What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-10 compared with 2020-05-11 · 200 added, 167 removed, 304 unchanged (55% of the section changed)

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These factors include, but are not limited to, the following:

• the anticipated impact to our business operations, payment volume and volume attrition due to the recent global pandemic of a novel strain of the coronavirus (COVID-19), including the impact of social distancing, shelter-in-place, shutdowns of non-essential businesses and similar measures imposed or undertaken by governments;

• our indebtedness and our ability to maintain compliance with the financial covenants in our Senior Secured Credit Facility (as defined below) in light of the impacts of the coronavirus (COVID-19);

• the anticipated impact to our business operations, payment volume and volume attrition due to the global pandemic of a novel strain of the coronavirus (COVID-19), including the impact of social distancing, shelter-in-place, shutdowns of non-essential businesses and similar measures imposed or undertaken by governments;

• our indebtedness and our ability to maintain compliance with the financial covenants in our Senior Secured Credit Facility (as defined below) in light of the impacts of the COVID-19 pandemic;

• our ability to meet our liquidity needs in light of the impacts of the COVID-19 pandemic;

• our ability to raise additional funds on terms acceptable to us, if at all, whether debt, equity or a combination thereof;

• the triggering of impairment testing of our fair-valued assets, including goodwill and intangible assets, in the event of a decline in the price of our Class A common stock;

• our ability to generate revenue sufficient to maintain profitability and positive cash flow;

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• operating and financial restrictions imposed by our Senior Secured Credit Facility (as defined below);

• risks related to the accounting method for the Exchangeable Notes;

• our ability to raise the funds necessary to settle exchanges of the Exchangeable Notes or to repurchase the Exchangeable Notes upon a fundamental change;

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On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout the United States and other parts of the world.

It is impossible to predict the effect and ultimate impact of the COVID-19 pandemic as the situation is rapidly evolving.

The spread of COVID-19 has caused public health officials to recommend precautions to mitigate the spread of the virus, including the closure of local government facilities and parks, schools, restaurants, many businesses and other locations of public assembly.

As a result, we and our clients have seen a significant disruption in business, including a steep decline in payment volume and the number of transactions processed, and therefore, a decline in revenue in our strategic verticals.

There are no reliable estimates of how long the pandemic will last or how many people are likely to be affected by it.

For that reason, we are unable to predict the long-term impact of the pandemic on our business at this time.

COVID-19 is having a significant effect on overall economic conditions in the United States, and efforts to contain the spread of COVID-19 intensified in March and April 2020.

The spread of COVID-19 has caused several states and cities to declare states of emergency or disaster proclamations.

State and local governments, together with public health officials, have recommended and mandated precautions to mitigate the spread of the virus, including the closure of local government facilities and parks, schools, restaurants, many businesses and other locations of public assembly.

Although many of the restrictions have eased across the

country, the pandemic has yet to show substantial signs of decline in the U.S.

Some areas are re-imposing closures and other restrictions due to increased rates of COVID-19 cases.

As a result, the COVID-19 pandemic is significantly affecting overall economic conditions in the United States.

The economic impact of these conditions is materially impacting our business and is expected to continue to adversely impact our strategic verticals and our business in general.

For example, for the six months ended March 31, 2020, a significant portion of our revenue

and payment volume within our Merchant Services segment and our Proprietary Software and Payments segment was derived from our education and public sector strategic verticals.

For example, beginning in the second half of March 2020 and continuing into the third quarter of fiscal 2020, we and our clients have experienced a decline and subsequent partial recovery in payment volume and the number of transactions processed, and therefore, a decline and subsequent partial recovery in revenue in our strategic verticals.

Our payment volume was $0.8 billion, $1.0 billion and $1.2 billion for the months of April, May and June 2020, respectively.

Further, for the three months ended June 30, 2020, a significant portion of our revenue and payment volume within our Merchant Services segment and our Proprietary Software and Payments segment was derived from our education and public sector strategic verticals.

Due to the temporary closure of schools and many local government facilities throughout the nation, we expect the combined revenue and payment volume from multiple of these and other strategic verticals will be adversely impacted for the duration of the closure.

On April 3, 2020, we announced certain proactive actions in response to the significant ongoing uncertainty around the severity and duration of the COVID-19 pandemic.

We have temporarily furloughed a portion of our employees and have implemented a workforce reduction program that includes the elimination of certain positions as well as a general reduction in headcount.

There are no reliable estimates of how long the pandemic will last, how many people are likely to be affected by it or the duration or types of restrictions that will be imposed.

For that reason, we are unable to predict the long-term impact of the pandemic on our business at this time.

As previously disclosed, on April 3, 2020, we announced certain proactive actions in response to the significant uncertainty around the severity and duration of the COVID-19 pandemic, which included temporarily furloughing a portion of our employees and a workforce reduction program that included the elimination of certain positions as well as a general reduction in headcount.

The total number of employees impacted by the furlough and workforce reduction represented approximately 12% of our workforce.

At March 31, 2020, we had $1.6 million of cash and cash equivalents and $256.0 million of available capacity under our Senior Secured Credit Facility (as defined in the “Senior Secured Credit Facility” subsection within the “Liquidity and Capital Resources” section below), subject to our financial covenants.

At June 30, 2020, we had $9.1 million of cash and cash equivalents and $240.0 million of available capacity under our Senior Secured Credit Facility (as defined in the “Senior Secured Credit Facility” subsection within the “Liquidity and Capital Resources” section below), subject to our financial covenants.

Our liquidity profile reflects our completed offering in February 2020 of an aggregate principal amount of $138.0 million in 1.0% Exchangeable Senior Notes due 2025, with substantially all the proceeds being used to pay down outstanding borrowings under our Senior Secured Credit Facility.

As of March 31, 2020, we were in compliance with these covenants with a consolidated interest coverage ratio, total leverage ratio and consolidated senior leverage ratio of 6.11x, 3.41x and 0.38x, respectively.

As of June 30, 2020, we were in compliance with these covenants with a consolidated interest coverage ratio, total leverage ratio and consolidated senior leverage ratio of 7.00x, 3.69x and 0.61x, respectively.

For additional information about our Senior Secured Credit Facility and Exchangeable Notes, see the section entitled “Liquidity and Capital Resources” below.

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We continue to take precautionary measures as directed by health authorities and local and national governments.

Given the dynamic nature of these circumstances, the duration of business disruption and reduced revenues and payment volume, the related financial effect cannot be reasonably estimated at this time but is expected to materially adversely impact our business for our third quarter and 2020 fiscal year.

Moreover, if general economic conditions continue to deteriorate or remain uncertain for an extended period of time, the trading price of our common stock, which has already declined in recent weeks, could decline further.

This could cause a triggering event for impairment testing in the future.

During the third quarter of fiscal 2020, in response to the COVID-19 pandemic, the Company conducted an interim goodwill impairment analysis using the quantitative test for certain reporting units.

The testing date was May 1, 2020.

The Company determined that none of the reporting units were impaired and fair values of all of its reporting units substantially exceeded their carrying values at the assessment date.

There could be material changes to these estimates as a result of ongoing COVID-19 developments in future periods.

Actual results could differ from those estimates.

See “Item 1A.

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economy remains unstable for a significant amount of time”.

In recognition of the significant threat to the liquidity of financial markets posed by COVID-19, the Federal Reserve and Congress have taken dramatic actions to provide liquidity to businesses and the banking system in the U.S.

For example, on March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), a sweeping stimulus bill intended to bolster the U.S.

economy, among other things, and provide emergency assistance to qualifying businesses and individuals.

There can be no assurance that these interventions by the government will be successful, and the financial markets may experience significant contractions in available liquidity.

While we may receive financial, tax or other relief and other benefits under and as a result of the CARES Act, it is not possible to estimate at this time the need, availability, extent or impact of any such relief.

Public Equity Offerings

On June 25, 2018, we completed the initial public offering (“IPO”) of 7,647,500 shares of our Class A common stock at a public offering price of $13.00 per share.

We received approximately $92.5 million of net proceeds, after deducting underwriting discounts and commissions, which we used to purchase 7,264,083 newly issued common units from i3 Verticals, LLC (“Common Units”) for approximately $87.8 million, and 383,417 Common Units from a selling Common Unit holder for approximately $4.6 million, in each case at a price per Common Unit equal to the price per share paid by the underwriters for shares of our Class A common stock in the IPO.

