i3 Verticals(IIIV) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including the balance sheets, statements of operations, changes in equity, and cash flows, along with detailed notes explaining the company's accounting policies, acquisitions, debt, equity, and other financial commitments Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing total assets, liabilities, and equity at specific reporting dates Balance Sheet Summary (in thousands) | Metric | June 30, 2023 (in thousands) | September 30, 2022 (in thousands) | | :--------------------------------------- | :----------------------------- | :-------------------------------- | | Total Assets | $875,824 | $770,312 | | Total Liabilities | $562,882 | $462,624 | | Total Equity | $312,942 | $307,688 | | Goodwill | $409,042 | $353,639 | | Long-term debt, less current portion and debt issuance costs, net | $389,569 | $287,020 | Condensed Consolidated Statements of Operations This section outlines the company's financial performance over specific periods, including revenue, net loss, and earnings per share Statements of Operations Summary (in thousands) | Metric | Three months ended June 30, 2023 (in thousands) | Three months ended June 30, 2022 (in thousands) | Change (%) | | :--------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :--------- | | Revenue | $93,931 | $80,553 | 16.6% | | Net loss attributable to i3 Verticals, Inc. | $(5,155) | $(3,728) | 38.3% | | Basic Net Loss Per Share | $(0.22) | $(0.17) | - | | Diluted Net Loss Per Share | $(0.22) | $(0.17) | - | Statements of Operations Summary (in thousands) | Metric | Nine months ended June 30, 2023 (in thousands) | Nine months ended June 30, 2022 (in thousands) | Change (%) | | :--------------------------------------- | :------------------------------------------- | :------------------------------------------- | :--------- | | Revenue | $273,832 | $232,612 | 17.7% | | Net loss attributable to i3 Verticals, Inc. | $(5,359) | $(13,629) | (60.7)% | | Basic Net Loss Per Share | $(0.23) | $(0.62) | - | | Diluted Net Loss Per Share | $(0.23) | $(0.62) | - | Condensed Consolidated Statement of Change in Equity This section details the changes in the company's equity components, including additional paid-in capital and accumulated deficit, over time Statement of Change in Equity Summary (in thousands) | Metric | June 30, 2023 (in thousands) | September 30, 2022 (in thousands) | | :--------------------------------------- | :----------------------------- | :-------------------------------- | | Total Equity | $312,942 | $307,688 | | Additional Paid-In Capital | $239,917 | $241,958 | | Accumulated Deficit | $(17,492) | $(23,582) | - Adoption of ASU 2020-06 on October 1, 2022, resulted in a decrease in additional paid-in capital of $23,382 thousand and a decrease in accumulated deficit of $11,449 thousand[18][75] - Equity-based compensation for the nine months ended June 30, 2023, totaled $20,846 thousand[18][158] Condensed Consolidated Statements of Cash Flows This section summarizes the cash inflows and outflows from operating, investing, and financing activities, reflecting the company's liquidity and solvency Cash Flow Summary (in thousands) | Cash Flow Activity | Nine months ended June 30, 2023 (in thousands) | Nine months ended June 30, 2022 (in thousands) | | :--------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Net cash provided by operating activities | $29,623 | $35,840 | | Net cash used in investing activities | $(115,415) | $(109,350) | | Net cash provided by financing activities | $82,229 | $85,695 | | Cash, cash equivalents and restricted cash at end of period | $20,202 | $30,116 | - Net cash provided by operating activities decreased by $6.2 million, primarily due to a decrease in non-cash contingent consideration and an increase in the provision for income taxes, partially offset by an increase in depreciation and amortization[260] - Net cash used in investing activities increased by $6.1 million, mainly driven by $102.0 million used for acquisitions, net of cash acquired, in 2023[261] Notes to the Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures regarding the accounting policies, significant transactions, and financial commitments underlying the consolidated financial statements Note 1. ORGANIZATION AND OPERATIONS i3 Verticals, Inc. was formed in 2018 as a Delaware corporation for its IPO and operates as a holding company, controlling i3 Verticals, LLC, which provides integrated software and payment solutions. The company consolidates i3 Verticals, LLC's financial results and reports a non-controlling interest - i3 Verticals, Inc. was formed on January 17, 2018, as a Delaware corporation for its IPO[29] - The Company operates as a holding company, controlling i3 Verticals, LLC, which delivers integrated software and payment solutions[30] - i3 Verticals, Inc. consolidates the financial results of i3 Verticals, LLC and reports a non-controlling interest for common units held by other owners[30] Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the company's significant accounting policies, including the basis of presentation under GAAP and SEC rules, principles of