Shift4 Payments, Inc.: Form 10-Q for the period ended Jun 30, 2021

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the information presented in unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (“SEC”) on March 8, 2021 (“2020 Form 10-K”). The following discussion and analysis reflects the historical results of operations and financial position of Shift4 Payments, LLC and its consolidated subsidiaries prior to the Reorganization Transactions (as defined below) on June 4, 2020 and that of Shift4 Payments, Inc. and its consolidated subsidiaries (including Shift4 Payments, LLC) following the completion of the Reorganization Transactions. In addition to historical information, the following discussion contains forward-looking statements, such as statements regarding our expectation for future performance, liquidity and capital resources, that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our expectations. Our actual results may differ materially from those contained in or implied by any forward-looking statements. Factors that could cause such differences include those identified below and those described in “Cautionary Note Regarding Forward-Looking Statements,” and “Risk Factors” in Part I, Item 1A of the 2020 Form 10-K. We assume no obligation to update any of these forward-looking statements.

As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to:

• “we,” “us,” “our,” the “Company,” “Shift4” and similar references refer: (1) following the consummation of the Reorganization Transactions, 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 Reorganization Transactions, to Shift4 Payments, LLC and, unless otherwise stated, all of its subsidiaries.
• “Continuing Equity Owners” refers collectively to Searchlight, our Founder and their respective permitted transferees that own LLC Interests after the Reorganization Transactions and who may redeem at each of their options, in whole or in part from time to time, their LLC Interests for, at our election, cash or newly-issued shares of Shift4 Payments, Inc.’s Class A common stock.
• “LLC Interests” refers to the common units of Shift4 Payments, LLC, including those that we purchased directly from Shift4 Payments, LLC with the proceeds from our initial public offering (“IPO”) and the concurrent 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 Reorganization Transactions. See the section entitled “Initial public offering and concurrent private placement” below.
• “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 in connection with the consummation of the Reorganization Transactions.
• “Reorganization Transactions” refer to certain organizational transactions that we effected in connection with our IPO in June 2020. See the section entitled “Reorganization Transactions” below.
• “Rook” refers to Rook Holdings Inc., a Delaware corporation wholly-owned by our Founder and for which our Founder is the sole stockholder.
• “Searchlight” refers to Searchlight Capital Partners, L.P., a Delaware limited partnership, and certain funds affiliated with Searchlight. Searchlight is a Continuing Equity Owner and an owner of Class C common stock.

Overview

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

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

• end-to-end payment processing for a broad range of payment types;
• merchant acquiring;
• proprietary omni-channel gateway capable of multiple methods of mobile, contactless and QR code-based payments;
• complementary software integrations;
• full eCommerce capabilities, including web-store design, hosting, shopping cart management and fulfillment integrations;
• integrated and mobile POS solutions;
• security and risk management solutions; and
• reporting and analytical tools.

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

We have a partner-centric distribution approach. We market and sell our solutions through a diversified network of over 7,000 software partners, which consists of ISVs and VARs. ISVs are technology providers that develop commerce-enabling software suites with which they can bundle our payments platform. VARs are organizations that provide distribution support for ISVs and act as trusted and localized service providers to merchants by providing them with software and services. Together, our ISVs and VARs provide us immense distribution scale and provide our merchants with front-line service and support.

Our end-to-end payments offering combines our payments platform, including our proprietary gateway and breadth of software integrations, and our suite of technology solutions to create a compelling value proposition for our merchants. Our end-to end payment volume was $11.8 billion and $4.2 billion for the three months ended June 30, 2021 and 2020, respectively, and $19.8 billion and $10.4 billion for the six months ended June 30, 2021 and 2020, respectively. This end-to-end payment volume contributed approximately 68% and 57% of gross revenue less network fees for the three months ended June 30, 2021 and 2020, respectively, and 65% and 57% of gross revenue less network fees for the six months ended June 30, 2021 and 2020, respectively.

Our merchants range from small to medium sized businesses to large and complex enterprises across numerous verticals including lodging, leisure, stadiums and arenas, and food and beverage.

Revision of Previously Issued Financial Statements

The accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to the revision of our previously reported consolidated financial statements for the three and six months ended June 30, 2020. See Note 1 in the notes to the accompanying unaudited condensed consolidated financial statements for more information.

Recent acquisition

VenueNext

On March 3, 2021, we acquired VenueNext Inc. (“VenueNext”), a leader in integrated payments solutions in sporting arenas and event complexes, for $68.5 million in aggregate purchase consideration. We believe this acquisition enhances our presence and capabilities in a number of large and growing verticals such as stadiums and arenas, while significantly expanding our total addressable market with entry into entertainment, universities, theme parks, airports, and other verticals. See Note 2 in the notes to the accompanying unaudited condensed consolidated financial statements for more information.

Recent developments

Investments in securities

As of June 30, 2021, we invested $27.5 million in shares of Space Exploration Technologies Corp.(“SpaceX”), which designs, manufactures, and launches advanced rockets, spacecraft and satellites and $2.0 million in Sightline Payments, Inc. (“Sightline Payments”), a financial technology company that provides cashless, mobile, and omni-channel commerce solutions for the gaming, lottery, sports betting and other industries.