We received approximately $92.5 million of net proceeds, after deducting underwriting discounts and commissions, which we used to purchase 7,264,083 newly issued common

units from i3 Verticals, LLC (“Common Units”) for approximately $87.8 million, and 383,417 Common Units from a selling Common Unit holder for approximately $4.6 million, in each case at a price per Common Unit equal to the price per share paid by the underwriters for shares of our Class A common stock in the IPO.

On June 10, 2019, we completed a secondary public offering (the “June 2019 Secondary Public Offering”) of 5,165,527 shares of our Class A common stock, at a public offering price of $22.75 per share, which included a full exercise of the underwriters' option to purchase 673,764 additional shares of Class A common stock from us.

We received approximately $111.6 million of net proceeds, after deducting underwriting discounts and

commissions, but before offering expenses.

We received approximately $111.6 million of net proceeds, after deducting underwriting discounts and commissions, but before offering expenses.

We used the net proceeds to purchase (1) 1,000,000 Common Units directly from i3 Verticals, LLC, and (2) 4,165,527 Common Units (including 673,764 Common Units due to the exercise of the underwriters' option to purchase additional shares in full) and an equivalent number of Class B common stock (which shares were then canceled) from certain holders, other than i3 Verticals, Inc., of Common Units in i3 Verticals, LLC (“Continuing Equity Owners”), in each case at a price per Common Unit equal to the price per share paid by the underwriters for shares of our Class A common stock in the offering.

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“Long-Term Debt, Net” to our condensed consolidated financial statements.

Acquisitions during the six months ended March 31, 2019

A core component of our growth strategy includes a disciplined approach to acquisitions of companies and technology, evidenced by numerous platform acquisitions and tuck-in acquisitions since our inception in 2012.

Our acquisitions have opened new strategic vertical markets, increased the number of businesses and organizations to whom we provide solutions and augmented our existing payment and software solutions and capabilities.

During the six months ended March 31, 2020, the Company was active in executing its acquisition strategy, though it did not complete any acquisitions during this period.

Recent acquisitions

During the nine months ended June 30, 2020, we were active in executing our acquisition strategy, though we did not complete any acquisitions during this period.

This was primarily the result of our decision to defer the projected closing of certain acquisitions as a result of the uncertainty from the COVID-19 pandemic and our desire to maintain liquidity as a result.

During the six months ended March 31, 2019, the Company completed the acquisitions of four unrelated businesses.

These four acquisitions expanded our software offerings in the public sector vertical market, provided technology that enhances our Burton Platform and expanded our merchant base.

Total net purchase consideration was $45.8 million, which included $41.2 million of cash consideration funded with proceeds from our revolving line of credit and $4.6 million of contingent consideration.

Subsequent to June 30, 2020, we completed the acquisition of two businesses.

One expands our geographic reach and software capabilities in the public sector vertical.

The other adds text-to-pay capabilities and other software solutions in our non-profit vertical.

Total purchase consideration included $16.4 million in cash and revolving line of credit proceeds, and an amount of contingent consideration, which is still being valued.

Acquisitions during the nine months ended June 30, 2019

On May 31, 2019, we acquired all the outstanding stock of Pace Payment Systems, Inc.

We acquired Pace to expand our software offerings, primarily in the public sector and education verticals.

The total net purchase consideration was $56.1 million, including $52.5 million in cash consideration, funded by proceeds from our revolving line of credit, $3.3 million of contingent consideration, $0.2 million of restricted Class A common stock in i3 Verticals and potential additional consideration of up to $20.0 million to be paid based upon the achievement of certain growth metrics related to the financial performance of Pace in the 24 months from January 1, 2020 through December 31, 2021.

We also completed the acquisitions of additional unrelated businesses.

These acquisitions expanded our software offerings in the public sector vertical market, provided technology that enhances our Burton Platform and expanded our merchant base.

Total net purchase consideration for these businesses was $85.7 million, which included $78.7 million of cash consideration funded with proceeds from our revolving line of credit and $7.0 million of contingent consideration.

Our Revenue and Expenses

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• period-to-period payment volume attrition.

Our payment volume for the three months ended March 31, 2020 and 2019 was $3.6 billion and $2.9 billion, respectively, representing a period-to-period growth rate of 21.6%.

Our payment volume for the six months ended March 31, 2020 and 2019 was $7.4 billion and $5.9 billion, respectively, representing a period-to-period growth rate of 26.0%.

Our payment volume has been adversely impacted by the deteriorating economic conditions as a result of the impact of the COVID-19 pandemic.

Our payment volume in the month of March 2020 was down between 1% and 2% compared to March 2019.

Our payment volume for the three months ended June 30, 2020 and 2019 was $3.0 billion and $3.4 billion, respectively, representing a period-to-period contraction of 12.6%.

Our payment volume for the nine months ended June 30, 2020 and 2019 was $10.4 billion and $9.3 billion, respectively, representing a period-to-period growth rate of 11.9%.

Our payment volume for thethree months ended June 30, 2020 was adversely impacted by deteriorating economic conditions as a result of the impacts of the COVID-19 pandemic.

Our payment volume was $0.8 billion, $1.0 billion and $1.2 billion for the months of April, May and June 2020, respectively.

We focus on payment volume because it is a reflection of the scale and economic activity of our client base and because a significant part of our revenue is derived as a percentage of our clients’ dollar volume receipts.

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We believe integrated payments create stronger client relationships with higher payment volume retention and growth.

Integrated payments grew to 55% of our payment volume for the three months ended March 31, 2020 from 49% for the three months ended March 31, 2019.

Integrated payments were 51% of our payment volume for both the three months ended June 30, 2020 and 2019 and were 54% and 49% of our payment volume for the nine months ended June 30, 2020 and 2019, respectively.

We measure period-to-period payment volume attrition as the change in card-based payment volume for all clients that were processing with us for the same period in the prior year.

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We use this metric to evaluate various operating decisions and initiatives.

In March of 2020, our net volume attrition on a per month basis was approximately 2% to 2.5% due to the adverse impact of the COVID-19 pandemic on the month.

However, during the six months ended March 31, 2020, our average net volume attrition per month remained below 1%.

During the nine months ended June 30, 2020, our average net volume attrition per month remained below 1.6%.

Results of Operations

Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

The following table presents our historical results of operations for the periods indicated:

Three months ended March 31, Change

Three months ended June 30, Change

(in thousands) 2020 2019 Amount %

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Total operating expenses 31,136 96,289 (65,153) (67.7) %

Income (loss) from operations 2,041 (203) 2,244 n/m

Income from operations 437 1,194 (757) n/m

Other expenses

Interest expense, net 2,423 1,918 505 26.3 %

(Loss) income before income taxes (143) (1,358) 1,215 (89.5) %

Other expense 829 — 829 n/m

Total other expenses 3,252 1,918 1,334 69.6 %

Loss before income taxes (2,815) (724) (2,091) 288.8 %

Benefit from income taxes (5) (131) 126 (96.2) %

Net income (loss) 1,919 (1,222) 3,141 n/m

Net income (loss) attributable to non-controlling interest 1,182 (120) 1,302 n/m

Net income (loss) attributable to i3 Verticals, Inc.

Net loss (2,810) (593) (2,217) n/m

Net (loss) income attributable to non-controlling interest (2,454) 598 (3,052) n/m

Net loss attributable to i3 Verticals, Inc.

$ (356) $ (1,191) $ 835 n/m

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See Note 2 to our condensed consolidated financial statements for a description of the recently adopted accounting pronouncement.

Revenue decreased $46.2 million, or 54.1%, to $39.2 million for the three months ended March 31, 2020 from $85.4 million for the three months ended March 31, 2019.

Revenue decreased $65.9 million, or 67.6%, to $31.6 million for the three months ended June 30, 2020 from $97.5 million for the three months ended June 30, 2019.

This decrease was driven by the adoption of ASC 606 effective October 1, 2019, which resulted in our revenues being presented net of interchange and network fees prospectively.

This change in presentation affected our reported revenues and operating expenses for the three months ended March 31, 2020 by the same amount and had no effect on our income from operations.

Our revenue in the month of March 2020 was also negatively impacted an overall reduction in consumer spending as a result of COVID-19.