consolidation, and specific treatments for restricted cash, settlement assets and obligations, inventories, acquisitions, leases, and revenue recognition. It also details the adoption of ASU 2020-06, which simplified accounting for convertible instruments - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim financial information and SEC rules[31] - Revenue is recognized as performance obligations are satisfied, disaggregated by product (Software and related services, Payments, Other) and timing of transfer (over time, at a point in time)[46][47][60] - The company adopted ASU 2020-06 on October 1, 2022, simplifying accounting for convertible instruments, which resulted in an increase in long-term debt and adjustments to additional paid-in capital and accumulated deficit[75] Note 3. ACQUISITIONS During the nine months ended June 30, 2023, the company completed several acquisitions, including residual buyouts ($462 thousand), referral agreements ($420 thousand), and the significant acquisition of Celtic Cross Holdings, Inc. and Celtic Systems Pvt. Ltd. for $85.0 million to expand its Public Sector software offerings. Additionally, two other businesses were acquired for $19.8 million. These acquisitions contributed $13.4 million in revenue and $3.7 million in net income for the period - Acquired $462 thousand in residual buyouts during the nine months ended June 30, 2023, with an estimated amortization period of eight years[78] - Completed the acquisition of Celtic Cross Holdings, Inc. and Celtic Systems Pvt. Ltd. for $85.0 million in cash to expand software offerings in the Public Sector vertical[80] - Acquired two other businesses for $19.8 million, including $17.0 million in cash, $2.0 million in Class A Common Stock, and $0.8 million in contingent consideration[85] - Acquisitions completed during the nine months ended June 30, 2023, contributed $13.4 million in revenue and $3.7 million in net income[40] Note 4. PREPAID EXPENSES AND OTHER CURRENT ASSETS This note provides a summary of the company's prepaid expenses and other current assets, which increased slightly from $19.4 million at September 30, 2022, to $20.1 million at June 30, 2023, primarily driven by increases in prepaid licenses and inventory Prepaid Expenses and Other Current Assets (in thousands) | Asset Category | June 30, 2023 (in thousands) | September 30, 2022 (in thousands) | | :--------------------------------------- | :----------------------------- | :-------------------------------- | | Inventory | $4,537 | $4,121 | | Prepaid licenses | $7,813 | $5,743 | | Prepaid insurance | $1,126 | $736 | | Notes receivable — current portion | $5,106 | $4,930 | | Other current assets | $1,475 | $3,915 | | Total Prepaid expenses and other current assets | $20,057 | $19,445 | Note 5. GOODWILL AND INTANGIBLE ASSETS Goodwill increased by $55.4 million to $409.0 million as of June 30, 2023, primarily due to acquisitions. The company's identifiable intangible assets, totaling $224.6 million, are mainly composed of merchant relationships with amortization periods ranging from 9 to 25 years Goodwill and Intangible Assets (in thousands) | Metric | June 30, 2023 (in thousands) | September 30, 2022 (in thousands) | | :--------------------------------------- | :----------------------------- | :-------------------------------- | | Goodwill | $409,042 | $353,639 | | Total identifiable intangible assets | $224,588 | $195,919 | - Goodwill increased by $55,403 thousand during the nine months ended June 30, 2023, primarily due to preliminary purchase price adjustments and acquisitions[98] - Merchant relationships constitute the largest portion of finite-lived intangible assets ($216,695 thousand), with amortization periods of 9 to 25 years[98] - Amortization expense for intangible assets was $15,315 thousand for the nine months ended June 30, 2023, up from $13,303 thousand in the prior year[98] Note 6. ACCRUED EXPENSES AND OTHER LIABILITIES The company's accrued expenses and other current liabilities decreased from $57.8 million at September 30, 2022, to $46.5 million at June 30, 2023, mainly due to a reduction in accrued contingent consideration and escrow liabilities. Long-term liabilities significantly increased, driven by a higher deferred tax liability Accrued Expenses and Other Liabilities (in thousands) | Liability Category | June 30, 2023 (in thousands) | September 30, 2022 (in thousands) | | :--------------------------------------- | :----------------------------- | :-------------------------------- | | Accrued expenses and other current liabilities | $46,505 | $57,833 | | Accrued contingent consideration — current portion | $16,680 | $21,385 | | Escrow liabilities | $3,915 | $12,285 | | Total other long-term liabilities | $24,151 | $9,540 | | Deferred tax liability — long-term | $22,687 | $7,896 | Note 7. LONG-TERM DEBT, NET The company's total long-term debt, net, increased to $389.6 million as of June 30, 2023. This includes $277.4 million outstanding under the new 2023 Senior Secured Revolving Credit Facility, which replaced the prior facility in May 2023, and $117.0 million in 1% Exchangeable Senior Notes due 2025. The estimated fair value of the Exchangeable