Convertible Notes Offering – 2027 Notes

On July 26, 2021, we issued an aggregate $632.5 million of convertible senior notes due 2027 (“2027 Convertible Notes”) to qualified institutional buyers in an offering exempt from registration under the Securities Act. We received net proceeds, after deducting initial purchasers’ discounts and estimated offering expenses, of approximately $617.6 million from the 2027 Convertible Notes offering. The net proceeds of the 2027 Notes Offering, together with cash on hand, will be used for general corporate purposes.

Reorganization Transactions

The historical results of operations discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are those of (1) Shift4 Payments, LLC and its consolidated subsidiaries for periods prior to the Reorganization Transactions on June 4, 2020 and (2) Shift4 Payments, Inc. and its consolidated subsidiaries for periods beginning on or following the Reorganization Transactions on June 4, 2020. The historical results of operations of Shift4 Payments, LLC prior to the completion of the Reorganization Transactions, including the IPO and concurrent private placement, do not reflect certain items that we expect will affect our results of operations and financial condition after giving effect to the Reorganization Transactions and the use of proceeds from the IPO and concurrent private placement.

The Reorganization Transactions resulted in Shift4 Payments, Inc. becoming the sole managing member of Shift4 Payments, LLC. As the sole managing member of Shift4 Payments, LLC, we operate and control all of the business and affairs of Shift4 Payments, LLC. Accordingly, we consolidate the financial results of Shift4 Payments, LLC, and report a noncontrolling interest related to the interests in Shift4 Payments, LLC held by the Continuing Equity Owners on our consolidated financial statements.

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 is taxed at the prevailing corporate tax rates. In addition to tax expenses, we also have and will continue to incur public company expenses related to our operations, plus payment obligations under the TRA, which we expect to be significant. We intend for Shift4 Payments, LLC to make to make distributions to us in an amount sufficient to allow us to pay our tax obligations and operating expenses, including distributions to fund any payments due under the TRA.

Initial public offering and concurrent private placement

In June 2020, we completed our IPO of 17,250,000 shares of Class A common stock, including 2,250,000 shares pursuant to the full exercise of the underwriters’ option to purchase additional shares, at a price to the public of $23.00 per share. Upon completion of the IPO, we received net proceeds of approximately $362.6 million, after deducting underwriting discounts and commissions and offering expenses of approximately $34.2 million. Concurrently with the IPO, we also completed a $100.0 million private placement of 4,625,346 shares of Class C common stock to Rook. The total net proceeds from the IPO and concurrent private placement were approximately $462.6 million. Shift4 Payments, Inc. used the total proceeds to purchase newly-issued LLC Interests, from Shift4 Payments, LLC. Shift4 Payments, LLC used these amounts received from Shift4 Payments, Inc. to repay certain existing indebtedness and for general corporate purposes.

Impact of the COVID-19 Pandemic

The unprecedented and rapid spread of COVID-19 as well as the shelter-in-place orders, promotion of social distancing measures, restrictions to businesses deemed non-essential, and travel restrictions implemented 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, in 2020 we implemented measures to focus on the safety of our employees, including implementing remote working capabilities, and to support our merchants as they shifted to take-out and delivery operations, while at the same time seeking to mitigate the impact on our financial position and operations.

Our business was not significantly impacted by the COVID-19 pandemic until the latter part of March 2020, at which time our end-to-end payment volumes declined 70%. Since late March 2020 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, we have seen a significant recovery in our end-to-end payment volumes despite volumes in certain merchant categories associated with international travel, corporate travel and stadium occupancy running lower than pre COVID-19 pandemic levels. End-to-end payment volumes for the second quarter of 2021 were approximately 180% higher than end-to-end payment volumes in the second quarter of 2020 and approximately 48% higher than the first quarter of 2021 as a result of merchants reopening their operations, new merchant onboarding and a growing number of gateway merchants converting to our end-to-end solution in 2021. While gross revenue and end-to-end payment volumes for the three and six months ended June 30, 2021 have exceeded those for the three and six months ended June 30, 2020, we will continue to evaluate the nature and extent of potential COVID-19-related impacts to our business, consolidated results of operations, and liquidity. See “Risk Factors” in Part I, Item 1A of our 2020 Form 10-K.

We believe we have sufficient liquidity to satisfy our cash needs for at least the next twelve months, however, we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times.

Factors impacting our business and results of operations

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

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

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

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

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

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

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

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

Key financial definitions

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

Gross revenue consists primarily of payments-based revenue and subscription and other revenues:

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

Subscription and other revenues include software as a service (“SaaS”) fees for point-of-sale systems and terminals provided to merchants and our Shift4Shop eCommerce platform. Point-of-sale and terminal SaaS fees are assessed based on the type and quantity of equipment deployed to the merchant. Shift4Shop SaaS fees are based on the eCommerce platform chosen by the merchant. SaaS fees also include statement fees, fees for our proprietary business intelligence software, annual fees, regulatory compliance fees and other miscellaneous services such as help desk support and warranties on equipment. Subscription and other revenues also includes revenue derived from software license sales, hardware sales, third party residuals and fees charged for technology support.