Revenue without the effect of the adoption of ASC 606 increased $17.0 million, or 19.9%, to $102.4 million for the three months ended March 31, 2020 from $85.4 million for the three months ended March 31, 2019.

This increase was principally driven by acquisitions completed during the 2019 fiscal year.

These acquisitions contributed an incremental $15.2 million, net of inter-segment eliminations, to our revenue for the three months ended March 31, 2020.

The remaining $1.8 million of increased revenue was due primarily to an increase in payment volume.

Without the effect of the adoption of ASC 606, revenue related to a subset of merchant contracts purchased in 2014 and 2017 (the “Purchased Portfolios”), which have a higher rate of revenue attrition and payment volume attrition than the rest of our business, decreased $0.9 million, or 29.5%, to $2.1 million for the three months ended March 31, 2020 from $3.0 million for the three months ended March 31, 2019.

Excluding revenues from the Purchased Portfolios and the effect of the adoption of ASC 606, revenue grew $17.9 million, or 21.7%, to $100.2 million for the three months ended March 31, 2020 from $82.4 million for the three months ended March 31, 2019.

Without the effect of the adoption of ASC 606, revenue within Merchant Services increased $9.2 million, or 12.0%, to $86.1 million for the three months ended March 31, 2020 from $76.9 million for the three months ended March 31, 2019.

This increase was principally driven by an increase in payments revenue of $11.0 million, partially offset by a decrease in other revenue of $1.8 million for the three months ended March 31, 2020.

The increase in payments revenue was primarily due to an increase in payment volume.

Without the effect of the adoption of ASC 606, revenue within Proprietary Software and Payments increased $8.3 million, or 97.2%, to $16.8 million for the three months ended March 31, 2020 from $8.5 million for the three months ended March 31, 2019.

This increase was principally driven by an increase in other revenue of $5.9 million for the three months ended March 31, 2020, driven by software and related services.

In addition, payments revenue increased $2.3 million for the three months ended March 31, 2020, driven by payment volume.

Payment volume increased $0.6 billion, or 21.6%, to $3.6 billion for the three months ended March 31, 2020 from $2.9 billion for the three months ended March 31, 2019.

This change in presentation affected our reported revenues and operating expenses for the three months ended June 30, 2020 by the same amount and had no effect on our income from operations.

Our revenue was also negatively impacted by an overall reduction in consumer spending as a result of the COVID-19 pandemic.

Revenue without the effect of the adoption of ASC 606 decreased $16.6 million, or 17.0%, to $80.9 million for the three months ended June 30, 2020 from $97.5 million for the three months ended June 30, 2019.

This decrease was principally driven the impacts of the COVID-19 pandemic.

Payment volume decreased $0.4 billion, or 12.6%, to $3.0 billion for the three months ended June 30, 2020 from $3.4 billion for the three months ended June 30, 2019, principally driven by the result of the COVID-19 pandemic.

Acquisitions completed during the 2019 fiscal year partially offset the impacts of the COVID-19 pandemic on our revenue.

Without the effect of the adoption of ASC 606, these acquisitions contributed an incremental $6.2 million, net of inter-segment eliminations, to our revenue for the three months ended June 30, 2020.

Without the effect of the adoption of ASC 606, revenue related to a subset of merchant contracts purchased in 2014 and 2017 (the “Purchased Portfolios”), which have a higher rate of revenue attrition and payment volume attrition than the rest of our business, decreased $1.1 million, or 36.8%, to $1.8 million for the three months ended June 30, 2020 from $2.9 million for the three months ended June 30, 2019.

Excluding revenues from the Purchased Portfolios and the effect of the adoption of ASC 606, revenue decreased $15.6 million, or 16.4%, to $79.0 million for the three months ended June 30, 2020 from $94.6 million for the three months ended June 30, 2019.

Without the effect of the adoption of ASC 606, revenue within Merchant Services decreased $16.9 million, or 19.4%, to $70.3 million for the three months ended June 30, 2020 from $87.3 million for the three months ended June 30, 2019.

This decrease was principally driven by a decrease in payments revenue of $15.2 million for the three months ended June 30, 2020, driven by a decrease in payment volume due to the COVID-19 pandemic.

In addition, other revenue decreased $1.8 million for the three months ended June 30, 2020.

Without the effect of the adoption of ASC 606, revenue within Proprietary Software and Payments increased $0.7 million, or 7.3%, to $11.0 million for the three months ended June 30, 2020 from $10.2 million for the three months ended June 30, 2019.

This increase was principally driven by an increase in other revenue of $2.6 million for the three months ended June 30, 2020, driven by software and related services, which increased due to the incremental impact of acquisitions completed during the 2019 fiscal year, despite overall decreases in other revenue related to the COVID-19 pandemic.

The increase in revenue within Proprietary Software and Payments was partially offset by a decrease in payments revenue of $1.9 million for the three months ended June 30, 2020, driven by payment volume decreases related to the COVID-19 pandemic.

Interchange and Network Fees

Interchange and network fees decreased $54.7 million, or 100.0%, to $0.0 million for the three months ended March 31, 2020 from $54.7 million for the three months ended March 31, 2019.

Interchange and network fees decreased $63.3 million, or 100.0%, to $0.0 million for the three months ended June 30, 2020 from $63.3 million for the three months ended June 30, 2019.

This decrease was driven by the adoption of ASC 606 effective October 1, 2019, which resulted in our revenues being presented net of interchange and network fees prospectively.

This change in presentation affected our reported revenues and operating expenses for the three months ended March 31, 2020 by the same amount and had no effect on our income from operations.

Interchange and network fees without the effect of the adoption of ASC 606 increased $8.5 million, or 15.6%, to $63.2 million for the three months ended March 31, 2020 from $54.7 million for the three months ended March 31, 2019.

Acquisitions completed during the 2019 fiscal year contributed an incremental $5.4 million to our interchange and network fees for the three months ended March 31, 2020.

The remaining $3.1 million of increased interchange and network fees was due primarily to an increase in payment volume.

Without the effect of the adoption of ASC 606, interchange and network fees related to the Purchased Portfolios decreased $0.4 million, or 26.0%, to $1.1 million for the three months ended March 31, 2020 from $1.5 million for the three months ended March 31, 2019.

Excluding interchange and network fees from these Purchased Portfolios and the effect of the adoption of ASC 606, interchange and network fees grew $8.9 million, or 16.7%, to $62.1 million for the three months ended March 31, 2020 from $53.2 million for the three months ended March 31, 2019.

Without the effect of the adoption of ASC 606, interchange and network fees within Merchant Services increased $8.0 million, or 15.0%, to $61.1 million for the three months ended March 31, 2020 from $53.1 million for the three months ended March 31, 2019.

Without the effect of the adoption of ASC 606, interchange and network fees within Proprietary Software and Payments increased $0.5 million, or 34.6%, to $2.1 million for the three months ended March 31, 2020 from $1.6 million for the three months ended March 31, 2019.

This change in presentation affected our reported revenues and operating expenses for the three months ended June 30, 2020 by the same amount and had no effect on our income from operations.

Interchange and network fees without the effect of the adoption of ASC 606 decreased $14.0 million, or 22.1%, to $49.3 million for the three months ended June 30, 2020 from $63.3 million for the three months ended June 30, 2019.

This decrease was principally driven by the impacts of the COVID-19 pandemic.

Acquisitions completed during the 2019 fiscal year partially offset the impacts of the COVID-19 pandemic on our interchange and network fees.

Without the effect of the adoption of ASC 606, these acquisitions contributed an incremental $2.6 million to our interchange and network fees for the three months ended June 30, 2020.

Without the effect of the adoption of ASC 606, interchange and network fees related to the Purchased Portfolios decreased $0.5 million, or 35.3%, to $1.0 million for the three months ended June 30, 2020 from $1.5 million for the three months ended June 30, 2019.

Excluding interchange and network fees from these Purchased Portfolios and the effect of the adoption of ASC 606, interchange and network fees decreased $13.4 million, or 21.8%, to $48.3 million for the three months ended June 30, 2020 from $61.8 million for the three months ended June 30, 2019.

Without the effect of the adoption of ASC 606, interchange and network fees within Merchant Services decreased $13.0 million, or 21.0%, to $48.8 million for the three months ended June 30, 2020 from $61.7 million for the three months ended June 30, 2019.