Notes was $108.2 million Long-Term Debt Summary (in thousands) | Debt Instrument | Maturity | June 30, 2023 (in thousands) | September 30, 2022 (in thousands) | | :--------------------------------------- | :------- | :----------------------------- | :-------------------------------- | | Revolving lines of credit (2023 Senior Secured Credit Facility) | May 8, 2028 | $277,400 | $0 | | Revolving lines of credit (Prior Senior Secured Credit Facility) | May 9, 2024 | $0 | $185,017 | | 1% Exchangeable Senior Notes due 2025 | Feb 15, 2025 | $117,000 | $104,557 | | Debt issuance costs, net | - | $(4,831) | $(2,554) | | Total long-term debt, net of issuance costs | - | $389,569 | $287,020 | - The 2023 Senior Secured Revolving Credit Facility provides aggregate commitments of $450 million[117] - The estimated fair value of the Exchangeable Notes was $108,206 thousand as of June 30, 2023, classified as Level 2[110] Note 8. INCOME TAXES i3 Verticals, Inc. is taxed as a corporation, while i3 Verticals, LLC operates as a pass-through entity for federal income tax purposes. The company recorded a provision for income taxes of $2.1 million for the three months ended June 30, 2023, compared to a benefit of $1.8 million in the prior year. The Tax Receivable Agreement (TRA) obligates the company to pay 85% of certain tax benefits to Continuing Equity Owners, with a total liability of $40.9 million as of June 30, 2023, and expected annual payments of $0 to $3.3 million over 24 years - i3 Verticals, Inc. is taxed as a corporation, while i3 Verticals, LLC is a pass-through entity for federal income tax purposes[134] Income Tax Provision (Benefit) (in thousands) | Metric | Three months ended June 30, 2023 (in thousands) | Three months ended June 30, 2022 (in thousands) | | :--------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Provision for (benefit from) income taxes | $2,077 | $(1,810) | - The Tax Receivable Agreement (TRA) obligates the company to pay 85% of certain tax benefits to Continuing Equity Owners, with a total liability of $40,915 thousand as of June 30, 2023[136][140] - Payments under the TRA are expected to range from $0 to $3,321 thousand per year and are projected to be paid over the next 24 years[141] Note 9. LEASES The company's leases primarily consist of real estate operating leases. As of June 30, 2023, the weighted-average remaining lease term was four years, and the weighted-average discount rate used for lease liabilities was 7.7%. Total operating lease costs for the nine months ended June 30, 2023, were $4.3 million - The weighted-average remaining lease term was four years as of June 30, 2023[142] - The weighted-average discount rate used for lease liabilities was 7.7% as of June 30, 2023[143] Operating Lease Costs (in thousands) | Metric | Nine months ended June 30, 2023 (in thousands) | Nine months ended June 30, 2022 (in thousands) | | :--------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Operating lease costs | $4,287 | $4,415 | - The present value of lease liability was $15,882 thousand as of June 30, 2023[148] Note 10. FAIR VALUE MEASUREMENTS The company applies ASC 820 for fair value measurements, classifying financial instruments into a three-tier hierarchy. Contingent consideration obligations are Level 3 measurements, valued using Monte Carlo simulations and probability forecasts, with an accrued amount of $17.9 million as of June 30, 2023. The Exchangeable Notes are classified as Level 2, with an estimated fair value of $108.2 million - Contingent consideration obligations are classified as Level 3 financial instruments, valued using Monte Carlo simulations and probability forecasts due to unobservable inputs[154] Accrued Contingent Consideration (in thousands) | Metric | June 30, 2023 (in thousands) | September 30, 2022 (in thousands) | | :--------------------------------------- | :----------------------------- | :-------------------------------- | | Accrued Contingent Consideration | $17,856 | $22,833 | - The estimated fair value of the Exchangeable Notes was $108,206 thousand as of June 30, 2023, classified as Level 2[156] Note 11. EQUITY-BASED COMPENSATION Equity-based compensation expense for the nine months ended June 30, 2023, totaled $20.8 million, primarily from stock options and restricted stock units (RSUs) granted under the 2018 and 2020 Equity Incentive Plans. Unrecognized compensation expense for unvested stock options and RSUs amounts to $28.8 million and $13.2 million, respectively Equity-Based Compensation Expense (in thousands) | Metric | Nine months ended June 30, 2023 (in thousands) | Nine months ended June 30, 2022 (in thousands) | | :--------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Stock options | $18,341 | $19,065 | | Restricted stock units | $2,505 | $615 | | Total equity-based compensation expense | $20,846 | $19,680 | - Total unrecognized compensation expense for unvested stock options was $28,792 thousand, expected to be recognized over 2.08 years[166] - Total unrecognized compensation expense for unvested RSUs was $13,244 thousand, expected to be recognized over 3.31 years[167] Note 12. COMMITMENTS AND CONTINGENCIES The company has various