i3 Verticals(IIIV) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and related disclosures for i3 Verticals, Inc Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for i3 Verticals, Inc. as of March 31, 2020, and for the three and six-month periods then ended Condensed Consolidated Balance Sheets Total assets slightly increased to $351.2 million, while total liabilities decreased due to reduced long-term debt, leading to higher equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2020 | September 30, 2019 | | :--- | :--- | :--- | | Total Assets | $351,182 | $349,302 | | Cash and cash equivalents | $1,591 | $1,119 | | Goodwill | $167,054 | $168,284 | | Total Liabilities | $184,401 | $206,861 | | Long-term debt, net | $123,226 | $139,298 | | Total Equity | $166,781 | $142,441 | Condensed Consolidated Statements of Operations Net income for the quarter was $1.9 million, a turnaround from a prior-year loss, with reported revenue of $39.2 million reflecting ASC 606 adoption Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended Mar 31, 2020 | Three Months Ended Mar 31, 2019 | Six Months Ended Mar 31, 2020 | Six Months Ended Mar 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $39,178 | $85,394 | $80,289 | $170,262 | | Income (loss) from operations | $2,041 | $(203) | $6,138 | $3,327 | | Net income (loss) | $1,919 | $(1,222) | $3,853 | $1,129 | | Diluted EPS | $0.05 | $(0.12) | $0.04 | $(0.10) | - Effective October 1, 2019, the company adopted ASC 606, presenting revenues net of interchange and network fees, which were previously reported as an operating expense[15] Condensed Consolidated Statements of Cash Flows Operating cash flow decreased to $8.8 million, while investing cash outflow significantly reduced to $3.9 million due to fewer acquisitions Cash Flow Summary (in thousands) | Activity | Six Months Ended Mar 31, 2020 | Six Months Ended Mar 31, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $8,847 | $11,424 | | Net cash used in investing activities | $(3,881) | $(44,945) | | Net cash (used in) provided by financing activities | $(4,994) | $34,343 | - The significant decrease in cash used for investing activities was due to no business acquisitions in the first six months of fiscal 2020, compared to $41.2 million spent on acquisitions in the same period of 2019[26] Notes to the Unaudited Condensed Consolidated Financial Statements Notes detail accounting policies, ASC 606 impact, $138 million exchangeable notes, segment performance, and initial COVID-19 effects - The company adopted the new revenue standard ASC 606 on October 1, 2019, using a modified retrospective basis, with the most significant impact being the presentation of revenue net of interchange and network fees[52][84] Impact of ASC 606 Adoption on Revenue (in thousands) | Period | As Reported Revenue | Adjustment | Revenue without ASC 606 Adoption | | :--- | :--- | :--- | :--- | | Three months ended Mar 31, 2020 | $39,178 | $63,199 | $102,377 | | Six months ended Mar 31, 2020 | $80,289 | $132,301 | $212,590 | - In February 2020, the company issued $138 million in 1.0% Exchangeable Senior Notes due 2025, receiving net proceeds of approximately $132.7 million[111] - The company's two reportable segments are Merchant Services, providing comprehensive payment solutions, and Proprietary Software and Payments, delivering embedded payment solutions via company-owned software[181][182] - The outbreak of COVID-19 was declared a pandemic in March 2020, causing significant business disruption, a decline in payment volume, and a decline in revenue, with the long-term impact unpredictable at the time of the report[205] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, COVID-19 impact, company responses, liquidity, and operational results, noting ASC 606 masked underlying revenue growth COVID-19 Recent Developments The section details the initial, material impact of COVID-19, including steep declines in payment volume and revenue, and the company's workforce reduction response - The COVID-19 pandemic caused a significant disruption in business, including a steep decline in payment volume and revenue, particularly in the education and public sector verticals[214][216] - In April 2020, the company responded by temporarily furloughing a portion of its employees and implementing a workforce reduction impacting approximately 12% of its workforce[217] - As of March 31, 2020, the company had $1.6 million in cash and $256.0 million available under its Senior Secured Credit Facility, and was in compliance with all debt covenants[218] Key Operating Metrics Key metrics show significant payment volume growth and increased integrated payments, though volume attrition