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

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

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

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

Other costs of sales includes amortization of capitalized software development costs, capitalized software, acquired technology and capitalized customer acquisition costs. It also includes incentives, shipping and handling costs related to the delivery of devices, and through June 30, 2020, contains other contract fulfillment costs as well as equipment provided under our warranty program that is included with the monthly SaaS fee. Subsequent to June 30, 2020, other contract fulfilment costs and equipment under our warranty program included with the monthly SaaS fee are capitalized as equipment for lease. Capitalized software development costs are amortized using the straight-line method on a product-by-product basis over the estimated useful life of the software. Capitalized software, acquired technology and capitalized acquisition costs are amortized on a straight-line basis in accordance with our accounting policies.

General and administrative expenses consist primarily of compensation, benefits and other expenses associated with corporate management, finance, human resources, shared services, information technology and other activities.

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

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

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

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

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

Loss on extinguishment of debt represents losses recorded for unamortized capitalized financing costs associated with debt prepayments.

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

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

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

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

Comparison of results for the three months ended June 30, 2021 and 2020

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

(in millions)

(a) For the three months ended June 30, 2020, includes the period April 1, 2020 through June 4, 2020, the date the SEC declared effective our Registration Statement on Form S-1 filed in connection with our IPO.

Gross Revenue

Gross revenue was $351.0 million for the three months ended June 30, 2021, compared to $141.8 million for the three months ended June 30, 2020, an increase of $209.2 million or 147.5%. Gross revenue is comprised of payments-based revenue and subscription and other revenues.

Payments-based revenue was $324.8 million for the three months ended June 30, 2021, compared to $121.2 million for the three months ended June 30, 2020, an increase of $203.6 million or 168.0%. The increase in payments-based revenue is primarily driven by an increase in end-to-end payment volume of $7.6 billion, or approximately 180%, for the three months ended June 30, 2021, compared to the three months ended June 30, 2020. The COVID-19 pandemic impacted our end-to-end payment volumes beginning mid-March 2020 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.

Subscription and other revenues were $26.2 million for the three months ended June 30, 2021, compared to $20.6 million for the three months ended June 30, 2020, an increase of $5.6 million or 27.2%. The increase is driven primarily by the 3dcart, VenueNext and hospitality technology vendor acquisitions which collectively contributed $5.9 million more to subscription and other revenues in the three months ended June 30, 2021, compared to the three months ended June 30, 2020. In addition, we granted temporary fee waivers on certain products from

March 2020 through June 2020 in an aggregate amount of $1.9 million as a result of the COVID-19 pandemic. This was offset by a decrease in hardware revenue of $1.2 million primarily due to hardware provided under our SaaS arrangements being accounted for as operating leases in the second quarter of 2021, whereby revenue is recognized monthly, compared to the second quarter of 2020, when it was recognized at the time of shipment.

Network Fees

Network fees were $214.7 million for the three months ended June 30, 2021, compared to $74.4 million for the three months ended June 30, 2020, an increase of $140.3 million or 188.6%. This increase is correlated with the increase in end-to-end payment volume as described above.

Gross revenue less network fees was $136.3 million for the three months ended June 30, 2021, compared to $67.4 million for the three months ended June 30, 2020, an increase of $68.9 million or 102.2%. The increase in gross revenue less network fees is largely correlated with the increase in end-to-end payment volume. See “—Key performance indicators and non-GAAP measures” for a reconciliation of gross profit to gross revenue less network fees.

Other costs of sales

Other costs of sales was $58.2 million for the three months ended June 30, 2021, compared to $35.8 million for the three months ended June 30, 2020, an increase of $22.4 million, or 62.6%. This increase was primarily a result of:

• higher residual commissions of $20.1 million driven by the growth in gross revenue less network fees;
• the 3dcart, VenueNext and hospitality technology vendor acquisitions which collectively contributed $4.6 million to other costs of sales in the three months ended June 30, 2021;
• higher capitalized acquisition cost amortization of $1.6 million related to deal bonuses paid to VARs to obtain processing contracts; and,
• higher capitalized software development amortization of $0.6 million; partially offset by,
• the impact of modifying the terms and conditions of our SaaS arrangements and updating our operational procedures to account for our hardware as operating leases, which resulted in a decline of $6.5 million in costs of sales. Effective June 30, 2020, equipment leased to merchants is capitalized as a fixed asset, whereas, prior to June 30, 2020, these arrangements were accounted for as sales-type leases and expensed when deployed.

Operating expenses

General and administrative expenses. General and administrative expenses were $51.7 million for the three months ended June 30, 2021, compared to $88.3 million for the three months ended June 30, 2020, a decrease of $36.6 million or 41.4%. The decrease was primarily due to lower equity-based compensation expense of $49.9 million in the three months ended June 30, 2021, compared to the three months ended June 30, 2020, as a result of compensation expense recognized in the three months ended June 30, 2020 related to contractual change of control bonuses in connection with the IPO. See Note 20 in the notes to the accompanying unaudited condensed consolidated financial statements for more information on equity-based compensation and Note 12 in the notes to the accompanying unaudited condensed consolidated financial statements for more information on contingent liabilities. This was offset by higher employee-related expenses of $10.0 million in the three months ended June 30, 2021, compared to the three months ended June 30, 2020, as a result of our continued growth and expansion. In addition, the recent acquisitions of VenueNext, 3dcart and a hospitality technology vendor collectively contributed $3.5 million in general and administrative expenses in the three months ended June 30, 2021.