Without the effect of the adoption of ASC 606, interchange and network fees within Proprietary Software and Payments decreased $1.0 million, or 66.4%, to $0.5 million for the three months ended June 30, 2020 from $1.5 million for the three months ended June 30, 2019.

These decreases in interchange and network fees for the three months ended June 30, 2020 were driven by payment volume decreases related to the COVID-19 pandemic.

Other Costs of Services

Other costs of services increased $1.8 million, or 17.3%, to $12.0 million for the three months ended March 31, 2020 from $10.2 million for the three months ended March 31, 2019.

Acquisitions completed during the 2020 and 2019 fiscal years contributed an incremental $1.9 million, net of inter-segment eliminations, to our other costs of services for the three months ended March 31, 2020.

Other costs of services within Merchant Services increased $1.6 million, or 16.2%, to $11.3 million for the three months ended March 31, 2020 from $9.7 million for the three months ended March 31, 2019.

Other costs of services within Proprietary Software and Payments increased $0.7 million, or 153.8%, to $1.2 million for the three months ended March 31, 2020 from $0.5 million for the three months ended March 31, 2019.

Other costs of services decreased $1.4 million, or 12.5%, to $10.0 million for the three months ended June 30, 2020 from $11.4 million for the three months ended June 30, 2019.

Our other costs of services decreased due to an overall reduction in consumer spending as a result of the COVID-19 pandemic.

Acquisitions completed during the 2019 fiscal year partially offset the impacts of the COVID-19 pandemic on our other costs of services.

These acquisitions contributed an incremental $0.9 million, net of inter-segment eliminations, to our other costs of services for the three months ended June 30, 2020.

Other costs of services within Merchant Services decreased $1.1 million, or 10.8%, to $9.4 million for the three months ended June 30, 2020 from $10.5 million for the three months ended June 30, 2019.

Other costs of services within Proprietary Software and Payments increased $0.1 million, or 13.2%, to $1.0 million for the three months ended June 30, 2020 from $0.9 million for the three months ended June 30, 2019, due to the incremental impact of acquisitions completed during the 2019 fiscal year, despite overall decreases in other costs of services related to the COVID-19 pandemic.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $6.5 million, or 45.2%, to $20.8 million for the three months ended March 31, 2020 from $14.3 million for the three months ended March 31, 2019.

Selling, general and administrative expenses increased $0.5 million, or 3.1%, to $18.1 million for the three months ended June 30, 2020 from $17.6 million for the three months ended June 30, 2019.

This increase was primarily driven by a $1.2 million increase in employment expenses, primarily resulting from an increase in headcount that resulted from acquisitions and an increase in stock compensation expense.

Increases in insurance and professional services, software and technological services, advertising and promotion, offering related expenses and rent expense comprised the majority of the remainder of the increase.

The majority of the remaining increase was comprised of COVID-19 related expenses of $0.2 million and increases in software and technological services of $0.2 million, partially offset by decreases in travel expenses of $0.5 million, decreases in insurance and professional services of $0.4 million and decreases in advertising and promotion of $0.3 million.

Depreciation and Amortization

Depreciation and amortization increased $0.6 million, or 16.4%, to $4.5 million for the three months ended March 31, 2020 from $3.9 million for the three months ended March 31, 2019.

Amortization expense increased $0.4 million to $4.0 million for the three months ended March 31, 2020 from $3.6 million for the three months ended March 31, 2019 primarily due to acquisitions completed during the prior fiscal year.

Depreciation expense increased $0.2 million to $0.5 million for the three months ended March 31, 2020 from $0.3 million for the three months ended March 31, 2019.

Depreciation and amortization increased $0.1 million, or 1.1%, to $4.5 million for the three months ended June 30, 2020 from $4.4 million for the three months ended June 30, 2019.

Amortization expense decreased $0.1 million to $4.0 million for the three months ended June 30, 2020 from $4.1 million for the three months ended June 30, 2019 primarily due to accelerated amortization on certain merchant relationships resulting in decreased amortization in future periods.

Depreciation expense increased $0.2 million to $0.5 million for the three months ended June 30, 2020 from $0.3 million for the three months ended June 30, 2019.

Change in Fair Value of Contingent Consideration

Change in fair value of contingent consideration to be paid in connection with acquisitions was a benefit of $0.1 million for the three months ended March 31, 2020 primarily due to performance of some of our acquisitions falling below expectations.

The change in fair value of contingent consideration for the three months ended March 31, 2019 was a charge of $2.5 million.

Change in fair value of contingent consideration to be paid in connection with acquisitions was a benefit of $1.5 million for the three months ended June 30, 2020 primarily due to some of our acquisitions achieving lower performance as a direct result of the COVID-19 pandemic.

The change in fair value of contingent consideration for the three months ended June 30, 2019 was a benefit of $0.4 million.

Interest Expense, net

Interest expense, net, increased $1.0 million, or 89.1%, to $2.2 million for the three months ended March 31, 2020 from $1.2 million for the three months ended March 31, 2019.

The increase reflects a higher average outstanding debt balance for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019 and amortization of the debt discount, which was the difference between the principal amount of the Exchangeable Notes and the liability component, recorded in connection with the issuance of the Exchangeable Notes.

Interest expense, net, increased $0.5 million, or 26.3%, to $2.4 million for the three months ended June 30, 2020 from $1.9 million for the three months ended June 30, 2019.

The increase is driven by the amortization of the debt discount, which was the difference between the principal amount of the Exchangeable Notes and the liability component, recorded in connection with the issuance of the Exchangeable Notes.

We recorded $1.2 million in interest expense related to the amortization of the debt discount during the three months ended June 30, 2020.

The increase is partially offset by a lower weighted average interest rate for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.

Other expense

Other expense was $0.8 million for the three months ended June 30, 2020, primarily relating to a loss on retirement of debt due to the carrying value exceeding the fair value of the repurchased portion of the Exchangeable Notes at the dates of repurchases.

There was no other expense for the three months ended June 30, 2019.

Benefit from Income Taxes

The benefit from income taxes was a benefit of $2.1 million for the three months ended March 31, 2020 from a benefit of $0.1 million for the three months ended March 31, 2019.

Our effective tax rate was 1,442% for the three months ended March 31, 2020.

The benefit from income taxes decreased to a benefit of $0.0 million for the three months ended June 30, 2020 from a benefit of $0.1 million for the three months ended June 30, 2019.

The decrease is driven by the policy change to allocate stock compensation expense to the Class B shareholders of i3 Verticals, LLC, which resulted in a $0.6 million reduction in the benefit from income taxes during the three months ended June 30, 2020.

Our effective tax rate was 0% for the three months ended June 30, 2020.

Our effective tax rate differs from the federal statutory rate of 21% primarily due to the tax structure of the Company.

The income of minority owned i3 Verticals, LLC is not taxed and the separate loss of the Company has minimal tax effect due to the allocations from i3 Verticals, LLC.

Six Months Ended March 31, 2020 Compared to Six Months Ended March 31, 2019

Nine Months Ended June 30, 2020 Compared to Nine Months Ended June 30, 2019

The following table presents our historical results of operations for the periods indicated:

Six months ended March 31, Change

Nine months ended June 30, Change

(in thousands) 2020 2019 Amount %

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Income from operations 6,575 4,521 2,054 45.4 %

Other expenses

Interest expense, net 6,621 3,987 2,634 66.1 %

Other expense 829 — 829 n/m

Total other expenses 7,450 3,987 3,463 86.9 %

Income before income taxes (875) 534 (1,409) (263.9) %

(Benefit from) provision for income taxes (1,913) 129 (2,042) n/m

Benefit from income taxes (1,918) (2) (1,916) n/m

Net income 1,043 536 507 94.6 %

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See Note 2 to our condensed consolidated financial statements for a description of the recently adopted accounting pronouncement.

Revenue decreased $90.0 million, or 52.8%, to $80.3 million for the six months ended March 31, 2020 from $170.3 million for the six months ended March 31, 2019.

Revenue decreased $155.9 million, or 58.2%, to $111.9 million for the nine months ended June 30, 2020 from $267.7 million for the nine months ended June 30, 2019.

This decrease was driven by the adoption of ASC 606 effective October 1, 2019, which resulted in our revenues being presented net of interchange and network fees prospectively.

This change in presentation affected our reported revenues and operating expenses for the six months ended March 31, 2020 by the same amount and had no effect on our income from operations.