commitments, including $3.3 million in minimum processing commitments and a conditional buyout agreement for a third-party business capped at $29.0 million, plus potential additional consideration. The S&S Litigation, seeking $22.0 million in damages related to alleged cybersecurity inadequacies, is ongoing, but the company does not anticipate a material adverse effect on its financial condition Minimum Processing Commitments (in thousands) | Commitment | Total (in thousands) | Less than 1 year (in thousands) | | :--------------------------------------- | :------------------- | :------------------------------ | | Minimum Processing Commitments | $3,302 | $3,031 | - The company has conditionally committed to a future buyout of a third-party business, capped at $29,000 thousand, with potential additional consideration of up to $9,000 thousand[172] - The S&S Litigation involves claims for $15,000 thousand from the State of Louisiana and $7,000 thousand from Sheriffs for network remediation related to alleged cybersecurity inadequacies[176] - The company is unable to predict the outcome of the S&S litigation but does not believe it will have a material adverse effect on its business or financial condition[178] Note 13. RELATED PARTY TRANSACTIONS The primary related party transaction is the Tax Receivable Agreement (TRA) with the Continuing Equity Owners, which obligates the company to pay 85% of certain tax benefits. As of June 30, 2023, the total amount due under the TRA was $40.9 million - The Tax Receivable Agreement (TRA) with the Continuing Equity Owners is the primary related party transaction[180] - The TRA obligates the company to pay 85% of certain tax benefits to the Continuing Equity Owners[180] - As of June 30, 2023, the total amount due under the TRA was $40,915 thousand[182] Note 14. SEGMENTS The company operates through two primary segments: Software and Services, which provides vertical market software solutions with embedded payments, and Merchant Services, offering comprehensive payment solutions. The 'Other' category includes corporate overhead. Processing margin is the key metric for measuring operating performance - The company's operating segments are Software and Services, and Merchant Services[184][185] - The Software and Services segment delivers vertical market software solutions, often including embedded payments[184] - The Merchant Services segment provides comprehensive payment solutions, including third-party integrated and traditional merchant processing services[185] Segment Revenue and Processing Margin (in thousands) | Segment | Nine months ended June 30, 2023 (in thousands) | Nine months ended June 30, 2022 (in thousands) | | :--------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Software and Services Revenue | $172,911 | $141,575 | | Merchant Services Revenue | $100,968 | $91,071 | | Total Processing Margin | $246,988 | $207,388 | Note 15. NON-CONTROLLING INTEREST i3 Verticals, Inc. consolidates the financial results of i3 Verticals, LLC and reports a non-controlling interest for the Common Units held by other owners. As of June 30, 2023, i3 Verticals, Inc. held a 69.6% economic ownership interest in i3 Verticals, LLC - i3 Verticals, Inc. owned 69.6% economic ownership interest in i3 Verticals, LLC as of June 30, 2023[194] Net Loss Attributable to Non-Controlling Interest (in thousands) | Metric | Nine months ended June 30, 2023 (in thousands) | Nine months ended June 30, 2022 (in thousands) | | :--------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Net loss attributable to non-controlling interest | $(742) | $(5,178) | Note 16. EARNINGS PER SHARE Basic and diluted net loss per share for Class A common stock were $(0.22) for the three months and $(0.23) for the nine months ended June 30, 2023. All potentially dilutive securities, including Class B common stock, stock options, and restricted stock units, were anti-dilutive and thus excluded from the diluted EPS calculation for both periods Net Loss Per Share | Metric | Three months ended June 30, 2023 | Nine months ended June 30, 2023 | | :--------------------------------------- | :------------------------------- | :------------------------------ | | Basic Net Loss Per Share | $(0.22) | $(0.23) | | Diluted Net Loss Per Share | $(0.22) | $(0.23) | - All potentially dilutive securities (Class B common stock, stock options, and restricted stock units) were anti-dilutive and excluded from the diluted net loss per share calculation[197][198] Note 17. SIGNIFICANT NON-CASH TRANSACTIONS Significant non-cash transactions for the nine months ended June 30, 2023, included $760 thousand in acquisition date fair value of contingent consideration, the $284.0 million replacement of the prior credit facility with the 2023 Senior Secured Credit Facility, and $1.7 million in right-of-use assets obtained from operating lease obligations Significant Non-Cash Transactions (in thousands) | Non-Cash Transaction | Nine months ended June 30, 2023 (in thousands) | Nine months ended June 30, 2022 (in thousands) | | :--------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Acquisition date fair value of contingent consideration | $760 | $6,281 | | Replacement of the Prior Senior Secured Credit Facility with the 2023 Senior Secured Credit Facility | $284,000 | $0 | | Right-of-use assets obtained in exchange for operating lease obligations | $1,702 | $7,720 | Note 18. SUBSEQUENT EVENTS The company has evaluated subsequent events through the filing date of this Quarterly Report on Form 10-Q and determined that no events have occurred that would require adjustments to its financial statements disclosures - No events requiring adjustments to financial statements disclosures were identified through the filing date of the Quarterly Report on Form 10-Q[205] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, highlighting revenue and expense trends, liquidity, recent acquisitions, key performance indicators, and the impact of economic factors. It also discusses the company's debt structure and critical accounting estimates Executive Overview This section introduces the company's business model, strategic vertical markets, and core offerings of integrated software and services - i3 Verticals delivers seamlessly integrated software and services to customers in strategic vertical markets[212] - Primary strategic verticals include Public Sector (including Education) and Healthcare[212] Economic Trends This section discusses the potential impact of broad economic uncertainties, such as inflation, interest rates, and geopolitical situations, on the company's financial performance - The company acknowledges broad economic uncertainty due to inflationary pressures, elevated interest rates, monetary policy, and geopolitical situations[213] - These conditions could worsen if the U.S. and global economies enter recessionary periods[213] - The future magnitude, duration, and effects of these conditions are difficult to predict, making the potential impact on financial results unpredictable[213] Liquidity This section assesses the company's ability to meet its short-term and long-term financial obligations, detailing cash, available credit, and compliance with financial covenants Liquidity Metrics (in millions) | Metric | June 30, 2023 (in millions) | | :--------------------------------------- | :-------------------------- | | Cash and cash equivalents | $5.0 | | Available capacity under 2023 Credit Agreement | $172.6 | | Consolidated interest coverage ratio | 4.31x | | Total leverage ratio | 4.00x | - The company was in compliance with its financial covenants as of June 30, 2023[214] Acquisitions This section summarizes the company's acquisition activities, including the strategic rationale and financial impact of recent business purchases - During the nine months ended June 30, 2023, the company acquired Celtic Cross Holdings, Inc. and Celtic Systems Pvt. Ltd. for $85.0 million in cash to expand its Public Sector software offerings[215] - Two other businesses were acquired for $19.8 million, including $17.0 million in cash, $2.0 million in Class A Common Stock, and $0.8 million in contingent consideration[216] - During the nine months ended June 30, 2022, three businesses were acquired for $107.7 million, including $101.4 million in cash and $6.3 million in contingent consideration[217] Our Revenue and Expenses This section describes the primary sources of the company's revenue and the major categories of its operating expenses - Revenue is generated from software and related services (subscriptions, recurring services, licenses, installation) and volume-based payment processing fees[218] - Other costs of services include processing and bank sponsorship costs, residual payments to distribution partners, and losses from excessive chargebacks[220] - Selling, general and administrative expenses cover salaries, professional services, rent, utilities, and other operating costs[221] - Depreciation and amortization includes investments in property, equipment, computer hardware/software, and acquired intangible assets[222] How We Assess Our Business This section explains the company's operational structure and key segments, including Software and Services and Merchant Services, used for performance evaluation - The Software and Services segment delivers vertical market software solutions, often with embedded payments or other recurring services[224] - The Merchant Services segment provides comprehensive payment solutions, including third-party integrated and traditional merchant processing services[225] - The 'Other' category includes corporate overhead expenses[226] Key Performance Indicators This section presents critical metrics used to evaluate the company's operational and financial performance, such as annualized recurring revenue and payment volume Annualized Recurring Revenue (in millions) | KPI | June 30, 2023 (in millions) | June 30, 2022 (in millions) | Growth Rate (%) | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------- | | Annualized Recurring Revenue (ARR) | $311.4 | $266.7 | 16.8% | Software and Related Services Revenue Percentage | KPI | Three months ended June 30, 2023 | Three months ended June 30, 2022 | | :--------------------------------------- | :------------------------------- | :------------------------------- | | Software and related