Depreciation and amortization expense. Depreciation and amortization expense was $15.5 million for the three months ended June 30, 2021, compared to $10.4 million for the three months ended June 30, 2020, an increase of $5.1 million or 49.0%. The increase was primarily due to hardware provided under our SaaS arrangements being accounted for as operating leases, effective June 30, 2020, while previously they were accounted for as sales-type leases. See Note 3 in the notes to the accompanying unaudited condensed consolidated financial statements for more information on the change to the terms and conditions of our SaaS arrangements.

Professional fees. Professional fees were $3.5 million for the three months ended June 30, 2021, compared to $1.2 million for the three months ended June 30, 2020, an increase of $2.3 million or 191.7%. The increase was due to acquisition-related costs and increased fees related to requirements of operating as a public company.

Advertising and marketing. Advertising and marketing expenses were $2.5 million for the three months ended June 30, 2021, compared to $0.8 million for the three months ended June 30, 2020, an increase of $1.7 million or 212.5%. The increase was partially due to expenses related to the integration of 3dcart and its rebranding as Shift4Shop. These expenses are anticipated to be nonrecurring in nature. In addition, the VenueNext, 3dcart and hospitality technology vendor acquisitions collectively contributed $0.7 million in advertising and marketing expenses in the three months ended June 30, 2021, as compared to the three months ended June 30, 2020.

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 in the three months ended June 30, 2020 to reflect the impact of the lease modifications.

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 in the three months ended June 30, 2020 representing the unamortized capitalized financing costs associated with the debt prepayment. See Note 10 to the accompanying unaudited condensed consolidated financial statements for more information.

Interest expense

Interest expense was $6.3 million for the three months ended June 30, 2021, compared to $11.7 million for the three months ended June 30, 2020, a decrease of $5.4 million or 46.2%. This decrease in interest expense was primarily due to the pre-payments for the First Lien and Second Lien Term Loan Facilities and the repayment of the Revolving Credit Facility, all of which were completed in June 2020, which impacted interest expense by approximately $4.2 million. In addition, the debt refinancing in October 2020 reduced the interest rate on our First Lien Term Loan Facility from 5.50% to 4.625% on the 2026 Senior Notes, which reduced interest expense by $1.2 million for the three months ended June 30, 2021.

Income tax benefit

The effective tax rate for the three months ended June 30, 2021 was (421.4)%, compared to the effective tax rate for the three months ended June 30, 2020 of (0.8)%.

The 2021 income tax benefit was different than the U.S. federal statutory income tax rate of 21% primarily due to the loss allocated to the noncontrolling interest, changes in the valuation allowances in the United States, the tax windfall related to vested equity-based compensation awards, and the near break-even loss before income taxes for the three months ended June 30, 2021. The income tax benefit for the three months ended June 30, 2020 was different than the U.S. federal statutory income tax rate of 21% primarily due to the loss allocated to the noncontrolling interest, 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.

Net income (loss) attributable to noncontrolling interests

Net income (loss) attributable to noncontrolling interests of Shift4 Payments, LLC was $1.3 million for the three months ended June 30, 2021, compared to $(73.8) million for the three months ended June 30, 2020. The net loss incurred for the three months ended June 30, 2020 includes the net loss incurred prior to the Reorganization and prior to June 4, 2020, the date the SEC declared effective our Registration Statement on Form S-1 filed in connection with our IPO.

Comparison of results for the six months ended June 30, 2021 and 2020

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

(in millions)

(a) For the six months ended June 30, 2020, includes the net loss incurred prior to the Reorganization Transactions and prior to June 4, 2020, the date the SEC declared effective our Registration Statement on Form S-1 filed in connection with our IPO.

Gross Revenue

Gross revenue was $590.3 million for the six months ended June 30, 2021, compared to $341.2 million for the six months ended June 30, 2020, an increase of $249.1 million or 73.0%. Gross revenue is comprised of payments-based revenue and subscription and other revenues.

Payments-based revenue was $540.7 million for the six months ended June 30, 2021, compared to $297.6 million for the six months ended June 30, 2020, an increase of $243.1 million or 81.7%. The increase in payments-based revenue is primarily driven by an increase in end-to-end payment volume of $9.4 billion, or approximately 91%, for the six months ended June 30, 2021, compared to the six months ended June 30, 2020. The COVID-19 pandemic impacted our end-to-end payment volumes beginning mid-March 2020 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.

Subscription and other revenues were $49.6 million for the six months ended June 30, 2021, compared to $43.6 million for the six months ended June 30, 2020, an increase of $6.0 million or 13.8%. The increase is driven by the 3dcart, VenueNext and hospitality technology vendor acquisitions which collectively contributed $10.7 million more to subscription and other revenues in the six months ended June 30, 2021 compared to the six months ended June 30, 2020. This was offset by a decrease in hardware revenue of $2.8 million primarily due to hardware provided under our SaaS arrangements being accounted for as operating leases in the six months ended June 30, 2021, whereby revenue is recognized monthly, as compared to the six months ended June 30, 2020, when it was recognized at the time of shipment. In addition, software license revenue declined $0.7 million from the six months ended June 30, 2021 as compared to the six months ended June 30, 2020.

Network Fees

Network fees were $356.5 million for the six months ended June 30, 2021, compared to $194.7 million for the six months ended June 30, 2020, an increase of $161.8 million or 83.1%. This increase is correlated with the increase in end-to-end payment volume as described above.