Our revenue in the month of March 2020 was also negatively impacted an overall reduction in consumer spending as a result of COVID-19.

Revenue without the effect of the adoption of ASC 606 increased $42.3 million, or 24.9%, to $212.6 million for the six months ended March 31, 2020 from $170.3 million for the six months ended March 31, 2019.

This change in presentation affected our reported revenues and operating expenses for the nine months ended June 30, 2020 by the same amount and had no effect on our income from operations.

Our revenue in the month of March 2020 and in the three months ended June 30, 2020 was also negatively impacted an overall reduction in consumer spending as a result of the COVID-19 pandemic.

Revenue without the effect of the adoption of ASC 606 increased $25.7 million, or 9.6%, to $293.5 million for the nine months ended June 30, 2020 from $267.7 million for the nine months ended June 30, 2019.

This increase was principally driven by acquisitions completed during the 2019 fiscal year.

These acquisitions contributed an incremental $31.3 million, net of inter-segment eliminations, to our revenue for the six months ended March 31, 2020.

The remaining $11.0 million of increased revenue was due primarily to an increase in payment volume.

These acquisitions contributed an incremental $37.5 million, net of inter-segment eliminations, to our revenue for the nine months ended June 30, 2020.

Excluding revenues from these acquisitions, revenue without the adoption of ASC 606 decreased $11.8 million principally driven by the impact of the COVID-19 pandemic.

Without the effect of the adoption of ASC 606, revenue includes revenue from the Purchased Portfolios, which have a higher rate of revenue attrition and payment volume attrition than the rest of our business.

Revenues from the Purchased Portfolios decreased $2.1 million, or 30.4%, to $4.8 million for the six months ended March 31, 2020 from $6.9 million for the six months ended March 31, 2019.

Excluding revenues from the Purchased Portfolios and the effect of the adoption of ASC 606, revenue grew $44.4 million, or 27.2%, to $207.8 million for the six months ended March 31, 2020 from $163.4 million for the six months ended March 31, 2019.

Without the effect of the adoption of ASC 606, revenue within Merchant Services increased $25.6 million, or 16.5%, to $180.1 million for the six months ended March 31, 2020 from $154.6 million for the six months ended March 31, 2019.

This increase was principally driven by an increase in payments revenue of $27.5 million, partially offset by a decrease in other revenue of $1.9 million for the six months ended March 31, 2020.

The increase in payments revenue was primarily due to an increase in payment volume.

Without the effect of the adoption of ASC 606, revenue within Proprietary Software and Payments increased $17.7 million, or 112.9%, to $33.4 million for the six months ended March 31, 2020 from $15.7 million for the six months ended March 31, 2019.

This increase was principally driven by an increase in other revenue of $11.7 million for the three months ended March 31, 2020, driven by software and related services.

In addition, payments revenue increased $6.0 million for the six months ended March 31, 2020, driven by payment volume.

Payment volume increased $1.5 billion, or 26.0%, to $7.4 billion for the six months ended March 31, 2020 from $5.9 billion for the six months ended March 31, 2019.

Revenues from the Purchased Portfolios decreased $3.2 million, or 32.3%, to $6.6 million for the nine months ended June 30, 2020 from $9.8 million for the nine months ended June 30, 2019.

Excluding revenues from the Purchased Portfolios and the effect of the adoption of ASC 606, revenue grew $28.9 million, or 11.2%, to $286.9 million for the nine months ended June 30, 2020 from $258.0 million for the nine months ended June 30, 2019.

Without the effect of the adoption of ASC 606, revenue within Merchant Services increased $8.6 million, or 3.6%, to $250.4 million for the nine months ended June 30, 2020 from $241.8 million for the nine months ended June 30, 2019.

This increase was principally driven by an increase in payments revenue of $12.3 million, partially offset by a decrease in other revenue of $3.7 million for the nine months ended June 30, 2020.

The increase in payments revenue was primarily due to the incremental impact of acquisitions completed during the 2019 fiscal year, despite overall decreases in other revenue related to the COVID-19 pandemic.

Without the effect of the adoption of ASC 606, revenue within Proprietary Software and Payments increased $18.5 million, or 71.3%, to $44.4 million for the nine months ended June 30, 2020 from $25.9 million for the nine months ended June 30, 2019.

This increase was principally driven by an increase in other revenue of $14.3 million for the three months ended June 30, 2020, driven by software and related services.

In addition, payments revenue increased $4.2 million for the nine months ended June 30, 2020, driven by increases in payment volume.

These increases in Proprietary Software and Payments revenue were primarily due to the incremental impact of acquisitions completed during the 2019 fiscal year, despite overall decreases in other revenue related to the COVID-19 pandemic.

Payment volume increased $1.1 billion, or 11.9%, to $10.4 billion for the nine months ended June 30, 2020 from $9.3 billion for the nine months ended June 30, 2019.

This increase was principally driven by acquisitions completed during the 2019 fiscal year and organic growth prior to the COVID-19 pandemic.

Interchange and Network Fees

Interchange and network fees decreased $110.5 million, or 100.0%, to $0.0 million for the six months ended March 31, 2020 from $110.5 million for the six months ended March 31, 2019.

Interchange and network fees decreased $173.8 million, or 100.0%, to $0.0 million for the nine months ended June 30, 2020 from $173.8 million for the nine months ended June 30, 2019.

This decrease was driven by the adoption of ASC 606 effective October 1, 2019, which resulted in our revenues being presented net of interchange and network fees prospectively.

This change in presentation affected our reported revenues and operating expenses for the six months ended March 31, 2020 by the same amount and had no effect on our income from operations.

Interchange and network fees without the effect of the adoption of ASC 606 increased $21.8 million, or 19.7%, to $132.3 million for the six months ended March 31, 2020 from $110.5 million for the six months ended March 31, 2019.

Acquisitions completed during the 2019 fiscal year contributed an incremental $11.2 million to our interchange and network fees for the six months ended March 31, 2020.

The remaining $10.6 million of increased interchange and network fees was due primarily to an increase in payment volume.

Without the effect of the adoption of ASC 606, interchange and network fees related to the Purchased Portfolios decreased $0.9 million, or 26.7%, to $2.4 million for the six months ended March 31, 2020 from $3.3 million for the six months ended March 31, 2019.

Excluding interchange and network fees from the Purchased Portfolios and the effect of the adoption of ASC 606, interchange and network fees grew $22.7 million, or 21.1%, to $129.9 million for the six months ended March 31, 2020 from $107.2 million for the six months ended March 31, 2019.

Without the effect of the adoption of ASC 606, interchange and network fees within Merchant Services increased $20.2 million, or 18.8%, to $127.6 million for the six months ended March 31, 2020 from $107.5 million for the six months ended March 31, 2019.

Without the effect of the adoption of ASC 606, interchange and network fees within Proprietary Software and Payments increased $1.6 million, or 53.6%, to $4.7 million for the six months ended March 31, 2020 from $3.0 million for the six months ended March 31, 2019.

This change in presentation affected our reported revenues and operating expenses for the nine months ended June 30, 2020 by the same amount and had no effect on our income from operations.

Interchange and network fees without the effect of the adoption of ASC 606 increased $7.8 million, or 4.5%, to $181.6 million for the nine months ended June 30, 2020 from $173.8 million for the nine months ended June 30, 2019.

Acquisitions completed during the 2019 fiscal year contributed an incremental $13.8 million to our interchange and network fees for the nine months ended June 30, 2020.

Excluding interchange and network fees from these acquisitions, interchange and network fees without the adoption of ASC 606 decreased $5.9 million principally driven by the impact of the COVID-19 pandemic.

Without the effect of the adoption of ASC 606, interchange and network fees related to the Purchased Portfolios decreased $1.4 million, or 29.4%, to $3.4 million for the nine months ended June 30, 2020 from $4.8 million for the nine months ended June 30, 2019.

Excluding interchange and network fees from the Purchased Portfolios and the effect of the adoption of ASC 606, interchange and network fees grew $9.2 million, or 5.5%, to $178.2 million for the nine months ended June 30, 2020 from $169.0 million for the nine months ended June 30, 2019.

Without the effect of the adoption of ASC 606, interchange and network fees within Merchant Services increased $7.2 million, or 4.3%, to $176.4 million for the nine months ended June 30, 2020 from $169.2 million for the nine months ended June 30, 2019.