services revenue as % of total revenue | 50.32% | 48.42% | Payment Volume (in billions) | KPI | Three months ended June 30, 2023 (in billions) | Three months ended June 30, 2022 (in billions) | Growth Rate (%) | | :--------------------------------------- | :------------------------------------------- | :------------------------------------------- | :-------------- | | Payment volume | $6.3 | $5.9 | 5.8% | Payment Volume (in billions) | KPI | Nine months ended June 30, 2023 (in billions) | Nine months ended June 30, 2022 (in billions) | Growth Rate (%) | | :--------------------------------------- | :------------------------------------------ | :------------------------------------------ | :-------------- | | Payment volume | $18.1 | $16.6 | 9.5% | Results of Operations This section provides a comparative analysis of the company's financial performance across different reporting periods, detailing revenue and expense trends Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022 Revenue increased by 16.6% to $93.9 million, driven by acquisitions and growth in software and related services. However, net loss attributable to i3 Verticals, Inc. increased by 38.3% to $5.2 million, primarily due to a 78.5% increase in net interest expense and a shift from an income tax benefit to a provision Three-Month Comparative Results (in thousands) | Metric | 2023 (in thousands) | 2022 (in thousands) | Change (Amount) | Change (%) | | :--------------------------------------- | :------------------ | :------------------ | :-------------- | :--------- | | Revenue | $93,931 | $80,553 | $13,378 | 16.6% | | Other costs of services | $20,532 | $19,749 | $783 | 4.0% | | Selling, general and administrative | $55,426 | $47,775 | $7,651 | 16.0% | | Depreciation and amortization | $9,158 | $7,506 | $1,652 | 22.0% | | Change in fair value of contingent consideration | $6,183 | $8,254 | $(2,071) | (25.1)% | | Income (loss) from operations | $2,632 | $(2,731) | $5,363 | n/m | | Interest expense, net | $6,725 | $3,767 | $2,958 | 78.5% | | Provision for (benefit from) income taxes | $2,077 | $(1,810) | $3,887 | n/m | | Net loss attributable to i3 Verticals, Inc. | $(5,155) | $(3,728) | $(1,427) | 38.3% | - Revenue from acquisitions contributed $5.0 million to the increase, primarily within the Software and Services segment[231] - Selling, general and administrative expenses increased by $7.7 million, mainly due to a $6.9 million increase in employment expenses from headcount growth and higher stock compensation[237] Nine Months Ended June 30, 2023 Compared to Nine Months Ended June 30, 2022 Revenue increased by 17.7% to $273.8 million, driven by $17.1 million from acquisitions and organic growth in software and payment volumes. Net loss attributable to i3 Verticals, Inc. significantly decreased by 60.7% to $5.4 million, primarily due to a substantial 59.9% reduction in the change in fair value of contingent consideration, despite an 78.8% increase in net interest expense Nine-Month Comparative Results (in thousands) | Metric | 2023 (in thousands) | 2022 (in thousands) | Change (Amount) | Change (%) | | :--------------------------------------- | :------------------ | :------------------ | :-------------- | :--------- | | Revenue | $273,832 | $232,612 | $41,220 | 17.7% | | Other costs of services | $59,531 | $52,890 | $6,641 | 12.6% | | Selling, general and administrative | $163,633 | $142,878 | $20,755 | 14.5% | | Depreciation and amortization | $26,849 | $21,823 | $5,026 | 23.0% | | Change in fair value of contingent consideration | $9,905 | $24,684 | $(14,779) | (59.9)% | | Income (loss) from operations | $13,914 | $(9,663) | $23,577 | n/m | | Interest expense, net | $18,414 | $10,298 | $8,116 | 78.8% | | Provision for (benefit from) income taxes | $1,896 | $(1,154) | $3,050 | n/m | | Net loss attributable to i3 Verticals, Inc. | $(5,359) | $(13,629) | $8,270 | (60.7)% | - Revenue from acquisitions contributed $17.1 million to the increase, all within the Software and Services segment[243] - Selling, general and administrative expenses increased by $20.8 million, primarily due to a $16.6 million increase in employment expenses from headcount growth and higher stock compensation[248] Seasonality This section describes the recurring seasonal patterns that influence the company's revenue and net income fluctuations throughout the year - The company experiences seasonal fluctuations in revenue, with the first calendar quarter (second fiscal quarter) typically seeing a decrease due to lower holiday and vacation spending[254] - Revenue in the Education vertical is strongest at the start of each semester (August, September, October, January, and February) and weakest in the summer months (June and July)[254] - Operating expenses show less seasonal fluctuation, leading to net income being subject to the same seasonal factors as revenues[254] Liquidity and Capital Resources This section outlines the company's sources of funds and its primary cash requirements, including strategies for funding operations and acquisitions - The company's liquidity sources include net cash from operating activities, current cash and cash equivalents, and available