Gross revenue less network fees was $233.8 million for the six months ended June 30, 2021, compared to $146.5 million for the six months ended June 30, 2020, an increase of $87.3 million or 59.6%. The increase in gross revenue less network fees is largely correlated with the increase in end-to-end payment volume. See “—Key performance indicators and non-GAAP measures” for a reconciliation of gross profit to gross revenue less network fees.

Other costs of sales

Other costs of sales was $103.9 million for the six months ended June 30, 2021, compared to $71.5 million for the six months ended June 30, 2020, an increase of $32.4 million, or 45.3%. This increase was primarily a result of:

• higher residual commissions of $26.7 million driven by the growth in gross revenue less network fees;
• higher than normal chargeback losses during the six months ended June 30, 2021 compared to the six months ended June 30, 2020 driven by the business failure of one merchant causing $5.5 million in estimated unrecoverable chargeback transactions in 2021;
• the 3dcart, VenueNext and hospitality technology vendor acquisitions which collectively contributed $6.2 million to other costs of sales in the three months ended June 30, 2021;
• higher capitalized software development amortization of $1.2 million; and,
• higher capitalized acquisition cost amortization of $3.2 million related to deal bonuses paid to VARs to obtain processing contracts; partially offset by,
• the impact of modifying the terms and conditions of our SaaS arrangements and updating our operational procedures to account for our hardware as operating leases, which resulted in a decline of $12.6 million in costs of sales. Effective June 30, 2020, equipment leased to merchants is capitalized as a fixed asset, whereas, prior to June 30, 2020, these arrangements were accounted for as sales-type leases and expensed when deployed.

Operating expenses

General and administrative expenses. General and administrative expenses were $105.2 million for the six months ended June 30, 2021, compared to $109.4 million for the six months ended June 30, 2020, a decrease of $4.2 million or 3.8%. The decrease was due to lower equity-based compensation expense of $27.5 million in the six months ended June 30, 2021, compared to the six months ended June 30, 2020, as a result of compensation expense recognized in the six months ended June 30, 2020 related to contractual change of control bonuses in connection with the IPO. See Note 20 in the notes to the accompanying unaudited condensed consolidated financial statements for more information on equity-based compensation and Note 12 in the notes to the accompanying unaudited condensed consolidated financial statements for more information on contingent liabilities. This was offset by higher employee-related expenses of $12.2 million in the six months ended June 30, 2021, compared to the six months ended June 30, 2020, as a result of our continued growth and expansion. In addition, the recent acquisitions of VenueNext, 3dcart and a hospitality technology vendor collectively contributed $11.3 million in general and administrative expenses in the six months ended June 30, 2021.

Depreciation and amortization expense. Depreciation and amortization expense was $30.9 million for the six months ended June 30, 2021, compared to $20.9 million for the six months ended June 30, 2020, an increase of $10.0 million or 47.8%. The increase was primarily due to hardware provided under our SaaS arrangements being accounted for as operating leases, effective June 30, 2020, while previously they were accounted for as sales-type leases. Depreciation expense incurred for the six months ended June 30, 2021 related to these operating leases was $9.6 million. See Note 3 in the notes to the accompanying unaudited condensed consolidated financial statements for more information on the change to the terms and conditions of our SaaS arrangements.

Professional fees. Professional fees were $9.7 million for the six months ended June 30, 2021, compared to $2.9 million for the six months ended June 30, 2020, an increase of $6.8 million or 234.5%. The increase was due to acquisition-related costs and increased fees related to requirements of operating as a public company.

Advertising and marketing. Advertising and marketing expenses were $22.6 million for the six months ended June 30, 2021, compared to $2.1 million for the six months ended June 30, 2020, an increase of $20.5 million. The increase was primarily due to expenses related to the integration of 3dcart and its rebranding as Shift4Shop. These expenses are anticipated to be nonrecurring in nature.

Other operating (income) expense, net

Other operating (income) expense, net includes the impact of modifying the terms and conditions of our SaaS arrangements and updating our operational procedures. As a result, 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 in the six months ended June 30, 2020 to reflect the impact of the lease modifications.

Loss on extinguishment of debt

A loss on extinguishment of debt, representing unamortized capitalized financing costs, of $0.2 million was incurred with the refinancing of the Revolving Credit Facility during the six months ended June 30, 2021. In connection with the pre-payment of $59.8 million on the First Lien Term Loan Facility and the full repayment of $130.0 million on the Second Lien Term Loan Facility, we incurred a non-cash loss on extinguishment of debt of $7.1 million during the six months ended June 30, 2020 representing the unamortized capitalized financing costs associated with the debt prepayment. See Note 10 to the accompanying unaudited condensed consolidated financial statements for more information.

Interest expense

Interest expense was $12.8 million for the six months ended June 30, 2021, compared to $25.0 million for the six months ended June 30, 2020, a decrease of $12.2 million or 48.8%. This decrease in interest expense was primarily due to the pre-payments for the First Lien and Second Lien Term Loan Facilities and the repayment of the Revolving Credit Facility, all of which were completed in June 2020, which impacted interest expense by approximately $9.2 million. In addition, the debt refinancing in October 2020 reduced the interest rate on our First Lien Term Loan Facility from 5.50% to 4.625% on the 2026 Senior Notes, which reduced interest expense by $3.2 million.

Income tax benefit

The effective tax rate for the six months ended June 30, 2021 was (9.9)%, compared to the effective tax rate for the six months ended June 30, 2020 of (0.4)%.

The 2021 income tax benefit was different than the U.S. federal statutory income tax rate of 21% primarily due to the loss allocated to the noncontrolling interest, changes in the valuation allowances in the United States, and the tax windfall related to vested equity-based compensation awards. The income tax benefit for the six months ended June 30, 2020 was different than the U.S. federal statutory income tax rate of 21% primarily due to the loss allocated to the noncontrolling interest, 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.

Net loss attributable to noncontrolling interests

Net loss attributable to noncontrolling interests of Shift4 Payments, LLC was $(16.9) million for the six months ended June 30, 2021 compared to $(78.9) million for the six months ended June 30, 2020. The net loss incurred for the six months ended June 30, 2020 includes the net loss incurred prior to the Reorganization and prior to June 4, 2020, the date the SEC declared effective our Registration Statement on Form S-1 filed in connection with our IPO.

Key performance indicators and non-GAAP measures

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

(in millions)

End-to-end payment volume

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

Gross revenue less network fees, EBITDA and Adjusted EBITDA

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

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

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

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

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

Gross revenue less network fees:

(in millions)

EBITDA and Adjusted EBITDA:

(in millions)

(a) For the three months ended June 30, 2021, consists primarily of $1.4 million of acquisition-related costs and $1.3 million of expenses related to the integration of 3dcart and its rebranding as Shift4Shop. For the three months ended June 30, 2020, consists primarily of change of control liabilities as a result of the IPO of $11.0 million and fair value adjustments to contingent liabilities of $1.5 million. For the six months ended June 30, 2021, consists primarily of expenses related to the integration of 3dcart and its rebranding as Shift4Shop of $20.4 million, $2.1 million of expense for the Inspiration4 seat and acquisition-related costs incurred of $4.3 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 Note 12 in the notes to the accompanying unaudited condensed consolidated financial statements for more information on the contingent liability adjustments.

(b) Represents equity-based compensation expense for RSUs, including employer taxes for vested RSUs. See Note 20 in the notes to the accompanying unaudited condensed consolidated financial statements for more information on equity-based compensation.

(c) Effective June 30, 2020, we modified the terms and conditions of our SaaS arrangements and updated 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. 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 $4.0 million and $8.6 million for the three and six months ended June 30, 2020, respectively.

(d) For the three and 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 granted on certain products from March 2020 through June 2020 as a result of the COVID-19 pandemic. See Note 10 in the notes to the accompanying unaudited condensed consolidated financial statements for more information on the loss on extinguishment of debt. For the three and six months ended June 30, 2020 includes $0.3 million and $0.8 million, respectively, of fees to the Continuing Equity Owners for consulting and managing services through the date of the IPO. These fees are not required to be paid subsequent to the IPO. See Note 15 to the accompanying unaudited condensed consolidated financial statements for more information about these related party transactions.

Liquidity and capital resources

Overview

We have historically sourced our liquidity requirements primarily with cash flow from operations and, when needed, with borrowings under our Credit Facilities. The principal uses for liquidity have been debt service, capital expenditures (including research and development) and funds required to finance acquisitions. Given the impact the COVID-19 pandemic has had on the restaurant and hospitality industries, we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure we can continue to successfully operate until these industries fully recover.

We do not intend to pay cash dividends on our Class A common stock in the foreseeable future. Shift4 Payments, Inc. is a holding company that does not conduct any business operations of its own. As a result, Shift4 Payments, Inc.’s ability to pay cash dividends on its common stock, if any, is dependent upon cash dividends and distributions and other transfers from Shift4 Payments, LLC. The amounts available to Shift4 Payments, Inc. to pay cash dividends are subject to the covenants and distribution restrictions in its subsidiaries’ agreements governing its indebtedness, including covenants in such agreements providing that the payments of dividends or other distributions are subject to annual limitations based on our market capitalization.

The following table sets forth summary cash flow information for the periods presented.

(in millions)

Operating activities

Net cash provided by operating activities consists of net loss adjusted for certain non-cash items and changes in other assets and liabilities.

For the six months ended June 30, 2021, cash provided by operating activities of $5.0 million is primarily a result of:

• net loss of $46.5 million adjusted for non-cash expenses, including depreciation and amortization of $51.0 million, equity-based compensation of $20.6 million, provision for bad debts of $8.1 million and amortization of capitalized financing costs of $2.4 million; plus,
• changes in operating assets and liabilities of $(29.3) million, which is primarily a result of $24.1 million of additional funds deposited in our sponsor bank merchant settlement account to facilitate gross card transaction deposits for those customers we bill on a monthly, versus a daily basis.

For the six months ended June 30, 2020, cash provided by operating activities of $6.7 million is primarily a result of:

• net loss of $79.9 million, adjusted for non-cash expenses including equity-based compensation of $50.0 million, depreciation and amortization of $35.5 million, cumulative impact of modifying our lease contracts of $(12.4) million, loss on extinguishment of debt of $7.1 million, revaluation of contingent liabilities of $(7.0) million, provision for bad debts of $5.4 million and amortization of capitalized financing costs of $2.1 million; plus,
• changes in operating assets and liabilities of $6.0 million, which is primarily a result of change of control liabilities established at the time of the IPO of $11.0 million, offset by working capital fluctuations.