Without the effect of the adoption of ASC 606, interchange and network fees within Proprietary Software and Payments increased $0.6 million, or 13.5%, to $5.2 million for the nine months ended June 30, 2020 from $4.5 million for the nine months ended June 30, 2019.

Other Costs of Services

Other costs of services increased $4.9 million, or 24.5%, to $24.9 million for the six months ended March 31, 2020 from $20.0 million for the six months ended March 31, 2019.

Acquisitions completed during the 2020 and 2019 fiscal years contributed an incremental $3.9 million, net of inter-segment eliminations, to our other costs of services for the six months ended March 31, 2020.

Other costs of services within Merchant Services increased $4.3 million, or 22.4%, to $23.4 million for the six months ended March 31, 2020 from $19.1 million for the six months ended March 31, 2019.

Other costs of services within Proprietary Software and Payments was increased $1.5 million, or 178.8%, to $2.4 million for the six months ended March 31, 2020 from $0.9 million for the six months ended March 31, 2019.

Other costs of services increased $3.5 million, or 11.0%, to $34.9 million for the nine months ended June 30, 2020 from $31.4 million for the nine months ended June 30, 2019.

Acquisitions completed during the 2019 fiscal year contributed an incremental $4.8 million, net of inter-segment eliminations, to our other costs of services for the nine months ended June 30, 2020.

Other costs of services within Merchant Services increased $3.2 million, or 10.6%, to $32.8 million for the nine months ended June 30, 2020 from $29.6 million for the nine months ended June 30, 2019.

Other costs of services within Proprietary Software and Payments was increased $1.7 million, or 94.0%, to $3.4 million for the nine months ended June 30, 2020 from $1.8 million for the nine months ended June 30, 2019.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $13.2 million, or 49.3%, to $40.1 million for the six months ended March 31, 2020 from $26.8 million for the six months ended March 31, 2019.

This increase was primarily driven by a $9.8 million increase in employment expense, primarily resulting from an increase in headcount that resulted from acquisitions and an increase in stock compensation expense.

Increases in insurance and professional services, software and technological services, advertising and promotion, rent expense and offering related expenses comprised the majority of the remainder of the increase.

Selling, general and administrative expenses increased $13.8 million, or 31.0%, to $58.2 million for the nine months ended June 30, 2020 from $44.4 million for the nine months ended June 30, 2019.

The majority of the remaining increase was comprised of increases in software and technological services of $0.8 million, partially offset by decreases in travel expenses of $0.4 million.

Depreciation and Amortization

Depreciation and amortization increased $1.7 million, or 23.4%, to $9.2 million for the six months ended March 31, 2020 from $7.5 million for the six months ended March 31, 2019.

Amortization expense increased $1.3 million to $8.3 million for the six months ended March 31, 2020 from $6.9 million for the six months ended March 31, 2019 primarily due to acquisitions completed during the prior fiscal year.

Depreciation expense increased $0.4 million to $0.9 million for the six months ended March 31, 2020 from $0.5 million for the six months ended March 31, 2019.

Depreciation and amortization increased $1.8 million, or 15.1%, to $13.7 million for the nine months ended June 30, 2020 from $11.9 million for the nine months ended June 30, 2019.

Amortization expense increased $1.2 million to $12.3 million for the nine months ended June 30, 2020 from $11.0 million for the nine months ended June 30, 2019 primarily due to acquisitions completed during the prior fiscal year.

Depreciation expense increased $0.6 million to $1.4 million for the nine months ended June 30, 2020 from $0.8 million for the nine months ended June 30, 2019.

Change in Fair Value of Contingent Consideration

Change in fair value of contingent consideration to be paid in connection with acquisitions was a charge of less than $0.1 million for the six months ended March 31, 2020 primarily due to on average slightly stronger performance of some of our acquisitions than expectations.

The change in fair value of contingent consideration for the six months ended March 31, 2019 was a charge of $2.2 million.

Change in fair value of contingent consideration to be paid in connection with acquisitions was a benefit of $1.5 million for the nine months ended June 30, 2020 due to some of our acquisitions achieving lower performance as a direct result of the COVID-19 pandemic.

The change in fair value of contingent consideration for the nine months ended June 30, 2019 was a charge of $1.7 million.

Interest Expense, net

Interest expense, net, increased $2.1 million, or 102.9%, to $4.2 million for the six months ended March 31, 2020 from $2.1 million for the six months ended March 31, 2019.

The increase reflects a higher average outstanding debt balance for the six months ended March 31, 2020 as compared to the six months ended March 31, 2019 and amortization of the debt discount, which was the difference between the principal amount of the Exchangeable Notes and the liability component, recorded in connection with the issuance of the Exchangeable Notes.

Provision for Income Taxes

The provision for income taxes decreased to a benefit of $1.9 million for the six months ended March 31, 2020 from an expense of $0.1 million for the six months ended March 31, 2019.

Our effective tax rate was (99)% for the six months ended March 31, 2020.

Interest expense, net, increased $2.6 million, or 66.1%, to $6.6 million for the nine months ended June 30, 2020 from $4.0 million for the nine months ended June 30, 2019.

The increase is driven by the amortization of the debt discount, which was the difference between the principal amount of the Exchangeable Notes and the liability

component, recorded in connection with the issuance of the Exchangeable Notes.

We recorded $1.8 million in interest expense related to the amortization of the debt discount during the nine months ended June 30, 2020.

The increase also reflects a higher average outstanding debt balance, but offset by a lower weighted average interest rate for the nine months ended June 30, 2020 as compared to the nine months ended June 30, 2019.

Other expense

Other expense was $0.8 million for the nine months ended June 30, 2020, primarily relating to a loss on retirement of debt due to the carrying value exceeding the fair value of the repurchased portion of the Exchangeable Notes at the dates of repurchases.

There was no other expense for the nine months ended June 30, 2019.

Benefit from Income Taxes

The benefit from income taxes increased to a benefit of $1.9 million for the nine months ended June 30, 2020 from a benefit of $0.0 million for the nine months ended June 30, 2019.

As described in Note 2 to our condensed consolidated financial statements, we had a reduction in the valuation allowance recorded on a deferred tax asset, which resulted in a $2.7 million reduction in the valuation allowance on the deferred tax asset related to our investment in partnership and a corresponding increase in the benefit from income taxes, partially offset by the policy change to allocate stock compensation expense to the Class B shareholders of i3 Verticals, LLC, which resulted in a $0.6 million reduction in the benefit from income taxes in the nine months ended June 30, 2020.

Our effective tax rate was 219% for the nine months ended June 30, 2020.

Our effective tax rate differs from the federal statutory rate of 21% primarily due to the tax structure of the Company.

8 unchanged sentences

The growth in our business may have partially overshadowed seasonal trends to date, and seasonal impacts on our business may be more pronounced in the future.

We expect COVID-19 to have an adverse impact on our results of operations relative to the prior year and the normal seasonality of our business.

We expect the COVID-19 pandemic to have an adverse impact on our results of operations relative to the prior year and the normal seasonality of our business.

Liquidity and Capital Resources

We have historically financed our operations (not including investments and acquisitions) and working capital through net cash from operating activities.

As of March 31, 2020, we had $1.6 million of cash and cash equivalents and available borrowing capacity of $256.0 million under our Senior Secured Credit Facility, subject to the financial covenants.

As of June 30, 2020, we had $9.1 million of cash and cash equivalents and available borrowing capacity of $240.0 million under our Senior Secured Credit Facility, subject to the financial covenants.

We usually minimize cash balances by making payments on our revolving line of credit to minimize borrowings and interest expense.

1 unchanged sentence

We historically have had positive cash flow provided by operations.

Our plan for capital expenditures and future acquisitions for this fiscal year are being re-evaluated as we navigate through the economic impact related to COVID-19.

Our plan for capital expenditures and future acquisitions for this fiscal year are being re-evaluated as we navigate through the economic impact related to the COVID-19 pandemic.

We will assess our plans for acquisition opportunities against our cash availability during the crisis to make the most strategic decisions for our business.

1 unchanged sentence

We currently expect that our cash flow from operations, current cash and cash equivalents and available borrowing capacity under the Senior Secured Credit Facility will be sufficient to fund our operations and planned capital expenditures and to service our debt obligations for at least the next twelve months.