borrowing capacity under the 2023 Credit Agreement[255][256] - Primary cash needs are for working capital, technology infrastructure investments, acquisitions, debt principal and interest payments, and tax distributions[256] - The company expects its liquidity sources to be sufficient to fund operations, planned capital expenditures, and debt obligations for at least the next twelve months and the foreseeable future[256] - Acquisitions are expected to be funded through a combination of net cash from operating activities, borrowings under the 2023 Credit Agreement, and the issuance of equity and debt securities[256] Cash Flows This section provides a detailed breakdown of cash generated from or used in operating, investing, and financing activities Cash Flow Summary (in thousands) | Cash Flow Activity | Nine months ended June 30, 2023 (in thousands) | Nine months ended June 30, 2022 (in thousands) | | :--------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Net cash provided by operating activities | $29,623 | $35,840 | | Net cash used in investing activities | $(115,415) | $(109,350) | | Net cash provided by financing activities | $82,229 | $85,695 | - Net cash provided by operating activities decreased by $6.2 million, primarily due to a decrease in non-cash contingent consideration and an increase in the provision for income taxes[260] - Net cash used in investing activities increased by $6.1 million, mainly driven by $102.0 million used for acquisitions, net of cash acquired, in 2023[261] - Net cash provided by financing activities decreased by $3.5 million, primarily due to an increase in payments on the revolving credit facility, partially offset by increased proceeds from the facility and decreased cash paid for contingent consideration[262] 2023 Senior Secured Revolving Credit Facility This section details the terms, interest rates, and financial covenants of the company's new $450 million senior secured revolving credit facility - On May 8, 2023, i3 Verticals, LLC entered into a new $450 million senior secured revolving credit facility (the '2023 Credit Agreement')[263] - Borrowings accrue interest at the Adjusted Term SOFR rate or the base rate, plus applicable margins ranging from 2.00% to 3.00% for Term SOFR and 1.00% to 2.00% for the base rate, depending on the consolidated total net leverage ratio[267][268][269] - The facility includes financial covenants requiring a minimum consolidated interest coverage ratio of 3.0 to 1.0 and a maximum total net leverage ratio of 5.0 to 1.0[264] - As of June 30, 2023, the company was in compliance with these covenants, with a consolidated interest coverage ratio of 4.31x and a total leverage ratio of 4.00x[264] Exchangeable Notes This section provides information on the company's outstanding 1% Exchangeable Senior Notes due 2025, including their principal amount and settlement terms - i3 Verticals, LLC issued $138.0 million aggregate principal amount of 1.0% Exchangeable Senior Notes due February 15, 2025, on February 18, 2020[276] - As of June 30, 2023, $117.0 million aggregate principal amount of the Exchangeable Notes remained outstanding[276] - The company has irrevocably elected to settle the principal portion of its Exchangeable Notes only in cash upon conversion[276] At-the-Market Program This section describes the company's equity offering program for selling Class A common stock and its remaining capacity - The company has an at-the-market (ATM) offering sales agreement to issue and sell up to $125 million of Class A common stock[277] - No Class A common stock was sold under the ATM Program during the quarter ended June 30, 2023[277] - As of June 30, 2023, the company had a remaining capacity to sell up to $107 million of Class A common stock under the ATM Program[277] Material Cash Requirements This section outlines the company's significant contractual obligations and their expected cash payment schedules Contractual Obligations (in thousands) | Contractual Obligations | Total (in thousands) | Less than 1 year (in thousands) | 1 to 3 years (in thousands) | 3 to 5 years (in thousands) | More than 5 years (in thousands) | | :--------------------------------------- | :------------------- | :------------------------------ | :-------------------------- | :-------------------------- | :------------------------------- | | Processing minimums | $3,302 | $3,031 | $271 | $0 | $0 | | Facility leases | $17,635 | $5,163 | $8,075 | $2,951 | $1,446 | | 2023 Credit Agreement and related interest | $391,715 | $22,755 | $45,780 | $323,180 | $0 | | Exchangeable Notes and related interest | $118,901 | $1,170 | $117,731 | $0 | $0 | | Contingent consideration | $17,856 | $16,680 | $1,176 | $0 | $0 | | Total | $549,409 | $48,799 | $173,033 | $326,131 | $1,446 | Tax Receivable Agreement This section details the company's obligations under the Tax Receivable Agreement to pay a percentage of certain tax benefits to continuing equity owners - The company is obligated under a Tax Receivable Agreement (TRA) to pay 85% of certain tax benefits to the Continuing Equity Owners[280] - As of June 30, 2023, the total amount due under the TRA was $40.9 million[281] - Payments to the