Investing activities

Net cash used in investing activities includes cash paid for acquisitions, purchases of future commission streams of our software partners, purchases of property, plant and equipment, purchases of equipment to be leased, capitalized software development costs and upfront processing bonuses provided to software partners.

Net cash used in investing activities was $115.5 million for the six months ended June 30, 2021, an increase of $98.8 million compared to net cash used in investing activities of $16.7 million for the six months ended June 30, 2020. This increase is primarily the result of:

• the acquisition of VenueNext in March 2021 for $68.5 million in aggregate purchase consideration, including $40.6 million in cash, net of cash acquired of $1.6 million,
• the investment in SpaceX of $27.5 million,
• $18.9 million in purchases for equipment to be leased; and,
• the investment in Sightline Payments of $2.0 million.

Financing activities

Net cash used in financing activities was $117.6 million for the six months ended June 30, 2021, a decrease of $367.9 million, compared to net cash provided by financing activities of $250.3 million for the six months ended June 30, 2020. This decrease was primarily the result of:

• the IPO and concurrent private placement net proceeds of approximately $465.7 million after deducting underwriting discounts, commissions and offering costs paid in the six months ended June 30, 2020; and,
• $116.3 million in employee taxes paid on vested RSUs during the six months ended June 30, 2021; partially offset by,
• the partial repayment of the First Lien Term Loan Facility and full repayment of our Second Lien Term Loan Facility in the six months ended June 30, 2020, totaling $189.8 million.

Senior Notes and Credit Facilities

As of June 30, 2021 and December 31, 2020, we had $1,140.0 million total principal amount of debt outstanding, including $450.0 million of 2026 Senior Notes and $690.0 million of 2025 Convertible Notes.

Senior Notes Offering – 2026 Notes

In October 2020, Shift4 Payments, LLC and Shift4 Payments Finance Sub, Inc. issued an aggregate principal amount of $450.0 million 4.625% Senior Notes due 2026 (“2026 Senior Notes”) in an offering to qualified institutional buyers exempt from registration under the Securities Act. We received net proceeds, after deducting initial purchasers’ discounts and estimated offering expenses, of approximately $442.8 million from the offering of the 2026 Senior Notes. The net proceeds of the 2026 Senior Notes offering, together with cash on hand, were used to repay all indebtedness outstanding under the First Lien Term Loan Facility. The 2026 Senior Notes will mature on November 1, 2026, and accrue interest at a rate of 4.625% per year. Interest on the 2026 Senior Notes is payable semi-annually in arrears on each May 1 and November 1, commencing on May 1, 2021.

Convertible Notes Offering – 2025 Notes

In December 2020, Shift4 Payments, Inc. issued an aggregate principal amount of $690.0 million of convertible senior notes due 2025 (“2025 Convertible Notes”) (and together with the 2026 Senior Notes, “the Notes”) in an offering to qualified institutional buyers exempt from registration under the Securities Act. We received net proceeds, after deducting initial purchasers’ discounts and estimated offering expenses, of approximately $673.6 million from the 2025 Convertible Notes Offering. The net proceeds of the 2025 Convertible Notes Offering, together with cash on hand, will be used for general corporate purposes. The 2025 Convertible Notes do not bear regular interest and will mature on December 15, 2025 unless earlier repurchased, redeemed or converted. The Company will settle conversions by paying in cash up to the principal amount of Notes with any excess to be paid or delivered, as the case may be, in cash or shares of Class A common stock or a combination of both at its election, based on the conversion rate. The conversion rate for the 2025 Convertible Notes will initially be 12.4262 shares of Class A common stock per $1,000 principal amount of 2025 Convertible Notes (equivalent to an initial conversion price of approximately $80.48 per share of Class A common stock), subject to adjustment upon the occurrence of specified events. None of the specified events for the conversion of the 2025 Convertible Notes occurred as of June 30, 2021. See Note 10 to the accompanying unaudited condensed consolidated financial statements for more information.

Revolving Credit Facility

In October 2020, the Company fully repaid the $650.0 million of aggregate principal amount of secured term loans comprised of first lien term loans of $520.0 million due November 30, 2024 (“First Lien Term Loan Facility”), using the proceeds from the 2026 Senior Notes. The credit agreement governing the First Lien Term Loan Facility (“First Lien Credit Agreement”) included a revolving credit facility that had a borrowing capacity of $90.0 million (“Revolving Credit Facility”), which previously matured on November 30, 2022.

Amended and Restated Revolving Credit Facility

On January 29, 2021, Shift4 Payments, LLC amended and restated its First Lien Credit Agreement and increased the borrowing capacity under the Revolving Credit Facility to $100.0 million. The Revolving Credit Facility matures on January 29, 2026 or, if greater than $150.0 million aggregate principal amount of Shift4 Payments, LLC’s 2025 Convertible Notes remains outstanding on September 15, 2025, on that date. The Revolving Credit Facility requires periodic interest payments until maturity.