As previously stated, COVID-19 is having a significant effect on overall economic conditions in the United States, and efforts to contain the spread of COVID-19 intensified in March and April 2020.

The economic impact of these conditions is materially impacting our business and is expected to continue to adversely impact our strategic verticals and our business in general.

On April 3, 2020, we announced certain proactive actions in response to the significant ongoing uncertainty around the severity and duration of the COVID-19 pandemic.

The total number of employees impacted by the furlough and workforce reduction represented approximately 12% of our workforce.

We expect to incur immaterial charges in connection with this action, primarily consisting of future cash expenditures for the payment of severance, related benefits costs and certain modifications to equity compensation arrangements in the third quarter of fiscal 2020.

During the three months ended June 30, 2020, we repurchased $8.5 million in aggregate principal amount of the Exchangeable Notes for an aggregate purchase price of approximately $6.8 million.

We recorded a loss on retirement of debt of $0.8 million due to the carrying value exceeding the fair value of the repurchased portion of the Exchangeable Notes at the dates of repurchases.

We may elect from time to time to purchase our outstanding debt in open market purchases, privately negotiated transactions or otherwise.

1 unchanged sentence

As amended on February 18, 2020 in connection with our offering of Exchangeable Notes, our Senior Secured Credit Facility requires us to maintain a consolidated interest coverage ratio not less than 3.00 to 1.00, a total leverage ratio not exceeding 5.00 to 1.00 and a consolidated senior secured leverage ratio not exceeding 3.25 to 1.00, provided that for each of the four fiscal quarters immediately following a qualified acquisition, the total leverage ratio and the consolidated senior secured leverage ratio would increase by up to 0.25, subject to certain limitations.

Although we believe our liquidity position remains strong, there can be no assurance that we will be able to raise additional funds, in the form of debt or equity, or to amend our Senior Secured Credit Facility on terms acceptable to us, if at all, even if we determined such actions were necessary in the future.

Any material adverse change in client demand and our ability to retain clients, competitive market forces, or uncertainties caused by COVID-19, as well as other factors listed under the heading “Note Regarding Forward-looking Statements,” and in our risk factors included herein and in our Form 10-K for the fiscal year ended September 30, 2019 and subsequent filings could affect our ability to continue to fund our liquidity needs from business operations.

Any material adverse change in client demand and our ability to retain clients, competitive market forces, or uncertainties caused by the COVID-19 pandemic, as well as other factors listed under the heading “Note Regarding Forward-looking Statements,” and in our risk factors included herein and in our Form 10-K for the fiscal year ended September 30, 2019 and subsequent filings could affect our ability to continue to fund our liquidity needs from business operations.

The following table presents a summary of cash flows from operating, investing and financing activities for the following comparative periods.

Six Months Ended March 31, 2020 and 2019

Six months ended March 31,

Nine Months Ended June 30, 2020 and 2019

Nine months ended June 30,

(in thousands)

1 unchanged sentence

Net cash used in investing activities $ (5,744) $ (131,705)

Net cash (used in) provided by financing activities $ (4,994) $ 34,343

Net cash provided by financing activities $ 3,143 $ 117,296

Cash Flow from Operating Activities

Net cash provided by operating activities decreased $2.6 million to $8.8 million for the six months ended March 31, 2020 from $11.4 million for the six months ended March 31, 2019.

Net cash provided by operating activities decreased $6.2 million to $10.1 million for the nine months ended June 30, 2020 from $16.3 million for the nine months ended June 30, 2019.

The decrease in net cash provided by operating activities was partially offset by an increase in net income of $0.5 million.

The decrease in net cash provided by operating activities was further offset by increases in equity-based compensation of $2.3 million, depreciation and amortization expense of $1.7 million and amortization of debt discount and issuance costs expense of $0.4 million.

The decrease in net cash provided by operating activities was driven by an increase in the benefit from deferred taxes of $2.7 million, a decrease in increases in non-cash contingent consideration from original estimates of $2.1 million and a decrease in operating assets and liabilities of $5.3 million.

The decrease in operating assets and liabilities was primarily driven by a $3.3 million decrease in accrued liabilities, a $2.8 million decrease in contingent consideration paid in excess of original estimates and a $0.7 million increase in accounts receivable, partially offset by a $1.0 million increase in deferred revenue and a $0.6 million increase in accounts payable for the six months ended March 31, 2020 compared to the six months ended March 31, 2019.

The decrease in net cash provided by operating activities was further offset by adjustments to net income including increases in equity-based compensation of $3.3 million, depreciation and amortization expense of $1.8 million, amortization of debt discount and issuance costs expense of $1.7 million and loss on the repurchase of Exchangeable Notes of $0.8 million.

The decrease in net cash provided by operating activities was driven by a decrease in increases in non-cash contingent consideration from original estimates of $3.2 million, an increase in the benefit from deferred taxes of $2.8 million and a decrease in operating assets and liabilities of $8.7 million.

The decrease in operating assets and liabilities was primarily driven by a $4.5 million increase in accounts receivable, a $3.5 million decrease in contingent consideration paid in excess of original estimates, a $2.3 million decrease in accrued liabilities and a $1.5 million decrease in accounts payable, partially offset by a $2.2 million increase in deferred revenue and a $1.0 million decrease in other assets for the nine months ended June 30, 2020 compared to the nine months ended June 30, 2019.

Cash Flow from Investing Activities

Net cash used in investing activities decreased $41.1 million to $3.9 million for the six months ended March 31, 2020 from $44.9 million for the six months ended March 31, 2019.

The largest driver of cash used in investing activities for the six months ended March 31, 2019 was cash used in acquisitions, net of cash acquired.

For the six months ended March 31, 2019, we used $41.2 million of cash for acquisitions, net of cash acquired.

Net cash used in investing activities decreased $126.0 million to $5.7 million for the nine months ended June 30, 2020 from $131.7 million for the nine months ended June 30, 2019.

The largest driver of cash used in investing activities for the nine months ended June 30, 2019 was cash used in acquisitions, net of cash acquired.

For the nine months ended June 30, 2019, we used $126.9 million of cash for acquisitions, net of cash acquired.

The decrease in cash used in investing activities was further driven by a decrease in purchases of merchant portfolios and residual buyouts of $1.0 million, partially offset by an increase in expenditures for property and equipment of $1.3 million and an increase in expenditures for capitalized software of $0.6 million.

Cash Flow from Financing Activities

Net cash used in financing activities increased $39.3 million to $5.0 million net cash used in financing activities for the six months ended March 31, 2020 from $34.3 million net cash provided by financing activities for the six months ended March 31, 2019.

The increase in net cash used in financing activities was primarily the result of an increase in payments on the revolving credit facility of $191.1 million and payments for purchases of exchangeable senior note hedges of $28.7 million during the six months ended March 31, 2020.

The increase in cash used in financing activities is partially offset by proceeds from borrowings on exchangeable notes of $138.0 million, an increase in proceeds from the revolving credit facility of $28.5 million, proceeds from the issuance of warrants of $14.7 million, a decrease in payments of notes payable to banks of $2.5 million and a decrease in payments for required distributions to members for tax obligations of $1.0 million for the three months ended March 31, 2020 from the three months ended March 31, 2019.

Net cash provided by financing activities decreased $114.2 million to $3.1 million for the nine months ended June 30, 2020 from $117.3 million for the nine months ended June 30, 2019.

The decrease in net cash provided by financing activities was primarily the result of an increase in payments on the revolving credit facility of $216.4 million, payments for purchases of exchangeable senior note hedges of $28.7 million during the nine months ended June 30, 2020, a decrease in proceeds from the revolving credit facility of $24.9 million, a decrease in proceeds from issuance of Class A common stock sold in the offering in June 2019 of $21.7 million, an increase in payments for the repurchase of Exchangeable Notes of $6.8 million and an increase in payments of debt issuance costs of $5.1 million for the nine months ended June 30, 2020 compared to the nine months ended June 30, 2019.

The decrease in cash provided by financing activities is partially offset by proceeds from borrowings on exchangeable notes of $138.0 million and proceeds from the issuance of warrants of $14.7 million during the nine months ended June 30, 2020, as well as a decrease in payments of notes payable to banks of $35.0 million and a decrease in payments for required distributions to members for tax obligations of $2.0 million for the three months ended June 30, 2020 from the three months ended June 30, 2019.