Continuing Equity Owners related to exchanges through June 30, 2023, are expected to range from $0 to $3.3 million per year and are projected to be paid over the next 24 years[281] Critical Accounting Estimates This section highlights the key accounting estimates and judgments that significantly impact the company's financial statements - The company's financial statements rely on estimates and judgments, particularly for revenue recognition, goodwill and intangible assets, contingent consideration, and equity-based compensation[282] - No significant changes to critical accounting estimates were disclosed as of June 30, 2023, compared to the Form 10-K filed on November 18, 2022[283] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, primarily interest rate risk associated with its 2023 Senior Secured Credit Facility and foreign currency exchange rate risk from international operations Interest Rate Risk This section assesses the company's exposure to fluctuations in interest rates, particularly concerning its variable-rate debt - The company's 2023 Senior Secured Credit Facility, with $277.4 million outstanding as of June 30, 2023, accrues interest at variable rates (Term SOFR or base rate plus margins)[285][287] - A 1.0% increase or decrease in the interest rate applicable to borrowings under the 2023 Credit Agreement would have a $2.8 million impact on the business results[287] - As of June 30, 2023, the company was in compliance with its financial covenants, including a minimum consolidated interest coverage ratio of 3.0 to 1.0 and a maximum total leverage ratio of 5.0 to 1.0[286][287] Foreign Currency Exchange Rate Risk This section discusses the company's exposure to risks arising from changes in foreign currency exchange rates due to international operations - The company is exposed to foreign currency exchange rate risks due to its international operations[288] - A 10% change in foreign currency exchange rates would not have a material impact on the company's consolidated results of operations, financial position, or cash flows for the three months ended June 30, 2023[288] Item 4. Controls and Procedures This section details the evaluation of the company's disclosure controls and procedures and reports on any changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures This section reports on the effectiveness of the company's controls designed to ensure timely and accurate disclosure of financial information - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2023[289] - These controls ensure that information required to be disclosed in SEC reports is recorded, processed, summarized, and reported timely and accurately[289] Changes in Internal Control over Financial Reporting This section reports on any material changes to the company's internal control over financial reporting during the quarter - There have been no changes in the company's internal control over financial reporting during the quarter ended June 30, 2023, that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting[290] PART II. OTHER INFORMATION Item 1. Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 12 to the unaudited condensed consolidated financial statements - Information required for this item is incorporated by reference from Note 12 to the accompanying unaudited condensed consolidated financial statements[292] Item 1A. Risk Factors The company reports no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the fiscal year ended September 30, 2022 - There have been no material changes to the risk factors disclosed in the company's Form 10-K for the fiscal year ended September 30, 2022[293] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales of equity securities or use of proceeds during the period - None[294] Item 3. Defaults Upon Senior Securities The company reports no defaults upon senior securities during the period - None[295] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[296] Item 5. Other Information The company reports no other information to disclose, specifically noting that no director or officer adopted or terminated any Rule 10b5-1 or non-Rule 10b-5 trading arrangements during the three months ended June 30, 2023 - No other information to disclose[297] - No director or officer adopted or terminated any Rule 10b5-1 or non-Rule 10b-5 trading arrangements during the three months ended June 30, 2023[297] Item 6. Exhibits This section provides an index of exhibits filed with the Quarterly Report on Form 10-Q, including corporate governance documents, credit agreements, and various certifications - Includes Amended and Restated Certificate of Incorporation and Bylaws[298] - Includes the Credit Agreement and Security and Pledge Agreement, both dated May 8, 2023[298] - Includes certifications from the Chief Executive Officer and Chief Financial Officer (Exhibits 31.1, 31.2, 32.1, 32.2) and XBRL-related documents[298] SIGNATURES SIGNATURES This section formally certifies the accuracy and completeness of the Quarterly Report on Form 10-Q by authorized officers - The report was signed by Clay Whitson, Chief Financial Officer, on behalf of i3 Verticals, Inc[303] - Date of signature: August 9, 2023[303]