Loans incurred under the Revolving Credit Facility bear interest at our option at either the LIBO rate plus a margin ranging from 3.00% to 3.50% per year or the alternate base rate (the highest of the Federal Funds rate plus 0.50%, or the prime rate announced from time to time in The Wall Street Journal) plus a margin ranging from 2.00% to 2.50% per year (“Applicable Rate”). The Applicable Rate varies depending on the Company’s total leverage ratio (as defined in the Credit Agreement). The alternate base rate and the LIBO rate are each subject to a zero percent floor. In addition, we are required to pay a commitment fee under the Revolving Credit Facility in respect of the unutilized commitments thereunder at a rate ranging from 0.25% per year to 0.50% per year, in each case based on the total leverage ratio. We are also subject to customary letter of credit and agency fees. The Revolving Credit Facility has a borrowing capacity of $99.5 million, net of a $0.5 million letter of credit. As of June 30, 2021, we had no outstanding borrowings under the Revolving Credit Facility.

Contractual obligations

There have been no material changes to our contractual obligations during the six months ended June 30, 2021 from those previously disclosed in our 2020 Form 10-K.

Off-balance sheet arrangements

During the periods presented, we did not engage in any off-balance sheet financing activities.

Critical accounting policies

Our discussion and analysis of our historical financial condition and results of operations for the periods described is based on our audited consolidated financial statements, and our unaudited condensed consolidated financial statements, each of which have been prepared in accordance with U.S. GAAP. The preparation of these historical financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions and judgments in certain circumstances that affect the reported amounts of assets, liabilities and contingencies as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. We evaluate our assumptions and estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Additionally, the full impact of the COVID-19 pandemic is unknown and cannot be reasonably estimated. However, we have made accounting estimates for our allowance for doubtful accounts, valuation of our contingent liabilities, other intangible assets and goodwill based on the facts and circumstances available as of the reporting date. Actual results may differ from these estimates under different assumptions or conditions.

We have provided a summary of our significant accounting policies in Note 1 in the notes to the accompanying unaudited condensed consolidated financial statements. The following critical accounting discussion pertains to accounting policies management believes are most critical to the portrayal of our historical financial condition and results of operations and that require significant, difficult, subjective or complex judgments. Other companies in similar businesses may use different estimation policies and methodologies, which may impact the comparability of our financial condition, results of operations and cash flows to those of other companies.

New accounting pronouncements

For information regarding new accounting pronouncements, and the impact of these pronouncements on our consolidated financial statements, if any, refer to Note 1 in the notes to the accompanying unaudited condensed consolidated financial statements.

JOBS Act

We qualify as an EGC pursuant to the provisions of the JOBS Act, enacted on April 5, 2012. Section 102 of the JOBS Act provides that an EGC can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. We are electing to delay the adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-EGCs. As a result, our consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if as an EGC we choose to rely on such exemptions, we may not be required to, among other things, (1) provide an auditor’s attestation report on our systems of internal controls over financial reporting pursuant to Section 404, (2) provide all of the compensation disclosure that may be required of non-EGCs under the Dodd-Frank Act, (3) comply with the requirement of the PCAOB regarding the communication of critical audit matters in the auditor’s report on the financial statements, and (4) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation. These exemptions will apply until we no longer meet the requirements of being an EGC. We will remain an EGC until the earlier of (a) the last day of the fiscal year (i) following the fifth anniversary of the completion of our IPO, (ii) in which we have total annual gross revenue of at least $1.07 billion or (iii) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the last business day of our prior second fiscal quarter, and (b) the date on which we have issued more than $1.07 billion in non-convertible debt during the prior three-year period. As of June 30, 2021, the market value of our common stock that is held by non-affiliates exceeds $700.0 million; therefore, as of December 31, 2021, we expect that we will cease to be an EGC.

Our future income, cash flows and fair values relevant to financial instruments are subject to risks relating to interest rates.

As of June 30, 2021, we had approximately $1,140.0 million of fixed rate debt outstanding pursuant to the Notes, with a fair value of $1,408.0 million, none of which was subject to an interest rate hedge. Since the Notes bear interest at fixed rates, they do not result in any financial statement risk associated with changes in interest rates. However, the fair value of the Notes fluctuates when interest rates change.

We also have a Revolving Credit Facility available to us with available borrowing capacity of $99.5 million, net of a $0.5 million letter of credit. We are obligated to pay interest on loans under the Revolving Credit Facility as well as other customary fees, including an upfront fee and an unused commitment fee based on our debt rating. Borrowings under the Revolving Credit Facility, if any, bear interest at floating rates. As a result, we are exposed to the risk related to fluctuations in interest rate to the extent of our borrowings. As of June 30, 2021 and December 31, 2020, we had no amounts outstanding under the Revolving Credit Facility. See “Liquidity and capital resources” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Quarterly Report on Form 10-Q and Note 10 in the notes to the accompanying unaudited condensed consolidated financial statements for more information.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of June 30, 2021, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in internal control over financial reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks described under the heading “Risk Factors” in Part I, Item 1A of our 2020 Form 10-K, the other information in this Quarterly Report on Form 10-Q, including our unaudited condensed consolidated financial statements and the related notes, as well as our other public filings with the SEC, before deciding to invest in our Class A common stock. There have been no material changes to the Company’s risk factors since the 2020 Form 10-K. The occurrence of any of the events described therein 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.