual meetings;

 

   

certain limitations on convening special stockholder meetings;

 

   

prohibit cumulative voting in the election of directors; and

 

   

the removal of directors only for cause and only upon the affirmative vote of the holders of at least 66 2/3% of the voting power represented by our then-outstanding common stock.

These antitakeover provisions could make it more difficult for a third party to acquire us, even if the third party’s offer may be considered beneficial by many of our stockholders. As a result, our stockholders may be limited in their ability to obtain a premium for their shares.

In addition, we have opted out of Section 203 of the General Corporation Law of the State of Delaware, which we refer to as the DGCL, but our amended and restated certificate of incorporation provides that engaging in any of a broad range of business combinations with any “interested” stockholder (any stockholder with 15% or more of our voting stock) for a period of three years following the date on which the stockholder became an “interested” stockholder is prohibited, subject to certain exceptions. See “Description of Capital Stock.”

The JOBS Act allows us to postpone the date by which we must comply with certain laws and regulations intended to protect investors and to reduce the amount of information we provide in our reports filed with the SEC. We cannot be certain if this reduced disclosure will make our Class A common stock less attractive to investors.

The JOBS Act is intended to reduce the regulatory burden on “emerging growth companies.” As defined in the JOBS Act, a public company whose initial public offering of common equity securities occurs after December 8, 2011 and whose annual gross revenues are less than $1.07 billion will, in general, qualify as an “emerging growth company” until the earliest of:

 

   

the last day of its fiscal year following the fifth anniversary of the date of its initial public offering of common equity securities;

 

   

the last day of its fiscal year in which it has annual gross revenue of $1.07 billion or more;

 

   

the date on which it has, during the previous three-year period, issued more than $1.07 billion in nonconvertible debt; and

 

   

the date on which it is deemed to be a “large accelerated filer,” which will occur at such time as the company (1) has an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of its most recently completed second fiscal quarter, (2) has been required to file annual and quarterly reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, for a period of at least 12 months and (3) has filed at least one annual report pursuant to the Exchange Act.

 

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Under this definition, we are an “emerging growth company” and could remain an “emerging growth company” until as late as the fifth anniversary of the completion of our IPO. For so long as we are an “emerging growth company,” we are, among other things:

 

   

not required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act;

 

   

not required to hold a nonbinding advisory stockholder vote on executive compensation pursuant to Section 14A(a) of the Exchange Act;

 

   

not required to seek stockholder approval of any golden parachute payments not previously approved pursuant to Section 14A(b) of the Exchange Act;

 

   

exempt from the requirement of the Public Company Accounting Oversight Board, or PCAOB, regarding the communication of critical audit matters in the auditor’s report on the financial statements; and

 

   

subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.

In addition, Section 107 of the JOBS Act provides that an emerging growth company can use the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. This permits an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use this extended transition period and, as a result, our consolidated financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies.

We cannot predict if investors will find our Class A common stock less attractive as a result of our decision to take advantage of some or all of the reduced disclosure requirements above. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.

Because we have no current plans to pay regular cash dividends on our Class A common stock following this offering, you may not receive any return on investment unless you sell your Class A common stock for a price greater than that which you paid for it.

We do not anticipate paying any regular cash dividends on our Class A common stock. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, general and economic conditions, our results of operations and financial condition, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and such other factors that our board of directors may deem relevant. In addition, our ability to pay dividends is, and may be, limited by covenants of existing and any future outstanding indebtedness we or our subsidiaries incur, including under our Credit Facilities. Therefore, any return on investment in our Class A common stock is solely dependent upon the appreciation of the price of our Class A common stock on the open market, which may not occur. See “Dividend Policy” for more detail.

An active, liquid trading market for our Class A common stock may not be sustained, which may cause our Class A common stock to trade at a discount from the public offering price and make it difficult for you to sell the Class A common stock you purchase.

We cannot predict the extent to which investor interest in us will sustain a trading market or how active and liquid that market may remain. If an active and liquid trading market is not sustained, you may have difficulty selling any of our Class A common stock that you purchase at a price above the price you purchase it or at all. The failure of an active and liquid trading market to continue would likely have a material adverse effect on the

 

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value of our Class A common stock. The market price of our Class A common stock may decline below the public offering price, and you may not be able to sell your shares of our Class A common stock at or above the price you paid or at all. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

Our amended and restated certificate of incorporation provides, subject to limited exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.

Our amended and restated certificate of incorporation provides, subject to limited exceptions, that unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall, to the fullest extent permitted by law, be the sole and exclusive forum for any (1) derivative action or proceeding brought on behalf of our Company, (2) action asserting a claim of breach of a fiduciary duty owed by any director, officer, or other employee or stockholder of our Company to the Company or the Company’s stockholders, creditors or other constituents, (3) action asserting a claim against the Company or any director or officer of the Company arising pursuant to any provision of the DGCL, or our amended and restated certificate of incorporation or our amended and restated bylaws or as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware, or (4) action asserting a claim against the Company or any director or officer of the Company governed by the internal affairs doctrine; provided that the exclusive forum provisions will not apply to suits brought to enforce any liability or duty created by the Securities Act or the Exchange Act, or to any claim for which the federal courts have exclusive jurisdiction. For instance, the provision would not apply to actions arising under federal securities laws, including suits brought to enforce any liability or duty created by the Securities Act, Exchange Act, or the rules and regulations thereunder. Our amended and restated certificate of incorporation further provides that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States of America shall, to the fullest extent permitted by law, be the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage such lawsuits against us and our directors, officers, and other employees. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, results of operations, and financial condition. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provisions in our amended and restated certificate of incorporation.

Our amended and restated certificate of incorporation provides that the doctrine of “corporate opportunity” will not apply against Searchlight, any of our directors who are employees of or affiliated with Searchlight, Rook, any of our directors who are employees of or affiliated with Rook, or any director or stockholder who is not employed by us or our subsidiaries.

The doctrine of corporate opportunity generally provides that a corporate fiduciary may not develop an opportunity using corporate resources, acquire an interest adverse to that of the corporation or acquire property that is reasonably incident to the present or prospective business of the corporation or in which the corporation has a present or expectancy interest, unless that opportunity is first presented to the corporation and the corporation chooses not to pursue that opportunity. The doctrine of corporate opportunity is intended to preclude officers or directors or other fiduciaries from personally benefiting from opportunities that belong to the corporation. Our amended and restated certificate of incorporation provides that the doctrine of “corporate opportunity” does not apply against Searchlight, any of our directors who are employees of or affiliated with Searchlight, Rook, any of our directors who are employees of or affiliated with Rook, or any director or stockholder who is not employed by us or our subsidiaries. Searchlight, any of our directors who are employees

 

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of or affiliated with Searchlight, Rook, any of our directors who are employees of or affiliated with Rook, or any director or stockholder who is not employed by us or our subsidiaries therefore have no duty to communicate or present corporate opportunities to us, and have the right to either hold any corporate opportunity for their (and their affiliates’) own account and benefit or to recommend, assign or otherwise transfer such corporate opportunity to persons other than us, including to any director or stockholder who is not employed by us or our subsidiaries. Our amended and restated certificate of incorporation does not renounce our interest in any business opportunity that is expressly offered to an employee director or employee in his or her capacity as a director or employee of Shift4 Payments, Inc.

As a result, certain of our stockholders, directors and their respective affiliates are not prohibited from operating or investing in competing businesses. We therefore may find ourselves in competition with certain of our stockholders, directors or their respective affiliates, and we may not have knowledge of, or be able to pursue, transactions that could potentially be beneficial to us. Accordingly, we may lose a corporate opportunity or suffer competitive harm, which could negatively impact our business or prospects.

If securities analysts do not publish research or reports about our business or if they downgrade our stock or our sector, or if there is any fluctuation in our credit rating, our stock price and trading volume could decline.

The trading market for our Class A common stock relies in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. Securities and industry analysts may not publish research on our Company. If securities or industry analysts do not continue coverage of our Company, the trading price of our shares would likely be negatively impacted. Furthermore, if one or more of the analysts who do cover us downgrade our stock or our industry, or the stock of any of our competitors, or publish inaccurate or unfavorable research about our business, the price of our stock could decline. If one or more of these analysts stops covering us or fails to publish reports on us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline.

Additionally, any fluctuation in the credit rating of us or our subsidiaries may impact our ability to access debt markets in the future or increase our cost of future debt which could have a material adverse effect on our operations and financial condition, which in return may adversely affect the trading price of shares of our Class A common stock.

We are subject to rules and regulations established from time to time by the SEC and the NYSE regarding our internal control over financial reporting. If we fail to establish and maintain effective internal control over financial reporting and disclosure controls and procedures, we may not be able to accurately report our financial results, or report them in a timely manner.

We are subject to the rules and regulations established from time to time by the SEC and the NYSE. These rules and regulations require, among other things, that we establish and periodically evaluate procedures with respect to our internal control over financial reporting. Such reporting obligations place a considerable strain on our financial and management systems, processes and controls, as well as on our personnel.

In addition, we are required to document and test our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act so that our management can certify as to the effectiveness of our internal control over financial reporting by the time our second annual report is filed with the SEC and thereafter, which will require us to document and make significant changes to our internal control over financial reporting. Likewise, our independent registered public accounting firm will be required to provide an attestation report on the effectiveness of our internal control over financial reporting at such time as we cease to be an “emerging growth company,” as defined in the JOBS Act, and we become an accelerated or large accelerated filer although, as described above, we could potentially qualify as an “emerging growth company” until as late as the fifth anniversary of the completion of the IPO.

 

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We expect to incur costs related to implementing an internal audit and compliance function in the upcoming years to further improve our internal control environment. If we identify material weaknesses in our internal control over financial reporting or if we are unable to comply with the demands placed upon us as a public company, including the requirements of Section 404 of the Sarbanes-Oxley Act, in a timely manner, we may be unable to accurately report our financial results, or report them within the timeframes required by the SEC. We also could become subject to sanctions or investigations by the SEC or other regulatory authorities. In addition, if we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, when required, investors may lose confidence in the accuracy and completeness of our financial reports, we may face restricted access to the capital markets and our stock price may be adversely affected.

We have broad discretion over the use of proceeds we receive in this offering and may not apply the proceeds in ways that increase the value of your investment.

Our management will have broad discretion in the application of the net proceeds from this offering and, as a result, you will have to rely upon the judgment of our management with respect to the use of these proceeds. Our management may spend a portion or all of the net proceeds in ways that not all shareholders approve of or that may not yield a favorable return. The failure by our management to apply these funds effectively could harm our business.

We incur significant costs as a result of operating as a public company.

We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the NYSE and other applicable securities laws and regulations. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to continue to increase our legal and financial compliance costs and to make some activities more difficult, time-consuming and costly. Being a public company and being subject to such rules and regulations also makes it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our Class A common stock, fines, sanctions and other regulatory action and potentially civil litigation. These factors may therefore strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

Future sales, or the perception of future sales, by us or our existing stockholders in the public market following this offering could cause the market price for our Class A common stock to decline.

The sale of shares of our Class A common stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of shares of our Class A common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Upon consummation of this offering, we will have outstanding a total of 28,550,026 shares of Class A common stock. Of these shares, all shares sold in this offering and in the IPO (totaling 27,250,000 shares of Class A common stock) will be freely tradable without restriction or further registration under the Securities Act, other than any shares held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act, whose sales would be subject to the Rule 144 resale restrictions, other than the holding period requirement. The remaining shares of Class A common stock will be “restricted securities,” as that term is defined in Rule 144 under the Securities Act. These restricted securities are eligible for public sale only if they are registered under the Securities Act or if they qualify for an exemption from registration under Rules 144 or 701 under the Securities Act. See “Shares eligible for future sale.”

 

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In connection with the IPO, our directors and executive officers, and substantially all of our stockholders (including the selling stockholders in this offering) entered into lock-up agreements with the underwriters for the IPO, or the IPO lock-up agreements, pursuant to which each of these persons or entities, subject to certain exceptions, for a period of 180 days after June 4, 2020, agreed that, without the prior written consent of any two of Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC and Goldman Sachs & Co. LLC, or collectively, the Lock-up Release Parties, they would not (1) offer, pledge, loan, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for our common stock (including, without limitation, common stock or such other securities which may be deemed to be beneficially owned by such directors, executive officers, managers and members in accordance with the rules and regulations of the SEC and securities which may be issued upon exercise of a stock option or warrant), or (2) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the common stock or such other securities, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of common stock or such other securities, in cash or otherwise, or (3) make any demand for or exercise any right with respect to the registration of any shares of our common stock or any security convertible into or exercisable or exchangeable for our common stock. See “Shares Eligible for Future Sale—IPO Lock-Up Agreements.” In connection with this offering, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC and Goldman Sachs & Co. LLC have given written consent to permit filing of this registration statement. Additionally, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC and Goldman Sachs & Co. LLC have agreed to release the restrictions under the IPO lock-up agreements of the Continuing Equity Owners, including our Founder and Rook, subject to the delivery and effectiveness of the lock-up agreements described under “Shares Eligible for Future Sale—Lock-Up Agreements.”

We, our officers and directors, the selling stockholders in this offering and the other Continuing Equity Owners have agreed that, without the prior written consent of any two of the Lock-up Release Parties, we and they will not, subject to certain exceptions, during the period ending 90 days after the date of this prospectus (1) offer, sell, contract to sell, loan, pledge, grant any option to purchase, make any short sale or otherwise transfer or dispose of, directly or indirectly or publicly disclose the intention to make any offer, loan, sale, pledge or disposition of any shares of our Class A common stock or Class C common stock, or any options or warrants to purchase any shares of our Class A common stock or Class C common stock, or any securities convertible into, or exchangeable for, or that represent the right to receive, shares of our Class A common stock or Class C common stock; or (2) enter into any swap or other arrangement that transfers to another, all or a portion of the economic consequences of ownership of our Class A common stock or Class C common stock or any securities convertible into or exercisable or exchangeable for shares of our Class A common stock or Class C common stock, whether any transaction described above is to be settled by delivery of our Class A common stock, Class C common stock or such other securities, in cash or otherwise. See “Shares Eligible for Future Sale—Lock-Up Agreements.”

Additionally, Rook has entered into a loan agreement pursuant to which it pledged LLC Interests and shares of our Class B common stock to secure a margin loan. If Rook were to default on its obligations under the loan and not timely post additional collateral, the lender would have the right to sell at least 7,035,422 shares of LLC Interests and at least 7,035,422 shares of Class B common stock to satisfy Rook’s obligation. Such an event could cause our stock price to decline.

In addition, any Class A common stock that we issue under the 2020 Plan or other equity incentive plans that we may adopt in the future would dilute the percentage ownership held by the investors who purchase Class A common stock in this offering.

As restrictions on resale end or if these stockholders exercise their registration rights, the market price of our shares of Class A common stock could drop significantly if the holders of these shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our shares of Class A common stock or other securities.

 

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In the future, we may also issue securities in connection with investments, acquisitions or capital raising activities. In particular, the number of shares of our Class A common stock issued in connection with an investment or acquisition, or to raise additional equity capital, could constitute a material portion of our then-outstanding shares of our Class A common stock. Any such issuance of additional securities in the future may result in additional dilution to you or may adversely impact the price of our Class A common stock.

Our stock price may change significantly following the offering, and you may not be able to resell shares of our Class A common stock at or above the price you paid or at all, and you could lose all or part of your investment as a result.

The public offering price for shares sold in this offering was determined by negotiations between us, the selling stockholders and the underwriters. You may not be able to resell any shares you purchase in this offering at or above the public offering price due to a number of factors included herein, including the following:

 

   

results of operations that vary from the expectations of securities analysts and investors;

 

   

results of operations that vary from those of our competitors;

 

   

changes in expectations as to our future financial performance, including financial estimates and investment recommendations by securities analysts and investors;

 

   

technology changes, changes in consumer behavior or changes in merchant relationships in our industry;

 

   

security breaches related to our systems or those of our merchants, affiliates or strategic partners;

 

   

changes in economic conditions for companies in our industry;

 

   

changes in market valuations of, or earnings and other announcements by, companies in our industry;

 

   

declines in the market prices of stocks generally, particularly those of global payment companies;

 

   

strategic actions by us or our competitors;

 

   

announcements by us, our competitors or our strategic partners of significant contracts, new products, acquisitions, joint marketing relationships, joint ventures, other strategic relationships, or capital commitments;

 

   

changes in general economic or market conditions or trends in our industry or the economy as a whole and, in particular, in the consumer spending environment;

 

   

changes in business or regulatory conditions;

 

   

future sales of our Class A common stock or other securities;

 

   

investor perceptions of the investment opportunity associated with our Class A common stock relative to other investment alternatives;

 

   

the public’s response to press releases or other public announcements by us or third parties, including our filings with the SEC;

 

   

announcements relating to litigation or governmental investigations;

 

   

guidance, if any, that we provide to the public, any changes in this guidance, or our failure to meet this guidance;

 

   

the development and sustainability of an active trading market for our stock;

 

   

changes in accounting principles; and

 

   

other events or factors, including those resulting from system failures and disruptions, natural disasters, war, acts of terrorism or responses to these events.

 

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Furthermore, the stock market may experience extreme volatility that, in some cases, may be unrelated or disproportionate to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the market price of our Class A common stock, regardless of our actual operating performance. In addition, price volatility may be greater if the public float and trading volume of our Class A common stock is low.

In the past, following periods of market volatility, stockholders have instituted securities class action litigation. If we were involved in securities litigation, it could have a substantial cost and divert resources and the attention of management from our business regardless of the outcome of such litigation.

If you purchase shares of Class A common stock in this offering, you will suffer immediate and substantial dilution of your investment.

The public offering price of our Class A common stock is substantially higher than the pro forma net tangible book value per share of our Class A common stock. Therefore, if you purchase shares of our Class A common stock in this offering, you will pay a price per share that substantially exceeds our pro forma net tangible book value per share after this offering. You will experience immediate dilution of $49.48 per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering and the public offering price. See “Dilution” for more detail, including the calculation of the pro forma net tangible book value per share of our Class A common stock.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus may be forward-looking statements. Statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, including, among others, statements regarding the consummation of this offering, expected growth, future capital expenditures and debt service obligations, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this prospectus include, but are not limited to statements about:

 

   

the effect of the COVID-19 global pandemic on our business and results of operations;

 

   

our ability to differentiate ourselves from our competitors and compete effectively;

 

   

our ability to anticipate and respond to changing industry trends and merchant and consumer needs;

 

   

our ability to continue making acquisitions of businesses or assets;

 

   

our ability to continue to expand our market share or expand into new markets;

 

   

our reliance on third-party vendors to provide products and services;

 

   

our ability to integrate our services and products with operating systems, devices, software and web browsers;

 

   

our ability to maintain merchant and software partner relationships and strategic partnerships;

 

   

the effects of global economic, political and other conditions on consumer, business and government spending;

 

   

our compliance with governmental regulation and other legal obligations, particularly related to privacy, data protection and information security, and consumer protection laws;

 

   

our ability to establish, maintain and enforce effective risk management policies and procedures;

 

   

our ability to protect our systems and data from continually evolving cybersecurity risks, security breaches and other technological risks;

 

   

potential harm caused by software defects, computer viruses and development delays;

 

   

the effect of degradation of the quality of the products and services we offer;

 

   

potential harm caused by increased customer attrition;

 

   

potential harm caused by fraud by merchants or others;

 

   

potential harm caused by damage to our reputation or brands;

 

   

our ability to recruit, retain and develop qualified personnel;

 

   

our reliance on a single or limited number of suppliers;

 

   

the effects of seasonality and volatility on our operating results;

 

   

the effect of various legal proceedings;

 

   

our ability to raise additional capital to fund our operations;

 

   

our ability to protect, enforce and defend our intellectual property rights;

 

   

our ability to establish and maintain effective internal control over financial reporting and disclosure controls and procedures;

 

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our compliance with laws, regulations and enforcement activities that affect our industry;

 

   

our dependence on distributions from Shift4 Payments, LLC to pay our taxes and expenses, including payments under the TRA; and

 

   

the significant influence Rook and Searchlight continue to have over us, including control over decisions that require the approval of stockholders.

The forward-looking statements in this prospectus are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We believe that these factors include, but are not limited to the factors set forth under “Risk Factors.” Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus forms a part with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

These forward-looking statements speak only as of the date of this prospectus. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this prospectus after we distribute this prospectus, whether as a result of any new information, future events or otherwise.

 

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USE OF PROCEEDS

The net proceeds to us from the sale of shares of Class A common stock by us in this offering will be approximately $92.2 million, after deducting the underwriting discounts and commissions and estimated offering expenses. We will not receive any proceeds from the sale of Class A common stock by the selling stockholders in this offering.

We intend to use the net proceeds from this offering to purchase 2,000,000 LLC Interests directly from Shift4 Payments, LLC at a price per unit equal to the public offering price per share of Class A common stock in this offering less the underwriting discounts and commissions.

Shift4 Payments, LLC intends to use the net proceeds it receives from the sale of LLC Interests to Shift4 Payments, Inc. for general corporate purposes.

Pending use of the net proceeds from this offering described above, we may invest the net proceeds in short- and intermediate-term interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the United States government.

We will have broad discretion in the way that we use the net proceeds of this offering. Our use of the net proceeds from this offering will depend on a number of factors, including our future revenue and cash generated by operations and the other factors described in “Risk factors.”

 

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CAPITALIZATION

The following table sets forth the capitalization of Shift4 Payments, Inc. and its direct and indirect subsidiaries as of June 30, 2020, as follows:

 

   

on an actual basis; and

 

   

on a pro forma basis to give effect to (i) this offering and (ii) the redemption by the Continuing Equity Owners participating in this offering as selling stockholders, prior to the consummation of this offering, of 3,637,501 LLC Interests and an equivalent number of Class B common stock (which shares will be immediately cancelled) in exchange for 3,637,501 shares of Class A common stock and the conversion of 4,218,872 shares of Class C common stock held by the selling stockholders, prior to the consummation of this offering, to 4,218,872 shares of Class A common stock.

The table below assumes no exercise by the underwriters in full of their option to purchase additional shares of Class A common stock from the selling stockholders.

For more information, please see “Unaudited Pro Forma Condensed Consolidated Financial Information” included elsewhere in this prospectus. You should read this information in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other financial information contained in this prospectus.

 

     As of June 30, 2020  
(in millions, except per share  and share amounts)    Actual     Pro
Forma
 

Long-term debt (including current portion)(1):

    

First Lien Term Loan Facility(2)

   $ 437.4     $ 437.4  

Other financing arrangements

     2.6       2.6  
  

 

 

   

 

 

 

Total debt

     440.0       440.0  

Stockholders’ equity:

    

Preferred stock, $0.0001 par value, 20,000,000 shares authorized at June 30, 2020, none issued and outstanding

     —         —    

Class A common stock, par value $0.0001 per share; 300,000,000 shares authorized, 18,693,653 shares issued and outstanding, actual, and 28,550,026 shares issued and outstanding, pro forma

     —         —    

Class B common stock, par value $0.0001 per share; 100,000,000 shares authorized, 39,204,989 shares issued and outstanding, actual; and 35,567,488 shares issued and outstanding, pro forma

     —         —    

Class C common stock, par value $0.0001 per share; 100,000,000 shares authorized, 20,139,163 shares issued and outstanding, actual; and 15,920,291 shares issued and outstanding, pro forma

     —      

Additional paid-in capital

     517.7       570.3  

Retained deficit

     (257.6     (257.6

Noncontrolling interests

     210.5       250.1  
  

 

 

   

 

 

 

Total stockholders’ equity

     470.6       562.8  
  

 

 

   

 

 

 

Total capitalization

   $ 910.6     $ 1,002.8  
  

 

 

   

 

 

 

 

(1)

See “Description of Indebtedness” for a description of our currently outstanding indebtedness.

(2)

Amounts presented are net of approximately $12.6 million of unamortized capitalized financing costs.

 

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DIVIDEND POLICY

We currently intend to retain all available funds and any future earnings to fund the development and growth of our business and to repay indebtedness, and therefore we do not anticipate declaring or paying any cash dividends on our Class A common stock in the foreseeable future. Holders of our Class B common stock are not entitled to participate in any dividends declared by our board of directors. Furthermore, because we are a holding company, our ability to pay cash dividends on our Class A common stock depends on our receipt of cash distributions from Shift4 Payments, LLC and, through Shift4 Payments, LLC, cash distributions and dividends from our other direct and indirect wholly owned subsidiaries. Our ability to pay dividends may be restricted by the terms of any future credit agreement or any future debt or preferred equity securities of us or our subsidiaries. See “Description of Capital Stock,” “Description of Indebtedness” and “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and capital resources.” Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors, subject to compliance with contractual restrictions and covenants in the agreements governing our current and future indebtedness. Any such determination will also depend upon our business prospects, results of operations, financial condition, cash requirements and availability and other factors that our board of directors may deem relevant.

Accordingly, you may need to sell your shares of our Class A common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them. See “Risk Factors—Risks related to the offering and ownership of our Class A common stock—Because we have no current plans to pay regular cash dividends on our Class A common stock following this offering, you may not receive any return on investment unless you sell your Class A common stock for a price greater than that which you paid for it.”

We are a holding company, and our principal asset is the LLC Interests we hold in Shift4 Payments, LLC. If we decide to pay a dividend in the future, we would need to cause Shift4 Payments, LLC to make distributions to us in an amount sufficient to cover such dividend. If Shift4 Payments, LLC makes such distributions to us, the other holders of LLC Interests will be entitled to receive pro rata distributions. See “Risk Factors—Risks related to our organizational structure—Our principal asset is our interest in Shift4 Payments, LLC, and, as a result, we depend on distributions from Shift4 Payments, LLC to pay our taxes and expenses, including payments under the TRA. Shift4 Payments, LLC’s ability to make such distributions may be subject to various limitations and restrictions.”

 

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DILUTION

We have presented dilution in pro forma net tangible book value per share both before and after this offering assuming that all of the holders of LLC Interests (other than Shift4 Payments, Inc.) had their LLC Interests redeemed or exchanged for newly-issued shares of Class A common stock on a one-for-one basis (rather than for cash) and the cancellation for no consideration of any of their shares of Class B common stock (which are not entitled to receive distributions or dividends, whether cash or stock from Shift4 Payments, Inc.) in order to more meaningfully present the dilutive impact on the investors in this offering. We refer to the assumed redemption or exchange of all LLC Interests for shares of Class A common stock as described in the previous sentence as the Assumed Redemption.

Dilution is the amount by which the offering price paid by the purchasers of the Class A common stock in this offering exceeds the pro forma net tangible book value per share of Class A common stock and Class C common stock after the offering. Shift4 Payments, LLC’s pro forma net tangible book value as of June 30, 2020 prior to this offering and after giving effect to the Assumed Redemption was a deficit of $172.9 million. Pro forma net tangible book value per share prior to this offering is determined by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of Class A common stock and Class C common stock deemed to be outstanding after giving effect to the Assumed Redemption.

If you invest in our Class A common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the public offering price per share and the pro forma net tangible book value per share of our Class A common stock and Class C common stock after this offering.

Pro forma net tangible book value per share after this offering is determined by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of Class A common stock and Class C common stock deemed to be outstanding, after giving effect to this offering and the application of the proceeds from this offering as described in “Use of Proceeds,” and the Assumed Redemption. Our pro forma net tangible book value as of June 30, 2020, after this offering would have been approximately a deficit of $(80.7) million, or $(0.98) per share. This amount represents an immediate increase in pro forma net tangible book value of $1.17 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of approximately $49.48 per share to new investors purchasing shares of Class A common stock in this offering. We determine dilution by subtracting the pro forma net tangible book value per share after this offering from the amount of cash that a new investor paid for a share of Class A common stock. The following table illustrates this dilution:

 

Public offering price per share

     $ 48.50  

Pro forma net tangible book value (deficit) per share as of June 30, 2020 before this offering(1)

     (2.15  

Increase per share attributable to new investors in this offering

     1.17    
  

 

 

   

Pro forma net tangible book value (deficit) per share after this offering(2)

     $ (0.98
    

 

 

 

Dilution per share to new Class A common stock investors in this offering

     $ 49.48  
    

 

 

 

 

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(1)

The computation of pro forma net tangible book value per share as of June 30, 2020 before this offering is set forth below:

 

Numerator

  

Book value of tangible assets

   $ 370.8  

Less: total liabilities

     543.7  
  

 

 

 

Pro forma net tangible book value (deficit)

   $ (172.9
  

 

 

 

Denominator

  

Shares of Class A common stock outstanding immediately prior to this offering, after giving effect to the Assumed Redemption, and vested restricted stock units(a)

     60,360,481  

Shares of Class C common stock outstanding immediately prior to this offering

     20,139,163  
  

 

 

 

Total

     80,499,644  
  

 

 

 

Pro forma net tangible book value (deficit) per share

   $ (2.15
  

 

 

 

 

  (a)

Reflects 60,360,481 outstanding shares of Class A common stock, consisting of (i) 528,150 outstanding shares of Class A common stock issued in exchange for the Former Equity Owner’s indirect ownership interests in LLC Interests on a one-to-one basis, (ii) 915,503 outstanding shares of Class A common stock issued to P&W Enterprises, Inc., as satisfaction of Shift4 Payments, LLC’s existing obligation to P&W Enterprises, Inc., (iii) 2,461,839 RSUs that we granted in connection with the IPO and not subject to service conditions, (iv) 39,204,989 outstanding shares of Class A common stock issuable upon the exchange of LLC Interests to be held by the Continuing Equity Owners prior to this offering, and (v) 17,250,000 outstanding shares of Class A common stock issued with the IPO.

 

(2)

The computation of pro forma net tangible book value per share as of June 30, 2020, after giving effect to this offering is set forth below:

 

Numerator

  

Book value of tangible assets

   $ 463.0  

Less: total liabilities

     543.7  
  

 

 

 

Pro forma net tangible book value (deficit)

   $ (80.7
  

 

 

 

Denominator

  

Shares of Class A common stock and Class B common stock outstanding immediately after this offering and the Assumed Redemption and vested restricted stock units(a)

     66,579,353  

Shares of Class C common stock outstanding immediately after this offering

     15,920,291  
  

 

 

 

Total

     82,499,644  
  

 

 

 

Pro forma net tangible book value (deficit) per share

   $ (0.98
  

 

 

 

 

  (a)

Reflects 66,579,353 outstanding shares of Class A common stock, consisting of (i) 384,523 outstanding shares of Class A common stock issued in exchange for the Former Equity Owner’s indirect ownership interests in LLC Interests on a one-to-one basis, (ii) 915,503 outstanding shares of Class A common stock issued to P&W Enterprises, Inc., as satisfaction of Shift4 Payments, LLC’s existing obligation to P&W Enterprises, Inc., (iii) 2,461,839 RSUs that we granted in connection with the IPO and not subject to service conditions, (iv) 35,567,488 outstanding shares of Class A common stock issuable upon the exchange of LLC Interests to be held by the Continuing Equity Owners after giving effect to this offering, and (v) 27,250,000 outstanding shares of Class A common stock held by public stockholders after giving effect to this offering, including 8,000,000 shares of Class A common stock to be sold by the selling stockholders, consisting of (x) 143,627 shares of Class A common stock to be sold by the Former Equity Owner, (y) 3,637,501 LLC interests and related shares of Class B common stock to be exchanged for shares of Class A common stock and (z) 4,218,872 shares of Class C common stock to be converted into shares of Class A common stock.

 

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The following table summarizes, as of June 30, 2020, after giving effect to this offering, the number of shares of Class A common stock and Class C common stock purchased from us, the total consideration paid, or to be paid, to us and the average price per share paid, or to be paid, by existing owners and by the new investors. The calculation below is based on the public offering price of $48.50 per share before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares
Purchased
    Total Consideration     Average Price
Per Share
 
     Number      Percent     Amount      Percent  

Existing stockholders before this offering

     80,499,644        98   $ 496.8        84   $ 6.17

New investors participating in this offering

     2,000,000        2       97.0        16       48.50  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     82,499,644        100   $ 593.8        100   $ 7.20  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Except as otherwise indicated, the discussion and the tables above assume no exercise of the underwriters’ option to purchase additional shares of Class A common stock. In addition, the discussion and tables above exclude shares of Class B common stock, because holders of the Class B common stock are not entitled to distributions or dividends, whether cash or stock, from Shift4 Payments, Inc. The number of shares of our Class A common stock outstanding after this offering as shown in the tables above is based on the number of shares outstanding as of June 30, 2020, after giving effect to the Assumed Redemption, and excludes 1,119,116 shares of Class A common stock reserved for issuance under our 2020 Plan (as described in “Executive Compensation—2020 Incentive Award Plan”) and 2,169,045 shares of Class A common stock issuable pursuant to RSUs granted to the RSU Holders in connection with the IPO and subject to service conditions as described in “Executive Compensation—New Equity Awards”

 

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SELECTED HISTORICAL CONDENSED CONSOLIDATED FINANCIAL DATA

The following table presents the selected historical condensed consolidated financial data for Shift4 Payments, LLC and Shift4 Payments, Inc. Shift4 Payments, LLC is the predecessor of the issuer, Shift4 Payments, Inc., for financial reporting purposes. The selected consolidated statements of operations data for the years ended December 31, 2018 and 2019 are derived from the audited consolidated financial statements of Shift4 Payments, LLC included elsewhere in this prospectus. The selected condensed consolidated balance sheet data as of June 30, 2019 and the statements of operations data for the six months ended June 30, 2019 are derived from the unaudited condensed consolidated financial statements of Shift4 Payments, LLC included elsewhere in this prospectus. The selected condensed consolidated balance sheet data as of June 30, 2020 and statements of operations data for the six months ended June 30, 2020 is derived from the unaudited condensed consolidated financial statements of Shift4 Payments, Inc. included elsewhere in this prospectus. The results of operations for the periods presented below are not necessarily indicative of the results to be expected for any future period, and the results for any interim period are not necessarily indicative of the results that may be expected for a full year. The information set forth below should be read together with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and the consolidated financial statements and the accompanying notes included elsewhere in this prospectus.

The selected historical financial data set forth below reflect the historical results of operations and the financial position of Shift4 Payments, Inc., including consolidation of its investment in Shift4 Payments, LLC, commencing June 5, 2020. Prior to June 5, 2020, the selected historical financial data set forth below represent the financial statements of Shift4 Payments, LLC. The selected historical financial data does not reflect what the financial position, results of operations or cash flows of Shift4 Payments, Inc. or Shift4 Payments, LLC would have been had these companies been stand-alone public companies for the periods presented. Specifically, the summary historical consolidated financial and other data set forth below for the years ended December 31, 2018 and 2019 and the six months ended June 30, 2019 does not give effect to the following matters:

 

   

The IPO, Private Placement and Transactions or this offering; and

 

   

U.S. corporate federal income taxes.

In addition, the selected historical consolidated financial and other data set forth below for the six months ended June 30, 2020 does not give effect to this offering.

As a result of the adoption of ASC 606 in 2019, the selected historical financial data for the year ended December 31, 2019 and the six months ended June 30, 2019 and 2020 is not comparable to the selected historical financial data for the year ended December 31, 2018. See Notes 2 and 4 our consolidated financial statements for the year ended December 31, 2019, included elsewhere in this prospectus for more information about the adoption of ASC 606.

 

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     Shift4 Payments,
LLC
    Shift4
Payments,
LLC
     Shift4
Payments,
Inc.
 
     Year Ended
December 31,
    Six Months Ended
June 30,
 
(in millions)    2018      2019     2019      2020  

Consolidated Statement of Operations:

          

Gross revenue

   $ 560.6      $ 731.4     $ 335.5      $ 341.2  

Cost of sales

     410.2        552.4       253.3        264.4  
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     150.4        179.0       82.2        76.8  
  

 

 

    

 

 

   

 

 

    

 

 

 

General and administrative expenses

     83.7        124.4       52.6        111.5  

Depreciation and amortization expense

     40.4        40.2       19.6        20.9  

Professional fees

     7.4        10.4       3.8        2.9  

Advertising and marketing expenses

     6.1        6.3       2.8        2.1  

Restructuring expenses

     20.1        3.8       0.3        0.3  

Other operating (income)/expense, net

     —          —         —          (12.4
  

 

 

    

 

 

   

 

 

    

 

 

 

Total operating expenses

     157.7        185.1       79.1        125.3  
  

 

 

    

 

 

   

 

 

    

 

 

 

(Loss) income from operations

     (7.3      (6.1     3.1        (48.5
  

 

 

    

 

 

   

 

 

    

 

 

 

Loss on extinguishment of debt

     —          —         —          (7.1

Other income (expense), net

     0.6        1.0       0.9        0.1  

Interest expense

     (47.0      (51.5     (25.2      (25.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Loss before income taxes

     (53.7      (56.6     (21.2      (80.5

Income tax benefit (provision)

     3.8        (1.5     (0.5      0.3  
  

 

 

    

 

 

   

 

 

    

 

 

 

Net loss

   $ (49.9    $ (58.1   $ (21.7    $ (80.2
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     Shift4 Payments, LLC
As of December 31,
    Shift4 Payments, Inc.
As of June 30,
 
(in millions)    2018     2019     2020  

Consolidated Balance Sheet:

      

Cash

   $ 4.8     $ 3.7     $ 244.0  

Total assets

     738.7       788.0       1,014.3  

Total liabilities

     654.3       773.9       543.7  

Redeemable preferred units

     43.0       43.0       —    

Retained deficit

     (113.3     (178.4     (257.6

Additional paid-in capital

     —         —         517.7  

Noncontrolling interests

     —         —         210.5  

Total members equity (deficit)/stockholders’ equity

     41.4       (28.9     470.6  

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma condensed consolidated financial information reflects the impact of this offering, the IPO, Private Placement and Transactions.

The following unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2019 and for the six months ended June 30, 2020 give effect to this offering, the IPO, Private Placement and Transactions, as if the same had occurred on January 1, 2019. The unaudited pro forma condensed consolidated balance sheet as of June 30, 2020 presents our unaudited pro forma balance sheet giving effect to this offering, as if the same had occurred as of June 30, 2020.

We have derived the unaudited pro forma condensed consolidated statements of operations and unaudited pro forma condensed consolidated balance sheet from the consolidated financial statements of Shift4 Payments, LLC and Shift4 Payments, Inc. included elsewhere in this prospectus. The historical consolidated financial information of Shift4 Payments, LLC and Shift4 Payments, Inc. has been adjusted in this unaudited pro forma condensed consolidated financial information to give effect to events that are directly attributable to this offering, the IPO, Private Placement and Transactions, are factually supportable and, with respect to the condensed consolidated statements of operations, are expected to have a continuing impact on Shift4 Payments, Inc. The unaudited pro forma condensed consolidated financial information reflects adjustments that are described in the accompanying notes and are based on available information and certain assumptions we believe are reasonable, but are subject to change.

The adjustments related to the Transactions, which we refer to as the Pro Forma Transaction and IPO Adjustments, include the impact of all the Transactions described in “IPO, Private Placement and Transactions” and principally include the following:

 

   

the amendment and restatement of the limited liability company agreement of Shift4 Payments, LLC to, among other things, appoint Shift4 Payments, Inc. as the sole managing member of Shift4 Payments, LLC and provide certain redemption rights to the Continuing Equity Owners;

 

   

the issuance of 17,250,000 shares of our Class A common stock to the investors in the IPO in exchange for net proceeds of approximately $363.8 million, after deducting underwriting discounts, commissions and offering expenses;

 

   

the issuance of 4,625,346 shares of Class C common stock to Rook upon the closing of the Private Placement, in exchange for gross proceeds of $100.0 million;

 

   

the acquisition of the LLC Interests held by the Blocker Shareholders, affiliates of Searchlight, in exchange for shares of Class B common stock and Class C common stock

 

   

the grant of 4,630,884 RSUs to the RSU Holders in connection with the IPO;

 

   

the application of the net proceeds from the sale of Class A common stock in the IPO and the Private Placement to purchase LLC Interests directly from Shift4 Payments, LLC, at a purchase price per LLC Interest equal to $23.00 per share of Class A common stock less the underwriting discount, with such LLC Interests representing 49.8% of the outstanding LLC Interests; and

 

   

the use by Shift4 Payments, LLC of the proceeds from the sale of LLC Interests to us to repay existing indebtedness and the remainder for general corporate purposes.

The adjustments related to this offering, which we refer to as the Pro Forma Offering Adjustments, are described in the notes to the unaudited pro forma condensed consolidated financial information, and principally include the following:

 

   

this offering;

 

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the redemption by the Continuing Equity Owners participating in this offering as selling stockholders, prior to the consummation of this offering, of 3,637,501 LLC Interests and an equivalent number of Class B common stock (which shares will be immediately cancelled) in exchange for 3,637,501 shares of Class A common stock; and

 

   

the conversion of 4,218,872 shares of Class C common stock held by the selling stockholders, prior to the consummation of this offering, to 4,218,872 shares of Class A common stock.

Except as otherwise indicated, the unaudited pro forma condensed consolidated financial information presented assumes no exercise by the underwriters of their option to purchase additional shares of Class A common stock in the offering.

As a public company, we will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. We expect to incur additional annual expenses related to these steps and, among other things, additional directors’ and officers’ liability insurance, director fees, reporting requirements of the SEC, transfer agent fees, hiring additional accounting, legal and administrative personnel, increased auditing, tax and legal fees, stock exchange listing fees and similar expenses. We have not included any pro forma adjustments relating to these costs.

The unaudited pro forma condensed consolidated financial information is included for informational purposes only. The unaudited pro forma condensed consolidated financial information should not be relied upon as being indicative of our results of operations or financial condition had this offering, the IPO, Private Placement and Transactions, occurred on the dates assumed. The unaudited pro forma condensed consolidated financial information also does not project our results of operations or financial position for any future period or date. The unaudited pro forma condensed consolidated statements of operations and balance sheet should be read in conjunction with the “Risk factors,” “Prospectus Summary—Summary Historical and Pro Forma Condensed Consolidated Financial and Other Data,” “Selected Historical Condensed Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

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Shift4 Payments, Inc. and subsidiaries

Unaudited pro forma condensed consolidated balance sheet as of June 30, 2020

 

(in millions, except share and per share amounts)    Shift4
Payments,
Inc.
Historical
     Pro Forma
Offering
Adjustments
           Shift4
Payments,
Inc. Pro
Forma
 

Assets

          

Current assets

          

Cash

   $ 244.0      $   92.2        (1   $ 336.2  

Accounts receivable, net

     68.6        —            68.6  

Inventory

     8.4        —            8.4  

Prepaid expenses and other current assets

     11.0        —            11.0  
  

 

 

    

 

 

      

 

 

 

Total current assets

     332.0        92.2          424.2  
  

 

 

    

 

 

      

 

 

 

Noncurrent assets

          

Goodwill

     422.0        —            422.0  

Other intangible assets, net

     192.2        —            192.2  

Capitalized acquisition costs, net

     29.3        —            29.3  

Equipment under lease

     23.3        —            23.3  

Property, plant and equipment, net

     14.2        —            14.2  

Deferred tax assets(2)

     —          —            —    

Other noncurrent assets

     1.3        —            1.3  
  

 

 

    

 

 

      

 

 

 

Total noncurrent assets

     682.3        —            682.3  
  

 

 

    

 

 

      

 

 

 

Total assets

   $ 1,014.3      $ 92.2        $ 1,106.5  
  

 

 

    

 

 

      

 

 

 

 

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(in millions, except share and per share amounts)    Shift4
Payments,
Inc.
Historical
    Pro Forma
Offering
Adjustments
         Shift4
Payments,
Inc. Pro
Forma
 

Liabilities and Stockholders’ Equity

         

Current liabilities

         

Current portion of debt

   $ 2.6     $   —          $ 2.6  

Accounts payable

     64.8       —            64.8  

Accrued expenses and other current liabilities

     24.4       —            24.4  

Deferred revenue

     8.2       —            8.2  
  

 

 

   

 

 

      

 

 

 

Total current liabilities

     100.0       —            100.0  
  

 

 

   

 

 

      

 

 

 

Noncurrent liabilities

         

Long-term debt

     437.4       —            437.4  

Deferred tax liability

     3.7       —            3.7  

Amounts payable pursuant to Tax Receivable Agreement(2)

     —         —            —    

Other non-current liabilities

     2.6       —            2.6  
  

 

 

   

 

 

      

 

 

 

Total noncurrent liabilities

     443.7       —            443.7  
  

 

 

   

 

 

      

 

 

 

Total liabilities

     543.7       —            543.7  
  

 

 

   

 

 

      

 

 

 

Commitments and contingencies

     —         —            —    

Stockholders’ Equity

         

Preferred stock, $0.0001 par value, 20,000,000 shares authorized, none issued and outstanding

     —         —            —    

Class A common stock, $0.0001 par value per share, 300,000,000 shares authorized, 18,693,653 shares issued and outstanding, actual; 28,550,026 shares issued and outstanding, pro forma

     —         —       (1),(3)      —    

Class B common stock, $0.0001 par value per share, 100,000,000 shares authorized, 39,204,989 shares issued and outstanding, actual; 35,567,488 shares issued and outstanding, pro forma

     —         —       (3)      —    

Class C common stock, $0.0001 par value per share, 100,000,000 shares authorized, 20,139,163 shares issued and outstanding, actual; 15,920,291 shares issued and outstanding, pro forma

     —         —       (3)      —    

Additional paid-in capital

     517.7       52.6     (1),(3),(4)      570.3  

Retained deficit

     (257.6     —            (257.6
  

 

 

   

 

 

      

 

 

 

Total stockholders’ equity attributable to Shift4 Payments, Inc.

     260.1       52.6          312.7  

Noncontrolling interests

     210.5       39.6     (3),(4)      250.1  
  

 

 

   

 

 

      

 

 

 

Total stockholders’ equity

     470.6       92.2          562.8  
  

 

 

   

 

 

      

 

 

 

Total liabilities and stockholders’ equity

   $ 1,014.3     $ 92.2        $ 1,106.5  
  

 

 

   

 

 

      

 

 

 

Shift4 Payments, Inc. and subsidiaries

Notes to unaudited pro forma condensed consolidated balance sheet

 

  (1)

Reflects the net effect on cash of the receipt of offering proceeds to us of $97.0 million, based on the sale of 2,000,000 shares of Class A common stock at an offering price of $48.50 per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. These amounts, as described in “Use of Proceeds” above, relate to payment of approximately $4.8 million of underwriting discounts and commissions for the sale of Class A common stock by us in

 

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  this offering and estimated offering expenses. The underwriting discounts and commissions associated with the 8,000,000 shares offered by the selling stockholders are expected to be paid by the selling stockholders and therefore, are not included in the net proceeds received of $92.2 million.

 

  (2)

We treat redemptions and exchanges of LLC Interests as direct purchases of LLC Interests for U.S. federal income tax purposes, which results in us obtaining a step-up in tax basis to our share of net assets of Shift4 Payments, LLC as the result of Shift4 Payments, LLC having a section 754 election in place. These increases in tax basis may reduce the amounts that we would otherwise pay in the future to various tax authorities. As described in greater detail under “Certain Relationships and Related Party Transactions—Tax Receivable Agreement,” in connection with the IPO, we entered into a Tax Receivable Agreement, or TRA, with Shift4 Payments, LLC, each of the Continuing Equity Owners and each of the Blocker Shareholders that provide for the payment by Shift4 Payments, Inc. to the Continuing Equity Owners of 85% of the amount of certain tax benefits, if any, that Shift4 Payments, Inc. actually realizes, or in some circumstances is deemed to realize in its tax reporting, as a result of (i) the increases in our 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. We expect to benefit from the remaining 15% of any of cash savings that we realize.

In connection with this offering, we will increase our tax basis in our LLC interests in Shift4 Payments, LLC due to the exchange with the Continuing Equity Owners. The deferred tax asset relating to this exchange is $54.7 million, which would also result in a TRA liability of $46.5 million. We have 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. We have recorded a full valuation allowance against the deferred tax assets at Shift4 Payments, Inc. A full valuation allowance on deferred tax assets will be maintained until there is sufficient evidence to support the reversal of all or some portion of these allowances. We have 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. If all of the remaining Continuing Equity Owners were to exchange all of their LLC Units, we would recognize a deferred tax asset of approximately $514.5 million and a TRA liability of approximately $437.3 million, assuming (i) that the Continuing Equity Owners redeemed or exchanged all of their LLC Units immediately as of June 30, 2020 at the offering price of $48.50 per share of our Class A common stock, (ii) no material changes in relevant tax law, (iii) a constant corporate tax rate of 24.2%, (iv) that we earn sufficient taxable income in each year to realize on a current basis all tax benefits that are subject to the TRA, and (v) that the Blocker Attributes are not limited pursuant to section 382 of the Code. The actual amount of deferred tax assets and related liabilities that we will recognize will differ based on, among other things, the timing of the exchanges, the price of our shares of Class A common stock at the time of the exchange, and the tax rates then in effect. We may elect to completely terminate the TRA early only with the written approval of each of a majority of our independent directors, although we have no plans to do so at this time. As a result, we would be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the TRA.

 

  (3)

Reflects adjustment to give effect to the issuance of 7,856,373 shares of Class A common stock in exchange for (i) 3,637,501 LLC Interests from the Continuing Equity Owners participating in this offering as selling stockholders and an equivalent number of shares of Class B common stock (which shares will be immediately cancelled) and (ii) 4,218,872 shares of Class C common stock held by the selling stockholders. As the selling shareholders will be selling the aforementioned shares of Class A common stock in this offering, there will be no impact to additional paid-in capital subsequent to the conversion other than the reclassification of noncontrolling interests. Additionally, reflects the adjustment to give effect to the issuance of 2,000,000 shares of newly issued Class A common stock, the proceeds of which will be used by us to purchase an equivalent number of LLC Interests.

 

  (4)

Each of the noncontrolling interests represent ownership interests of Continuing Equity Owners which became noncontrolling interests with respect to Shift4 Payments, Inc. upon consummation of the Transactions and IPO, and were initially reclassified based upon the historical basis of such interests.

Upon completion of this offering, assuming the underwriters do not exercise their option to purchase additional shares of Class A common stock, Shift4 Payments, Inc. will own 55.6% of the economic interest of Shift4 Payments, LLC and will report a noncontrolling interest of 44.4% related to the interests in Shift4 Payments, LLC held by the Continuing Equity Owners. If the underwriters exercise their option to purchase additional shares of Class A common stock in full, the economic interest held by the noncontrolling interest would be approximately 43.6%.

 

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Shift4 Payments, Inc. and subsidiaries

Unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2019

 

(in millions, except share and per share amounts)    Shift4
Payments,
LLC
Historical
    Pro Forma
Transaction
and IPO
Adjustments
    As Adjusted
before this
offering
    Pro Forma
Offering
Adjustments
    Shift4
Payments,
Inc. Pro
Forma
 

Gross revenue

   $ 731.4     $ —       $ 731.4     $ —       $ 731.4  

Cost of sales

     552.4       —         552.4       —         552.4  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     179.0       —         179.0       —         179.0  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General and administrative expenses

     124.4       20.1 (4)      144.5       —         144.5  

Depreciation and amortization expense

     40.2       —         40.2       —         40.2  

Professional fees

     10.4       —         10.4       —         10.4  

Advertising and marketing expenses

     6.3       —         6.3       —         6.3  

Restructuring expenses

     3.8       —         3.8       —         3.8  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     185.1       20.1       205.2       —         205.2  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (6.1     (20.1     (26.2     —         (26.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income, net

     1.0       —         1.0       —         1.0  

Interest expense

     (51.5     20.0 (5)      (31.5     —         (31.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (56.6     (0.1     (56.7     —         (56.7

Income tax provision(1)

     (1.5     —         (1.5     —         (1.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (58.1   $ (0.1   $ (58.2   $ —       $ (58.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to noncontrolling interests

       (29.3 )(2)      (29.3     3.4 (6)      (25.9
    

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Shift4 Payments, Inc.

     $ 29.2     $ (28.9   $ (3.4   $ (32.3
    

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

          

Net loss per unit

          

Basic

   $ (629.50        

Diluted

   $ (629.50        

Weighted-average units used to compute net loss per unit

          

Basic

     100,000          

Diluted

     100,000          

Basic and diluted pro forma net loss per share(3)

          

Class A pro forma net loss per share

 

  $ (0.71
 

 

 

 

Weighted-average shares used to compute pro forma net loss per share(3)

 

    30,974,311  
 

 

 

 

Class C pro forma net loss per share

 

  $ (0.71
 

 

 

 

Weighted-average shares used to compute pro forma net loss per share(3)

 

    15,920,291  
 

 

 

 

 

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Shift4 Payments, Inc. and subsidiaries

Unaudited pro forma condensed consolidated statement of operations for the six months ended June 30, 2020

 

(in millions, except share and per share amounts)   Shift4
Payments,
Inc.
Historical
    Pro Forma
Transaction
and IPO
Adjustments
    As Adjusted
before this
offering
    Pro Forma
Offering
Adjustments
    Shift4
Payments,
Inc. Pro
Forma
 

Gross revenue

  $ 341.2     $ —       $ 341.2     $ —       $ 341.2  

Cost of sales

    264.4       —         264.4       —         264.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    76.8       —         76.8       —         76.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General and administrative expenses

    111.5       (52.5 )(4)(7)      59.0       —         59.0  

Depreciation and amortization expense

    20.9       —         20.9       —         20.9  

Professional fees

    2.9       —         2.9       —         2.9  

Advertising and marketing expenses

    2.1       —         2.1       —         2.1  

Restructuring expenses

    0.3       —         0.3       —         0.3  

Other operating (income)/expense

    (12.4     —         (12.4     —         (12.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    125.3       (52.5     72.8       —         72.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

    (48.5     52.5       4.0       —         4.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss on extinguishment of debt

    (7.1     7.1 (5)      —         —         —    

Other expense, net

    0.1       —         0.1       —         0.1  

Interest expense

    (25.0     9.0 (5)      (16.0     —         (16.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (80.5     68.6       (11.9     —         (11.9

Income tax provision(1)

    0.3       —         0.3       —         0.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (80.2   $ 68.6     $ (11.6   $ —       $ (11.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to noncontrolling interests

    (1.0     (4.8 )(2)      (5.8     0.7 (6)      (5.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Shift4 Payments, Inc.

  $ (79.2   $ 73.4     $ (5.8   $ (0.7   $ (6.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

         

Basic and diluted net loss per share(3)

         

Class A net loss per share

  $ (0.03         $ (0.14

Weighted-average shares used to compute net loss per share

    19,002,563             30,974,311  

Class C net loss per share

  $ (0.03         $ (0.14

Weighted-average shares used to compute net loss per share

    20,139,163             15,920,291  

Shift4 Payments, Inc. and subsidiaries

Notes to unaudited pro forma condensed consolidated statements of operations

 

(1)

Following the Transactions we became and will continue to be subject to United States federal income taxes, in addition to state and local taxes, with respect to our allocable share of any net taxable income of Shift4 Payments, LLC. As Shift4 Payments, LLC has historically generated losses, and on a pro forma basis, we anticipate incurring losses following this offering and the Transactions, the unaudited pro forma consolidated statements of operations do not reflect adjustments to our provision for federal income taxes.

 

(2)

Upon completion of the Transactions and IPO, we became the managing member of Shift4 Payments, LLC. As of June 30, 2020, we owned 49.8% of the economic interest in Shift4 Payments, LLC, but control the management of Shift4 Payments, LLC. The Continuing Equity Owners owned the remaining 50.2% of the economic interest in Shift4 Payments, LLC, as of June 30, 2020 which is accounted for as a noncontrolling interest in our consolidated financial results. Following the IPO, Shift4 Payments, Inc. owned 49.8% of the economic interest of Shift4 Payments, LLC and the Continuing Equity Owners owned the remaining 50.2% of the economic interest of Shift4 Payments, LLC.

 

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(3)

Pro forma net loss per share is computed by dividing the net income attributable to holders of Class A common stock and Class C common stock by the weighted-average shares of Class A common stock and Class C common stock outstanding during the period. Shares of Class B common stock do not participate in earnings of Shift4 Payments, Inc. As a result, the shares of Class B common stock are not considered participating securities and are not included in the weighted-average shares outstanding for purposes of computing pro forma net loss per share. The weighted-average shares of Class A common stock outstanding include 2,461,839 RSUs that we granted in connection with the IPO that vest over time but are not subject to ongoing service requirements.

The following table sets forth a reconciliation of the numerators and denominators used to compute pro forma basic and diluted net loss per share:

 

     Pro Forma Shift4 Payments, Inc.  
(in millions, except share and per share amounts)    Year ended
December 31,
2019
     Six months
ended
June 30, 2020
 

Net loss

   $ (58.2    $ (11.6

Net loss attributable to noncontrolling interests

   $ (25.1    $ (4.9
  

 

 

    

 

 

 

Net loss attributable to Shift4 Payments, Inc.

   $ (33.1    $ (6.7
  

 

 

    

 

 

 

Numerator—Basic and Diluted:

     

Net loss attributable to common shareholders

   $ (33.1    $ (6.7

Allocation of net loss among common shareholders:

     

Net loss allocated to Class A common stock

   $ (21.9    $ (4.4

Net loss allocated to Class C common stock

   $ (11.2    $ (2.3

Denominator—basic and diluted:

     

Weighted average shares of Class A common stock outstanding

     30,974,311        30,974,311  

Weighted average shares of Class C common stock outstanding

     15,920,291        15,920,291  

Net loss per share—basic and diluted:

     

Class A common stock

   $ (0.71    $ (0.14

Class C common stock

   $ (0.71    $ (0.14

The impact of RSUs subject to continued service and shares of Class A common stock upon redemption of the remaining noncontrolling interest, after giving effect to this offering, by the Continuing Equity Owners were not included in the computation of diluted loss per share because the effect would have been anti-dilutive.

 

(4)

We granted $49.9 million in the form of 2,169,045 RSUs to certain employees and non-employee directors in connection with the IPO, at the initial public offering price of $23.00 per share. The RSUs will vest ratably over time and are subject to continued employment. Pro forma stock compensation expense of $20.1 million and $10.0 million for the year ended December 31, 2019 and the six months ended June 30, 2020, respectively, represents the compensation expense incurred following the completion of the IPO related to the ongoing effect of unvested awards. These amounts were calculated assuming the RSUs were granted on January 1, 2019 and the fair value is assumed to be equal to the IPO price per share.

 

(5)

Reflects a net decrease in interest expense as if the repayment in full of our Second Lien Credit Facility and Revolving Credit Facility, and partial repayment of our First Lien Credit Facility, occurred on January 1, 2019. Further, the adjustment for the six months ended June 30, 2020 includes the reversal of the loss on extinguishment of debt of $7.1 million recognized in connection with the partial repayment of $59.8 million on the First Lien Term Loan Facility and full repayment of $130.0 million on the Second Lien Term Loan Facility since it does not have a continuing impact.

 

(6)

This adjustment reflects the impact of the change of the portion of LLC Interests owned by Shift4 Payments, Inc. from 49.8% to 55.6% subsequent to this offering. Immediately following the completion of this offering, Shift4 Payments, Inc. will own 55.6% of the economic interests of Shift4 Payments, LLC and the ownership percentage of Shift4 Payments, LLC held by the Continuing Equity Owners will be 44.4% and the net income attributable to the Continuing Equity Owners accordingly will represent 44.4% of the income attributable to Shift4 Payments, LLC.

 

(7)

Reverses $61.1 million of non-recurring compensation expense recognized in the six months ended June 30, 2020 related to contractual change of control bonuses in connection with the IPO.

 

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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 “Selected Historical Condensed Consolidated Financial Data” and our historical consolidated financial statements and the related notes included elsewhere in this prospectus. The following discussion and analysis reflects the historical results of operations and financial position of Shift4 Payments, LLC prior to the Transactions and that of Shift4 Payments, Inc. (including Shift4 Payments, LLC) following the completion of the Transactions.

In addition to historical information, the following discussion contains forward-looking statements, such as statements regarding our expectation for future performance, liquidity and capital resources, that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our expectations. Our actual results may differ materially from those contained in or implied by any forward-looking statements. Factors that could cause such differences include those identified below and those described in “Cautionary Note Regarding Forward-Looking Statements,” “Risk Factors” and “Unaudited Pro Forma Condensed Consolidated Financial Information.” We assume no obligation to update any of these forward-looking statements.

Overview

We are a leading independent provider of integrated payment processing and technology solutions in the United States based on total volume of payments processed. We have achieved our leadership position through decades of solving complex business and operational challenges facing our customers: software partners and merchants. For our software partners, we offer a single integration to an end-to-end payments offering, a proprietary gateway and a robust suite of technology solutions to enhance the value of their software and simplify payment acceptance. For our merchants, we provide a seamless, unified consumer experience as an alternative to relying on multiple providers to accept payments and utilize technology in their businesses.

At the heart of our business is our payments platform. Our payments platform is a full suite of integrated payment products and services that can be used across multiple channels (in-store, online, mobile and tablet- based) and industry verticals, including:

 

   

end-to-end payment processing for a broad range of payment types;

 

   

merchant acquiring;

 

   

proprietary omni-channel gateway capable of multiple methods of contactless and QR code-based payments;

 

   

complementary software integrations;

 

   

integrated and mobile POS solutions;

 

   

security and risk management solutions; and

 

   

reporting and analytical tools.

In addition, we offer innovative technology solutions that go beyond payment processing. Some of our solutions are developed in-house, such as business intelligence and POS software, while others are powered by our network of complementary third-party applications. Our focus on innovation combined with our product-driven culture enables us to create scalable technology solutions that benefit from an extensive library of intellectual property.

We have a partner-centric distribution approach. We market and sell our solutions through a diversified network of over 7,000 software partners, which consists of ISVs and VARs. ISVs are technology providers that develop

 

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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. As of December 31, 2019, we served over 64,000 merchants who subscribe to our end-to-end payments offering, representing over $22.0 billion in end-to-end payment volume for the year ended December 31, 2019. As of June 30, 2020, we served over 66,000 merchants who subscribe to our end-to-end payments offering, representing approximately $10.4 billion in end-to-end payment volume for the six months ended June 30, 2020. This end-to-end payment volume contributed approximately 57% of gross revenue less network fees for both the year ended December 31, 2019 and the six months ended June 30, 2020. Additionally, in 2019 we served over 66,000 merchants representing over $185.0 billion in payment volume that relied on Shift4’s gateway or technology solutions but did not utilize our end-to-end payments offering.

Our merchants range from SMBs to large enterprises across numerous verticals in which we have deep industry expertise, including food and beverage, lodging and leisure. In addition, our merchant base is highly diversified with no single merchant representing more than 1% of end-to-end payment volume for the year ended December 31, 2019 or the six months ended June 30, 2020.

Recent acquisitions

Merchant Link

In August 2019, we completed the acquisition of Merchant-Link, LLC, or Merchant Link, a leading provider of payment gateway and data security solutions, and which primarily services hotels and restaurants in the United States, or the Merchant Link Acquisition. The Merchant Link Acquisition brings to us a highly complementary customer base, with a significant portion of the customers using software already integrated on our gateway. This overlap presents us with a substantial opportunity for improved share of wallet and cost efficiencies.

IPO, Private Placement and Transactions

On June 9, 2020, we completed the IPO in connection with which we issued 17,250,000 shares of Class A common stock. All shares sold in the IPO were sold at an initial public offering price of $23.00 per share. The shares began trading on the New York Stock Exchange on June 5, 2020 under the symbol “FOUR.”

The historical results of operations discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are those of (1) Shift4 Payments, LLC and its consolidated subsidiaries for periods prior to the completion of the Transactions on June 9, 2020 and (2) Shift4 Payments, Inc. and its consolidated subsidiaries for periods beginning on or following the Transactions on June 9, 2020. The historical results of operations of Shift4 Payments, LLC prior to the completion of the Transactions, including the IPO, do not reflect certain items that will affect our results of operations and financial condition after giving effect to the Transactions and the use of proceeds from the IPO.

Following the completion of the Transactions, Shift4 Payments, Inc. became the sole managing member of Shift4 Payments, LLC. Although we have a minority economic interest in Shift4 Payments, LLC, we have the sole voting interest in, and control the management of, Shift4 Payments, LLC. As a result, we have consolidated the financial results of Shift4 Payments, LLC and have reported a noncontrolling interest related to the LLC Interests held by the non-controlling LLC owners on our consolidated statements of operations and comprehensive income (loss). Immediately after the IPO, public investors collectively owned 74.0% of our outstanding Class A common stock, consisting of 23,324,537 shares of Class A common stock, Shift4 Payments, Inc. owned 43,463,700 LLC Interests, representing 52.6% of the LLC Interests and the Continuing Equity Owners collectively owned

 

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39,204,989 LLC Interests, representing 47.4% of the LLC Interests. Shift4 Payments, Inc. is a holding company that conducts no operations and, as of the consummation of this offering, its principal asset is the LLC Interests we hold in Shift4 Payments, LLC.

After consummation of the IPO, Shift4 Payments, Inc. became subject to U.S. federal, state and local income taxes with respect to our allocable share of any taxable income of Shift4 Payments, LLC and are taxed at the prevailing corporate tax rates. In addition to tax expenses, we also have and will continue to incur public company expenses related to our operations, plus payment obligations under the TRA, which we expect to be significant. We intend to cause Shift4 Payments, LLC to make payments to us in an amount sufficient to allow us to pay our operating expenses. We also expect Shift4 Payments, LLC to make tax distributions to us in an amount sufficient to allow us to pay our tax obligations and distributions to fund any payments due under the TRA.

Impact of the COVID-19 Pandemic

The unprecedented and rapid spread of COVID-19 as well as the shelter-in-place orders, promotion of social distancing measures, restrictions to businesses deemed non-essential, and travel restrictions implemented throughout the United States have significantly impacted the restaurant and hospitality industries – verticals in which we have predominantly focused on over the last decade.

In response to these developments, we have implemented measures to focus on the safety of our employees, including implementing remote working capabilities, and to support our merchants as they shift to take-out and delivery operations, while at the same time seeking to mitigate the impact on our financial position and operations.

We have also implemented new programs to help ease the burden for our merchants, encourage customers to support their local small businesses and restaurants and incentivize new merchants to enroll in our end-to-end payment platform. Specifically, we have:

 

   

established www.shift4.com/situation in an effort to share data to educate political leaders and advocacy groups as to where aid needs to be prioritized;

 

   

released a gift card funding campaign to encourage consumers to support their favorite bars or restaurants by purchasing a gift card through our Shift4Cares.com website; and

 

   

implemented temporary fee waivers on certain products from March 2020 through June 2020 that did not have a material impact on financial performance.

We believe we have sufficient liquidity to satisfy our cash needs, however, we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times. Our business was not significantly impacted by the COVID-19 pandemic until the latter part of March 2020, at which time our end-to-end payment volumes declined 70%. At that time, we took the following actions to increase liquidity and strengthen our financial position:

 

   

drew $68.5 million under our revolving credit facility in the first quarter of 2020, which was repaid as of June 30, 2020;

 

   

furloughed approximately 25% of our employees. As of mid-August 2020, we reinstated the majority of our workforce and are hiring in certain areas to accommodate new merchant onboarding;

 

   

accelerated approximately $30 million of annual expense reduction plans related to prior acquisitions, including the Merchant Link Acquisition;

 

   

re-prioritized our capital projects to defer certain non-essential improvements;

 

   

instituted a company-wide hiring freeze, which has been lifted since August 2020; and

 

   

reduced salaries for management across the organization, which as of August 2020 were partially reinstated.

 

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Since mid-March, when shelter-in-place, social distancing, the closing of non-essential businesses and other restrictive measures were first put in place across the United States and our weekly gateway transactions decreased by approximately 75% from their pre-COVID-19 peak, we have seen a significant recovery in our end-to-end payment volumes and, for the trailing seven days leading up to June 30, 2020, end-to-end payment volumes were approximately 90% of pre-COVID-19 volumes in 2020 and as of the week beginning August 16, 2020, end-to-end payment volumes were approximately 230% of mid-March volumes, which were impacted similarly to gateway transactions by the COVID-19 pandemic. End-to-end payment volumes for June 2020 were $1,998 million, representing a 4% increase from June 2019. Additionally, July 2020 end-to-end payment volumes were 14% greater than July 2019 and August 2020 end-to-end payment volumes were 25% greater than August 2019. While end-to-end payment volumes for the six months ended June 30, 2020 have exceeded those for the six months ended June 30, 2019, the ultimate impact that the COVID-19 pandemic will have on our consolidated results of operations in the second half of 2020 remains uncertain. We will continue to evaluate the nature and extent of these potential impacts to our business, consolidated results of operations, and liquidity. See “Risk Factors—Business risks—The recent novel coronavirus, or COVID-19, global pandemic has had and is expected to continue to have a material adverse effect on our business and results of operations.”

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security, or CARES, Act was signed into law. The CARES Act provides a substantial stimulus and assistance package intended to address the impact of the COVID-19 pandemic, including tax relief and government loans, grants and investments. The CARES Act includes, among other things, provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified improvement property. Pursuant to the CARES Act, in June 2020, we submitted a carryback claim related to our net operating loss carryforward generated in 2018, which is expected to provide a cash tax savings of $0.6 million and is reflected in the condensed consolidated financial statements for the six months ended June 30, 2020. We will continue to monitor any effects that may result from the CARES Act or other government relief programs that are made available in the future.

Factors impacting our business and results of operations

In general, our results of operations are impacted by factors such as adoption of software integrated payment solutions, continued investment in core capabilities, on-going pursuit of strategic acquisitions, and macro-level economic trends.

Increased adoption of software-integrated payments. We primarily generate revenue through volume-based payments and transaction fees and subscription fees for software and technology solutions. We expect to grow this volume by attracting new software partners through our market-leading and innovative solutions. These software partners have proven to be an effective and efficient way of acquiring new merchants and servicing these relationships.

Continued focus on the sale of our end-to-end payments offering and resulting revenue mix shift. Our customers utilize our comprehensive solutions to solve a variety of business challenges. Currently, a large percentage of our merchant base uses only our proprietary gateway. As these merchants adopt our end-to-end payment solutions, our revenue per merchant and merchant retention are expected to increase.

Mix of our merchant base. The revenue contribution of our merchant portfolio is affected by several factors, including the amount of payment volume processed per merchant, the industry vertical in which the merchant operates, and the number of solutions implemented by the merchant. As the size and sophistication of our merchants change, we may experience shifts in the average revenue per merchant and the weighted average pricing of the portfolio.

Ability to attract and retain software partners. A key pillar of our Shift4 Model is our partner-centric distribution approach. We work with over 7,000 software partners who are essential to helping us grow and serve our merchant base. Maintaining our product leadership and continued investment in innovative technology solutions is critical to attracting and retaining software partners.

 

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Investment in product, distribution and operations. We make significant investments in both new product development and existing product enhancement, such as mobile point-of-sale and cloud enablement for our software partners’ existing systems. New product features and functionality are brought to market through varied distribution and promotional activities including collaborative efforts with industry leading software providers, trade shows, and customer conferences. Further, we will continue to invest in operational support in order to maintain service levels expected by our merchant customers. We believe these investments in product development and software integrations will lead to long-term growth and profitability. For example, in the second quarter of 2020, we released numerous new products and enhancements to help our merchants adapt to the rapidly changing commerce environment. These included numerous delivery/takeout products, contactless payment methods and QR code based mobile payment technologies.

Pursuit of strategic acquisitions. From time to time, we may pursue acquisitions as part of our ongoing growth strategy. While these acquisitions are intended to add long-term value, in the short term they may add redundant operating expenses or additional carrying costs until the underlying value is unlocked.

Economic conditions and resulting consumer spending trends. Changes in macro-level consumer spending trends, including as a result of the COVID-19 pandemic, could affect the amount of volumes processed on our platform, thus resulting in fluctuations to our revenue streams. Further, consumer spending habits are subject to seasonal fluctuations that could cause varied revenue results across the quarters.

Key performance indicators and non-GAAP measures

The following table sets forth our key performance indicators and non-GAAP measures for the periods presented:

 

     Year Ended
December 31,
     Six Months Ended
June 30,
 
(in millions)    2018      2019      2019      2020  

End-to-end payment volume

   $ 16,145.1      $ 22,125.2      $ 10,163.2      $ 10,386.1  

Gross revenue less network fees

     252.7        305.5        141.6        146.5  

EBITDA

     59.5        58.1        34.2        (19.7

Adjusted EBITDA

     89.9        103.8        44.6        32.3  

End-to-end payment volume

End-to-end payment volume is defined as the total dollar amount of card payments that we authorize and settle on behalf of our merchants. This volume does not include volume processed through our gateway-only merchants.

Gross revenue less network fees, EBITDA and adjusted EBITDA

We use supplemental measures of our performance which are derived from our consolidated financial information but which are not presented in our consolidated financial statements prepared in accordance with GAAP. These non-GAAP financial measures include: gross revenue less network fees, which includes interchange and assessment fees; earnings before interest expense, income taxes, depreciation, and amortization, or EBITDA; and adjusted EBITDA. Gross revenue less network fees represents a key performance metric that management uses to measure changes in the mix and value derived from our customer base as we continue to execute our strategy to expand our reach to serve larger, complex merchants. Adjusted EBITDA is the primary financial performance measure used by management to evaluate its business and monitor results of operations. Adjusted EBITDA represents EBITDA further adjusted for certain non-cash and other non-recurring items that management believes are not indicative of ongoing operations. These adjustments include acquisition, restructuring and integration costs, management fees and other nonrecurring items.

 

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We use non-GAAP financial measures to supplement financial information presented on a GAAP basis. We believe that excluding certain items from our GAAP results allows management to better understand our consolidated financial performance from period to period and better project our future consolidated financial performance as forecasts are developed at a level of detail different from that used to prepare GAAP-based financial measures. Moreover, we believe these non-GAAP financial measures provide our stakeholders with useful information to help them evaluate our operating results by facilitating an enhanced understanding of our operating performance and enabling them to make more meaningful period to period comparisons. There are limitations to the use of the non-GAAP financial measures presented in this report. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.

The non-GAAP financial measures are not meant to be considered as indicators of performance in isolation from or as a substitute for net income (loss) prepared in accordance with GAAP, and should be read only in conjunction with financial information presented on a GAAP basis. Reconciliations of EBITDA and adjusted EBITDA to its most directly comparable GAAP financial measure are presented below. We encourage you to review the reconciliations in conjunction with the presentation of the non-GAAP financial measures for each of the periods presented. In future fiscal periods, we may exclude such items and may incur income and expenses similar to these excluded items.

Reconciliations of gross revenue less network fees, EBITDA and adjusted EBITDA

The tables below provide reconciliations of gross profit to gross revenue less network fees and net loss on a consolidated basis for the periods presented to EBITDA and adjusted EBITDA.

Gross revenue less network fees:

 

     Year Ended
December 31,
     Six Months
Ended June 30,
 
(in millions)    2018      2019      2019      2020  

Gross profit

   $ 150.4      $ 179.0      $ 82.2      $ 76.8  

Add back: Other costs of sales

     102.3        126.5        59.4        69.7  
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross revenue less network fees

     252.7        305.5        141.6        146.5  
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA and adjusted EBITDA:

 

     Year Ended
December 31,
     Six Months Ended
June 30,
 
(in millions)    2018      2019      2019      2020  

Net loss

   $ (49.9    $ (58.1    $ (21.7    $ (80.2

Interest expense

     47.0        51.5        25.2        25.0  

Income tax (benefit) provision

     (3.8      1.5        0.5        (0.3

Depreciation and amortization expense

     66.2        63.2        30.2        35.8  
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

     59.5        58.1        34.2        (19.7

Acquisition, restructuring and integration costs(a)

     24.8        28.3        10.9        3.1  

Impact of adoption of ASC 606(b)

     —          14.0        —          —    

Equity-based compensation expense(c)

     —          —          —          50.0  

Impact of lease modifications(d)

     —          —          —          (12.4

 

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     Year Ended
December 31,
     Six Months Ended
June 30,
 
(in millions)    2018      2019      2019      2020  

Management fees(e)

     2.0        2.0        1.0        0.8  

Other nonrecurring items(f)

     3.6        1.4        (1.5      10.5  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 89.9      $ 103.8      $ 44.6      $ 32.3  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

For the year ended December 31, 2018, consists primarily of restructuring expenses of $20.1 million. For the year ended December 31, 2019, consists primarily of adjustments to contingent liabilities of $15.5 million, one-time professional fees of $6.7 million, restructuring expenses of $3.8 million, and deferred compensation arrangements of $1.9 million. For the six months ended June 30, 2019, consists primarily of fair value adjustments to contingent liabilities of $6.8 million, deferred compensation arrangements of $1.5 million, and one-time professional fees of $0.8 million. For the six months ended June 30, 2020, consists primarily of change of control liabilities as a result of the IPO of $11.0 million offset by fair value adjustments to contingent liabilities of $(7.0) million and deferred compensation arrangements of $(2.1) million. See notes to our consolidated financial statements included elsewhere in this prospectus for more information on these restructuring expenses and contingent liability adjustments.

 

(b)

Effective January 1, 2019, we adopted ASC 606: Revenue from Contracts with Customers. As a result of the adoption of ASC 606, the cost of equipment deployed to new merchants in 2019 is expensed when shipped within “Cost of Sales” in our consolidated statements of operations. Previously, the cost of equipment deployed to new merchants was capitalized as an acquisition cost and amortized over the estimated life of a customer and the amortization was included in the depreciation and amortization expense used to calculate EBITDA. The impact on EBITDA as a result of the ASC 606 adoption was $14.0 million. In order to provide comparability to our 2018 adjusted EBITDA, the impact of $14.0 million is included as a component of adjusted EBITDA for the year ended December 31, 2019.

 

(c)

Represents the equity-based compensation expense for restricted stock units that vest over time and are not subject to continued service, as well as the restricted stock units that vest ratably over time and are subject to continued employment. See notes to our accompanying unaudited condensed consolidated financial statements included elsewhere in this prospectus for more information on equity-based compensation.

 

(d)

Effective June 30, 2020, we modified the terms and conditions of our SaaS arrangements and updated operational procedures. As a result, beginning June 30, 2020, hardware provided under our SaaS agreements is accounted for as an operating lease, whereas prior to June 30, 2020, these arrangements were accounted for as sales-type leases. This adjustment represents the one-time cumulative impact of modifying the contracts effective June 30, 2020. Prior to amending the terms, the sales-type lease accounting treatment impacted EBITDA and adjusted EBITDA negatively by $8.6 million for the six months ended June 30, 2020, and $6.3 million for the six months ended June 30, 2019.

 

(e)

Represents fees to the Continuing Equity Owners for consulting and managing services through the date of the IPO. These fees are not required to be paid subsequent to the IPO. See notes to the accompanying unaudited condensed consolidated financial statements included elsewhere in this prospectus for more information about these related party transactions.

 

(f)

For the year ended December 31, 2018, primarily consists of a one-time accrual of $2.3 million for cumulative unremitted sales and use tax related to years 2017 and prior. For the six months ended June 30, 2020, primarily consists of a $7.1 million loss on extinguishment of debt associated with the debt pre-payments and $1.6 million for temporary fee waivers given on certain products from March 2020 through June 2020 as a result of COVID-19. See the notes to our accompanying unaudited consolidated financial statements included elsewhere in this prospectus for more information on the loss on extinguishment of debt.

Key financial definitions

The following briefly describes the components of revenue and expenses as presented in the consolidated statements of operations.

Gross revenue consists primarily of payment-based revenue and subscriptions and other revenues:

Payment-based revenue includes fees for payment processing services, gateway services, data encryption and tokenization. Payment processing fees are primarily driven as a percentage of payment volume and a per transaction fee. They may also be based on minimum monthly usage fees.

Subscription and other revenues include software as a service, or SaaS, fees for point-of-sale systems provided to merchants. Point-of-sale SaaS fees are assessed based on the type and quantity of point-of-sale systems deployed to the merchant. This includes monthly minimums, statement fees, fees for our proprietary business intelligence software, annual fees, regulatory compliance fees and other miscellaneous services such as help desk support and warranties on equipment. This also includes revenue derived from third party residuals, automated teller machine services, and fees charged for technology support.

 

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Cost of sales consists of interchange and processing fees, residual commissions, equipment and other costs of sales:

Interchange and processing fees represent payments to card issuing banks and assessments paid to card associations based on transaction processing volume. These also include fees incurred by third-parties for data transmission and settlement of funds, such as processors and sponsor banks.

Residual commissions represent monthly payments to software partners. These costs are typically based on a percentage of payment-based revenue.

Equipment represents our costs of devices that are purchased by the merchant.

Other costs of sales includes amortization of capitalized software development costs, capitalized software acquired technology and capitalized customer acquisition costs. It also includes incentives, shipping and handling costs related to the delivery of devices and other contract fulfillment costs. Capitalized software development costs are amortized using the straight-lined method on a product-by-product basis over the estimated useful life of the software. Capitalized software, acquired technology and capitalized acquisition costs are amortized on a straight-line basis in accordance with our accounting policies.

General and administrative expenses consist primarily of compensation, benefits and other expenses associated with corporate management, finance, human resources, shared services, information technology and other activities. General and administrative expenses also include the cost of equipment deployed that does not have a corresponding revenue stream, such as demonstration equipment and certain customer upgrades.

Depreciation and amortization expense consists of depreciation and amortization expenses related to merchant relationships, trademarks and trade names, residual commission buyouts, equipment, leasehold improvements, and other intangible assets and property, plant and equipment. We depreciate and amortize our assets on a straight-line basis in accordance with our accounting policies. Leasehold improvements are depreciated over the lesser of the estimated life of the leasehold improvement or the remaining lease term. Maintenance and repairs, which do not extend the useful life of the respective assets, are charged to expense as incurred. Intangible assets are amortized on a straight-line basis over their estimated useful lives which range from two years to 15 years.

Professional fees consists of costs incurred for accounting, tax, legal, and consulting services.

Advertising and marketing expenses relate to costs incurred to participate in industry tradeshows and dealer conferences, advertising initiatives to build brand awareness, and expenses to fulfill loyalty program rewards earned by software partners.

Restructuring expenses relate to strategic initiatives we have taken that include, but are not limited to, severance or separation costs and other exit and disposal costs. These expenses are typically not reflective of our ongoing operations.

Other operating (income) expense, net consists of other operating items.

Loss on extinguishment of debt represents a loss recorded for the unamortized capitalized financing costs associated with the debt prepayment.

Other income, net primarily consists of other non-operating items.

Interest expense consists of interest costs incurred on our borrowings and amortization of capitalized financing costs.

Income tax benefit (provision) represents federal, state and local taxes based on income in multiple domestic jurisdictions.

 

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Net loss attributable to noncontrolling interests arises from net loss from the non-owned portion of businesses where we have a controlling interest but less than 100% ownership. This represents the noncontrolling interests in Shift4 Payments, LLC and its consolidated subsidiaries, which is comprised of the income allocated to Continuing Equity Owners as a result of their proportional ownership of LLC interests.

Comparison of results for the six months ended June 30, 2019 and 2020

The following table sets forth the consolidated statements of operations for the periods presented.

 

     Six Months Ended
June 30,
               
(in millions)    2019      2020      $ change      % change  

Payments-based revenue

   $ 293.5      $ 297.6      $ 4.1        1.4

Subscription and other revenues

     42.0        43.6        1.6        3.8
  

 

 

    

 

 

    

 

 

    

Total gross revenue

     335.5        341.2        5.7        1.7

Less: Network fees

     193.9        194.7        0.8        0.4

Less: Other costs of sales

     59.4        69.7        10.3        17.3
  

 

 

    

 

 

    

 

 

    

Gross profit

     82.2        76.8        (5.4      (6.6 )% 
  

 

 

    

 

 

    

 

 

    

General and administrative expenses

     52.6        111.5        58.9        112.0

Depreciation and amortization expense

     19.6        20.9        1.3        6.6

Professional fees

     3.8        2.9        (0.9      (23.7 %) 

Advertising and marketing expenses

     2.8        2.1        (0.7      (25.0 %) 

Restructuring expenses

     0.3        0.3        —          NM  

Other operating (income) expense, net

     —          (12.4      (12.4      NM  
  

 

 

    

 

 

    

 

 

    

Total operating expenses

     79.1        125.3        46.2        58.4
  

 

 

    

 

 

    

 

 

    

Income (loss) from operations

     3.1        (48.5      51.6        NM  
  

 

 

    

 

 

    

 

 

    

Loss on extinguishment of debt

     —          (7.1      (7.1      NM  

Other income, net

     0.9        0.1        (0.8      (88.9 %) 

Interest expense

     (25.2      (25.0      0.2        (0.8 )% 
  

 

 

    

 

 

    

 

 

    

Loss before income taxes

     (21.2      (80.5      (59.3      279.7

Income tax provision

     (0.5      0.3        0.8        (160.0 )% 
  

 

 

    

 

 

    

 

 

    

Net loss

   $ (21.7    $ (80.2    $ (58.5      269.6
  

 

 

       

 

 

    

Net loss attributable to noncontrolling interests

        (1.0         NM  
     

 

 

       

Net loss attributable to Shift4 Payments, Inc.

      $ (79.2         NM  
     

 

 

       

Gross Revenue

Gross revenue was $341.2 million for the six months ended June 30, 2020, compared to $335.5 million for the six months ended June 30, 2019, an increase of $5.7 million or 1.7%. Gross revenue is comprised of payments-based revenue and subscription and other revenues.

Payments-based revenue was $297.6 million for the six months ended June 30, 2020, compared to $293.5 million for the six months ended June 30, 2019, an increase of $4.1 million or 1.4%. The increase in payments-based revenue was driven by an increase in end-to-end payment volume of $0.2 billion or 2.0%, for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019. The COVID-19 pandemic impacted our end-to-end payment volumes beginning in mid-March when shelter-in-place, social distancing, the closing of non-essential businesses and other restrictive measures were first put in place across the United States. Since mid-March, we have seen a significant recovery in our end-to-end payment volumes and, for the trailing seven

 

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days leading up to June 30, 2020, end-to-end payment volumes are approximately 90% of pre-COVID-volumes in 2020.

Subscription and other revenues were $43.6 million for the six months ended June 30, 2020, compared to $42.0 million for the six months ended June 30, 2019, an increase of $1.6 million or 3.8%. The increase was driven by the Merchant Link Acquisition, which contributed $7.3 million in the six months ended June 30, 2020, offset by a decline in customer billing revenue due to temporary fee waivers on certain products from March 2020 through June 2020 of $1.9 million, primarily as a result of the COVID-19 pandemic, as well as a decline in hardware revenue and software license sales of $2.3 million, for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

Network Fees

Network fees were $194.7 million for the six months ended June 30, 2020, compared to $193.9 million for the six months ended June 30, 2019, an increase of $0.8 million or 0.4%. This increase is correlated with the increase in end-to-end payment volume as described above.

Gross revenue less network fees was $146.5 million for the six months ended June 30, 2020, compared to $141.6 million for the six months ended June 30, 2019, an increase of $4.9 million or 3.5%. The increase in gross revenue less network fees is correlated with the increase in end-to-end payment volume. See “—Key performance indicators and non-GAAP measures” for a reconciliation of gross profit to gross revenue less network fees.

Other costs of sales

Other costs of sales was $69.7 million for the six months ended June 30, 2020, compared to $59.4 million for the six months ended June 30, 2019, an increase of $10.3 million, or 17.3%. This increase was primarily a result of:

 

   

the Merchant Link Acquisition, which contributed $3.2 million to other costs of sales for the six months ended June 30, 2020;

 

   

higher capitalized acquisition cost amortization of $2.4 million related to deal bonuses;

 

   

an increase in equipment deployed for new contracts of $3.1 million;

 

   

higher capitalized software development amortization of $0.9 million; and

 

   

higher gross revenue less network fees driving higher residual commissions of $0.4 million.

Operating expenses

General and administrative expenses. General and administrative expenses were $111.5 million for the six months ended June 30, 2020, compared to $52.6 million for the six months ended June 30, 2019, an increase of $58.9 million or 112.0%. The increase was primarily due to equity-based compensation expense of $50.0 million and $11.0 million in change of control liabilities recognized as a result of the IPO, offset by $13.8 million in non-cash adjustments for contingent liability valuations and deferred compensation arrangements. See Note 21 to our accompanying unaudited condensed consolidated financial statements for more information on equity-based compensation and Note 12 to our accompanying unaudited condensed consolidated financial statements for more information on these contingent liabilities. In addition, general and administrative expenses increased $13.3 million in the six months ended June 30, 2020 due to the Merchant Link Acquisition.

Depreciation and amortization expense. Depreciation and amortization expense was $20.9 million for the six months ended June 30, 2020, compared to $19.6 million for the six months ended June 30, 2019, an increase of $1.3 million or 6.6%. The increase was primarily due to the Merchant Link Acquisition, which contributed $1.1 million to depreciation and amortization expense in the six months ended June 30, 2020.

 

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Professional fees. Professional fees were $2.9 million for the six months ended June 30, 2020, compared to $3.8 million for the six months ended June 30, 2019, a decrease of $0.9 million or 23.7%. The decrease was primarily due to higher professional fees incurred in 2019 resulting from nonrecurring costs associated with activities to prepare for our IPO.

Advertising and marketing. Advertising and marketing expenses were $2.1 million for the six months ended June 30, 2020, compared to $2.8 million for the six months ended June 30, 2019, a decrease of $0.7 million or 25.0%. The decrease was primarily due to postponing trade shows originally scheduled during the second quarter of 2020 as a result of the COVID-19 pandemic.

Restructuring expenses. Restructuring expenses were $0.3 million for both the six months ended June 30, 2020 and 2019. Restructuring expenses represent accretion on the one-time restructuring expenses incurred in 2018 for a historical acquisition. See Note 4 to our accompanying unaudited condensed consolidated financial statements for more information on restructuring expenses.

Other operating (income) expense, net. Other operating (income) expense, net includes the impact of modifying the terms and conditions of our SaaS arrangements and updating our operational procedures. As a result, beginning June 30, 2020, hardware provided under our SaaS agreements is accounted for as an operating lease, whereas prior to June 30, 2020, these arrangements were accounted for as sales-type leases. An adjustment of $12.4 million was recorded to reflect the impact of the lease modifications. Prior to amending the terms, the sales-type lease accounting treatment impacted net income negatively by $8.6 million and $6.3 million for the six months ended June 30, 2020 and 2019, respectively.

Loss on extinguishment of debt

In connection with the pre-payment of $59.8 million on the First Lien Term Loan Facility and the full repayment of $130.0 million on the Second Lien Term Loan Facility, we incurred a non-cash loss on extinguishment of debt of $7.1 million representing the unamortized capitalized financing costs associated with the prepaid debt. See Note 10 to our accompanying unaudited condensed consolidated financial statements for more information.

Other income, net

Other income, net was $0.1 million for the six months ended June 30, 2020, compared to $0.9 million for the six months ended June 30, 2019, a decrease of $0.8 million or 88.9%. The decrease is driven by unearned contingent liabilities associated with our residual commission buyout agreements.

Interest expense

Interest expense was $25.0 million for the six months ended June 30, 2020, compared to $25.2 million for the six months ended June 30, 2019, a decrease of $0.2 million or 0.8%. This decrease in interest expense was primarily due to the pre-payments for the First Lien and Second Lien Term Loan Facilities, as well as the repayment of the Revolving Credit Facility, in June 2020, which impacted interest expense by approximately $1.2 million, partially offset by additional borrowings under the First Lien Term Loan Facility from refinancing of our outstanding indebtedness in October 2019 and additional borrowings under the Revolving Credit Facility during 2020 prior to the pre-payments.

Income tax provision

The effective tax rate for the six months ended June 30, 2020 was (0.4)%, compared to the effective tax rate for the six months ended June 30, 2019 of 2.4%. The 2020 income tax benefit was different than the U.S. federal

 

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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 recording a tax benefit of $0.6 million for a net operating loss carryback at Shift4 Corporation which was allowed due to the CARES Act. The 2019 income tax expense was different than the U.S. federal statutory income tax rate of 21% primarily due to Shift4 Payments, LLC being treated as a partnership and not paying income tax. The change in the effective tax rate between the periods was primarily a result of a mix of earnings between entities, the 2020 net operating loss carryback due to the CARES Act and the change in the noncontrolling interest and valuation allowance adjustment.

Net loss attributable to noncontrolling interests

Net loss attributable to noncontrolling interests of Shift4 Payments, LLC was $(1.0) million for the six months ended June 30, 2020. There was no net loss attributable to noncontrolling interests of Shift4 Payments, LLC for the six months ended June 30, 2019 as the Reorganization Transactions occurred on June 4, 2020 and the IPO was consummated on June 9, 2020.

Net loss attributable to Shift4 Payments, Inc.

Net loss attributable to Shift4 Payments, Inc. was $(79.2) million for the six months ended June 30, 2020.

Comparison of results for the years 2018 and 2019

The following table sets forth the consolidated statements of operations for the periods presented.

 

     Year Ended December 31,                
(in millions)    2018      2019      $ change      % change  

Payments-based revenue

   $ 485.2      $ 643.6      $ 158.4        32.6

Subscription and other revenues

     75.4        87.8        12.4        16.4
  

 

 

    

 

 

    

 

 

    

Total gross revenue

     560.6        731.4        170.8        30.5

Less: Network fees

     307.9        425.9        118.0        38.3

Less: Other costs of sales

     102.3        126.5        24.2        23.7
  

 

 

    

 

 

    

 

 

    

Gross profit

     150.4        179.0        28.6        19.0

General and administrative expenses

     83.7        124.4        40.7        48.6

Depreciation and amortization expense

     40.4        40.2        (0.2      (0.5 %) 

Professional fees

     7.4        10.4        3.0        40.5

Advertising and marketing expenses

     6.1        6.3        0.2        3.3

Restructuring expenses

     20.1        3.8        (16.3      (81.1 %) 
  

 

 

    

 

 

    

 

 

    

Total operating expenses

     157.7        185.1        27.4        17.4
  

 

 

    

 

 

    

 

 

    

Loss from operations

     (7.3      (6.1      1.2        (16.4 %) 
  

 

 

    

 

 

    

 

 

    

Other income, net

     0.6        1.0        0.4        66.7

Interest expense

     (47.0      (51.5      (4.5      9.6
  

 

 

    

 

 

    

 

 

    

Loss before income taxes

     (53.7      (56.6      (2.9      5.4

Income tax benefit (provision)

     3.8        (1.5      (5.3      (139.5 %) 
  

 

 

    

 

 

    

 

 

    

Net loss

   $ (49.9    $ (58.1    $ (8.2      16.4
  

 

 

    

 

 

    

 

 

    

Gross Revenue

Gross revenue was $731.4 million for the year ended December 31, 2019, compared to $560.6 million for the year ended December 31, 2018, an increase of $170.8 million or 30.5%. Gross revenue is comprised of payments-based revenue and subscription and other revenues.

 

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Payments-based revenue was $643.6 million for the year ended December 31, 2019, compared to $485.2 million for the year ended December 31, 2018, an increase of $158.4 million or 32.6%. The increase in payments-based revenue is primarily driven by an increase in end-to-end payment volume of $6.0 billion, or 37.0%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018.

Subscription and other revenues were $87.8 million for the year ended December 31, 2019, compared to $75.4 million for the year ended December 31, 2018, an increase of $12.4 million or 16.4%. The increase in subscription and other revenues was driven by the Merchant Link Acquisition contributing $4.8 million in 2019, $4.4 million from enhanced services offered in 2019 and $2.6 million as a result of adopting ASC 606 as of January 1, 2019.

Network Fees

Network fees were $425.9 million for the year ended December 31, 2019, compared to $307.9 million for the year ended December 31, 2018, an increase of $118.0 million or 38.3%. This increase is correlated with the increase in end-to-end payment volume as described above.

Gross revenue less network fees was $305.5 million for the year ended December 31, 2019, compared to $252.7 million for the year ended December 31, 2018, an increase of $52.8 million or 20.9%. See “—Key performance indicators and non-GAAP measures” for a reconciliation of gross revenue less network fees to gross profit.

Other costs of sales

Other costs of sales was $126.5 million for the year ended December 31, 2019, compared to $102.3 million for the year ended December 31, 2018, an increase of $24.2 million, or 23.7%. This increase was primarily due to the growth in gross revenue less network fees driving higher residual commissions of $11.4 million and higher capitalized acquisition cost amortization for deal bonuses of $5.1 million. In addition, as a result of the 2019 adoption of ASC 606, equipment that was previously capitalized is now expensed under the current contract terms. In 2018, amortization of equipment capitalized as acquisition costs on the consolidated balance sheets was $9.4 million, while in 2019, the equipment expensed was $13.7 million, driving an increase in cost of sales of $4.3 million.

Operating expenses

General and administrative expenses. General and administrative expenses were $124.4 million for the year ended December 31, 2019, compared to $83.7 million for the year ended December 31, 2018, an increase of $40.7 million or 48.6%. The increase was primarily due to a $14.9 million increase in employee-related expenses in 2019 as a result of continued growth and expansion of the company and in anticipation of our initial public offering, as well as a change of $15.8 million in non-cash adjustments for contingent liability valuations. See Note 14 to our consolidated financial statements included elsewhere in this prospectus for more information on these contingent liabilities. In addition, general and administrative expenses increased $13.8 million in 2019 due to the Merchant Link Acquisition.

Professional fees. Professional fees were $10.4 million for the year ended December 31, 2019, compared to $7.4 million for the year ended December 31, 2018, an increase of $3.0 million or 40.5%. The increase was primarily due to higher professional fees resulting from nonrecurring costs associated with activities to prepare for our initial public offering.

Restructuring expenses. Restructuring expenses were $3.8 million for the year ended December 31, 2019, compared to $20.1 million for the year ended December 31, 2018, a decrease of $16.3 million, or 81.1%. The one-time restructuring expenses incurred in 2018 were separation costs primarily associated with a historical

 

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acquisition. The restructuring expenses incurred in 2019 are separation costs associated with the integration as a result of the Merchant Link Acquisition. See Note 5 to our consolidated financial statements included elsewhere in this prospectus for more information on restructuring expenses.

Interest expense

Interest expense was $51.5 million for the year ended December 31, 2019, compared to $47.0 million for the year ended December 31, 2018, an increase of $4.5 million or 9.6%. This increase in interest expense was primarily due to an increase of $90.0 million in borrowings under the First Lien Term Loan Facility and additional borrowings under the Revolving Credit Facility in 2019.

Income tax benefit (provision)

Income tax provision was $1.5 million for the year ended December 31, 2019, compared to an income tax benefit of $3.8 million for the year ended December 31, 2018, a change of $5.3 million. This change was primarily due to pretax book income from Shift4 Corporation of $5.7 million in 2019 compared to a pretax book loss from Shift4 Corporation of $17.7 million in 2018. The change in pretax book income of $23.4 million for Shift4 Corporation was primarily a result of restructuring charges of $18.3 million recorded in 2018.

Quarterly results of operations

The following tables present our unaudited quarterly results of operations. This information should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this prospectus. We have prepared the unaudited consolidated quarterly financial information for the quarters presented on the same basis as our consolidated financial statements. The historical quarterly results presented are not necessarily indicative of the results that may be expected for any future quarters or periods.

The quarterly financial information for the year ended December 31, 2018 is presented under ASC 605, while the quarterly financial information for the year ended December 31, 2019 and the three months ended March 31, 2020 and June 30, 2020 reflects the adoption of ASC 606.

 

     For the three months ended  
     March 31,
2018
    June 30,
2018
    September 30,
2018
    December 31,
2018
 

Payments-based revenue

   $ 103.0     $ 120.6     $ 130.7     $ 130.9  

Subscription and other revenues

     17.8       19.0       18.2       20.4  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total gross revenue

     120.8       139.6       148.9       151.3  

Less: Network fees

     63.6       76.1       83.4       84.8  

Less: Other costs of sales

     23.1       25.3