rose in March 2020 due to the pandemic Key Operating Metrics Performance | Metric | Q2 2020 | Q2 2019 | YoY Growth | | :--- | :--- | :--- | :--- | | Payment Volume (in billions) | $3.6 | $2.9 | 21.6% | | Integrated Payments (% of Volume) | 55% | 49% | +6 p.p. | - Net volume attrition rose to 2.0-2.5% in March 2020 due to COVID-19, though the average for the six-month period remained below 1%[240] Results of Operations This section details financial results, explaining reported revenue decreases were due to ASC 606, while underlying revenue grew from acquisitions and volume - For the three months ended March 31, 2020, reported revenue decreased 54.1% to $39.2 million, driven by the adoption of ASC 606, but without this accounting change, revenue would have increased by 19.9% to $102.4 million, primarily due to acquisitions[243][244] - For the six months ended March 31, 2020, reported revenue decreased 52.8% to $80.3 million, but without the effect of ASC 606, revenue increased 24.9% to $212.6 million, driven by acquisitions ($31.3 million) and organic growth[261][262] - Selling, general and administrative (SG&A) expenses increased 45.2% for the quarter, primarily due to higher employment expenses from increased headcount related to acquisitions and higher stock compensation[255] Liquidity and Capital Resources The company maintains a strong liquidity position, bolstered by $138 million in exchangeable notes, with management re-evaluating capital expenditures due to COVID-19 - As of March 31, 2020, the company had $1.6 million in cash and $256.0 million of available borrowing capacity under its Senior Secured Credit Facility[279] - The company's liquidity profile was strengthened by the February 2020 offering of $138.0 million in Exchangeable Senior Notes, with proceeds used to pay down the revolving credit facility[283] - The company was in compliance with all financial covenants as of March 31, 2020, including a total leverage ratio of 3.41x (against a maximum of 5.00x)[284] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations on its variable-rate Senior Secured Credit Facility, with foreign currency risk deemed insignificant - The company is exposed to interest rate risk through its Senior Secured Credit Facility, which accrues interest at a variable rate based on LIBOR[310] - As of March 31, 2020, a 1.0% change in the applicable interest rate would impact the business by approximately $0.2 million[313] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of March 31, 2020, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of March 31, 2020, the company's disclosure controls and procedures were effective[315] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[316] PART II. OTHER INFORMATION This section provides additional information including legal proceedings, updated risk factors, and details on equity security sales Item 1. Legal Proceedings The company is involved in ordinary course legal proceedings not expected to materially impact its financial position, results, or cash flows - The company states that ongoing legal proceedings are part of the ordinary course of business and are not expected to have a material impact[173][318] Item 1A. Risk Factors This section updates risk factors, focusing on COVID-19 impacts and new risks related to the Exchangeable Notes, including financial reporting and liquidity challenges - The COVID-19 pandemic is highlighted as a significant risk, affecting operations, business, and financial condition due to customer closures, reduced consumer spending, and increased fraud risk[320][327] - New risks are introduced related to the Exchangeable Notes, including the accounting method (ASC 470-20) which requires recording higher non-cash interest expense, potentially lowering reported net income[327][328] - The company may not have the ability to raise the necessary funds to settle exchanges of the Exchangeable Notes in cash or to repurchase them upon a fundamental change, which could lead to a default[330] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the quarter, the company issued 510,016 Class A common shares in exchange for Class B common stock and Common Units, exempt from registration - In Q2 2020, the company issued an aggregate of 510,016 shares of Class A common stock in exchange for Class B common stock and Common Units from existing members[332] Other Items (Items 3, 4, 5, 6) This section confirms no defaults on senior securities, no mine safety disclosures, no other material information, and lists filed exhibits - The company reports no defaults upon senior securities (Item 3), no mine safety disclosures (Item 4), and no other information (Item 5)[333][334][335]