Senior Secured Credit Facility

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The Senior Secured Credit Facility consists of a $275.0 million revolving credit facility, together with an option to increase the revolving credit facility and/or obtain incremental term loans in an additional principal amount of up to $50.0 million in the aggregate.

The Senior Secured Credit Facility accrues interest at LIBOR (based upon an interest period of one, two, three or six months or, under some circumstances, up to twelve months) plus an applicable margin of 2.25% to 3.25% (2.75% as of March 31, 2020), or the base rate (defined as the highest of (x) the Bank of America prime rate, (y) the federal funds rate plus 0.50% and (z) LIBOR plus 1.00%), plus an applicable margin of 0.25% to 1.25% (0.75% as of March 31, 2020), in each case depending upon the consolidated total leverage ratio, as defined in the agreement.

The Senior Secured Credit Facility accrues interest at LIBOR (based upon an interest period of one, two, three or six months or, under some circumstances, up to twelve months) plus an applicable margin of 2.25% to 3.25% (3.25% as of June 30, 2020), or the base rate (defined as the highest of (x) the Bank of America prime rate, (y) the federal funds rate plus 0.50% and (z) LIBOR plus 1.00%), plus an applicable margin of 0.25% to 1.25% (1.25% as of June 30, 2020), in each case depending upon the consolidated total leverage ratio, as defined in the agreement.

Interest is payable at the end of the selected interest period, but no less frequently than quarterly.

Additionally, the Senior Secured Credit Facility requires us to pay unused commitment fees of 0.15% to 0.30% (0.25% as of March 31, 2020) on any undrawn amounts under the revolving credit facility and letter of credit fees of up to 3.25% on the maximum amount available to be drawn under each letter of credit issued under the agreement.

Additionally, the Senior Secured Credit Facility requires us to pay unused commitment fees of 0.15% to 0.30% (0.30% as of June 30, 2020) on any undrawn amounts under the revolving credit facility and letter of credit fees of up to 3.25% on the maximum amount available to be drawn under each letter of credit issued under the agreement.

The maturity date of the Senior Secured Credit Facility is May 9, 2024.

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(i) a minimum consolidated interest coverage ratio of 3.00 to 1.00, (ii) a maximum total leverage ratio of 5.00 to 1.00, provided, that for each of the four fiscal quarters immediately following a qualified acquisition (each a “Leverage Increase Period”), the required ratio set forth above may be increased by up to 0.25, subject to certain limitations and (iii) a maximum consolidated senior secured leverage ratio of 3.25 to 1.00, provided, that for each Leverage Increase Period, the consolidated senior leverage ratio may be increased by up to 0.25, subject to certain limitations.

As of March 31, 2020, we were in compliance with these covenants, and there was $256.0 million available for borrowing under the revolving credit facility, subject to the financial covenants.

As of June 30, 2020, we were in compliance with these covenants, and there was $240.0 million available for borrowing under the revolving credit facility, subject to the financial covenants.

The Senior Secured Credit Facility is secured by substantially all of our assets.

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The covenants contained in the Senior Secured Credit Facility may restrict i3 Verticals, LLC's ability to provide funds to i3 Verticals, Inc.

Secondary Offering

Follow-on Offering

On June 10, 2019, we completed the June 2019 Secondary Public Offering of 5,165,527 shares of our Class A common stock, at a public offering price of $22.75 per share, which included a full exercise of the underwriters' option to purchase 673,764 additional shares of Class A common stock from us.

We received approximately $111.6 million of net proceeds, after deducting underwriting discounts and commissions, but before offering expenses.

We used the net proceeds to purchase (1) 1,000,000 Common Units directly from i3 Verticals, LLC, and (2) 4,165,527 Common Units (including 673,764 Common Units due to the exercise of the underwriters' option to purchase additional shares in full) and an equivalent number of Class B common stock (which shares were then canceled) from certain Continuing Equity Owners, in each case at a price per Common Unit equal to the price per share paid by the underwriters for shares of our Class A common stock in the offering.

the price per share paid by the underwriters for shares of our Class A common stock in the offering.

i3 Verticals, LLC received $20.9 million in net proceeds from the sale of Common Units to the Company, which it used to repay outstanding indebtedness.

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Contractual Obligations

The following table summarizes our contractual obligations and commitments as of March 31, 2020 related to leases and borrowings:

The following table summarizes our contractual obligations and commitments as of June 30, 2020 related to leases and borrowings:

Payments Due by Period

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The amount reflected in this table includes the maximum commitment for the loan.

We estimated interest payments through the maturity of our Senior Secured Credit Facility by applying the interest rate of 3.92% in effect on the outstanding balance as of March 31, 2020, plus the unused fee rate of 0.25% in effect as of March 31, 2020.

We calculated interest payments through the maturity of our Exchangeable Notes by applying the coupon interest rate of 1.00% on the principal balance as of March 31, 2020 of $138.0 million.

We estimated interest payments through the maturity of our Senior Secured Credit Facility by applying the interest rate of 3.61% in effect on the outstanding balance as of June 30, 2020, plus the unused fee rate of 0.30% in effect as of June 30, 2020.

We calculated interest payments through the maturity of our Exchangeable Notes by applying the coupon interest rate of 1.00% on the principal balance as of June 30, 2020 of $138.0 million.

In connection with certain of our acquisitions, we may be obligated to pay the seller of the acquired entity certain amounts of contingent consideration as set forth in the relevant purchasing documents, whereby additional consideration may be due upon the achievement of certain specified financial performance targets.

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We intend to fund the payment of the amounts due under the Tax Receivable Agreement out of the cash savings that we actually realize in respect of the attributes to which Tax Receivable Agreement relates.

As of March 31, 2020, the total amount due under the Tax Receivable Agreement was $25.8 million, and payments to the Continuing Equity Owners related to exchanges through March 31, 2020 will range from $0 to $2.3 million per year and are expected to be paid over the next 25 years.

The amounts recorded as of March 31, 2020, approximate the current estimate of expected tax savings and are subject to change after the filing of the Company’s U.S.

As of June 30, 2020, the total amount due under the Tax Receivable Agreement was $25.9 million, and payments to the Continuing Equity Owners related to exchanges through June 30, 2020 will range from approximately $0 to $2.3 million per year and are expected to be paid over the next 25 years.

The amounts recorded as of June 30, 2020, approximate the current estimate of expected tax savings and are subject to change after the filing of the Company’s U.S.

federal and state income tax returns.

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Actual results may differ from these estimates under different assumptions or conditions.

The impact of COVID-19 on certain of our estimates, including goodwill and intangible assets, is uncertain at this time.

The impact of the COVID-19 pandemic on certain of our estimates, including goodwill and intangible assets, is uncertain at this time.

If general economic conditions continue to deteriorate or remain uncertain for an extended period of time, the trading price of our common stock, which has already declined in recent weeks, could decline further.

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Critical accounting policies are those that we consider the most critical to understanding our financial condition and results of operations.

As of March 31, 2020, there have been no significant changes to our critical accounting estimates disclosed in the Form 10-K filed with the SEC on November 22, 2019, except regarding the adoption of ASC 606 on October 1, 2019, and the reduction in the valuation allowance on the deferred tax asset related to our investment in partnership, as described in Note 2 to our condensed consolidated financial statements.

As of June 30, 2020, there have been no significant changes to our critical accounting estimates disclosed in the Form 10-K filed with the SEC on November 22, 2019, except regarding the adoption of ASC 606 on October 1, 2019, the reduction in the valuation allowance on the deferred tax asset related to our investment in partnership and the policy change to allocate stock compensation expense to the Class B shareholders of i3 Verticals, LLC, as described in Note 2 to our condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

As of March 31, 2020, there have been no significant changes to our recently issued accounting pronouncements disclosed in the Form 10-K filed with the SEC on November 22, 2019, except as described in Note 2 to our condensed consolidated financial statements.

As of June 30, 2020, there have been no significant changes to our recently issued accounting pronouncements disclosed in the Form 10-K filed with the SEC on November 22, 2019, except as described in Note 2 to our condensed consolidated financial statements.

Off-Balance Sheet Arrangements

As of March 31, 2020, we did not have any off-balance sheet financing arrangements.

As of June 30, 2020, we did not have any off-balance sheet financing arrangements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis