What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2020-11-23 compared with 2019-11-22 · 278 added, 133 removed, 330 unchanged (55% of the section changed)

7 unchanged sentences

Since commencing operations, we have built a broad suite of payment and software solutions that address the specific needs of SMBs and other organizations in our strategic vertical markets, and we believe our suite of solutions differentiates us from our competition.

Our primary strategic vertical markets include education, non-profit, public sector, property management and healthcare.

Initial Public Offering

On June 25, 2018, we completed the 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 (the “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.

Secondary Offering

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 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.

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.

In connection with this offering, we recognized an additional deferred tax asset of $26.2 million related to the Tax Receivable Agreement and a corresponding liability of $22.2 million.

Our primary strategic vertical markets include education, non-profit, public sector and healthcare.

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.

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

State and local governments, together with public health officials, 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, beginning in the second half of March 2020 and continuing through the remainder 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, $1.2 billion, $1.2 billion, $1.5 billion and $1.3 billion for the months of April, May, June, July,

August and September 2020, respectively.

Further, for the second half of the year ended September 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.

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.

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.

A portion of those furloughed have since returned to work.

The impact of the COVID-19 pandemic is fluid and continues to evolve, and therefore, we cannot currently predict with certainty the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted.

Our top priority is to protect our employees and their families, as well as our vendors and clients.

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 the 2021 fiscal year.

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

Actual results could differ from those estimates.

See “Item 1A.

Risk Factors—The COVID-19 pandemic is significantly affecting our operations, business and financial condition, and our liquidity could also be negatively impacted, particularly if the U.S.

economy remains unstable for a significant amount of time”.

At September 30, 2020, we had $15.6 million of cash and cash equivalents and $275.0 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 September 30, 2020, $117.0 million of the original aggregate principal amount of $138.0 million was outstanding.

As of September 30, 2020, we were in compliance with these covenants with a consolidated interest coverage ratio, total leverage ratio and consolidated senior leverage ratio of 6.71x, 2.59x and 0.0x, respectively.

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

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.

Acquisitions subsequent to September 30, 2020

Subsequent to September 30, 2020, we completed the acquisition of four businesses.

The first acquisition is within the Company’s Public Sector vertical and provides software services to public safety and law enforcement customers.

The second acquisition is within the Company’s Healthcare vertical and offers medical billing and other software.

The third acquisition offers proprietary technology that will augment the Company’s existing platform across several verticals.

The final acquisition sells a combination of proprietary and third-party software, which eliminates paper-based systems by creating integrated electronic workflows for courts and government agencies.

Total purchase consideration included $59.6 million in cash and revolving line of credit proceeds, and an amount of contingent consideration, which is still being valued.

Acquisitions during the year ended September 30, 2020

During the year ended September 30, 2020, we completed the acquisitions of three unrelated businesses.

Two expand 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 was $32.6 million, including $27.9 million in revolving credit facility proceeds and $4.7 million of contingent consideration.

Acquisitions during the year ended September 30, 2019

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

1 unchanged sentence

The total net purchase consideration was $56.1 million, including $52.5 million in cash consideration, funded by proceeds from our revolving credit facility, $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.

During the year ended September 30, 2019, 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 $98.8 million, which included $89.1 million of cash consideration funded with proceeds from our revolving credit facility and $9.7 million of contingent consideration.

Acquisitions during the year ended September 30, 2018

On October 31, 2017, we acquired all of the outstanding stock of San Diego Cash Register Company, Inc.

(“SDCR, Inc.”).

We acquired SDCR, Inc.

to expand our presence within the integrated POS market.

The total net purchase consideration was $20.8 million, including $20.0 million in cash consideration, funded by proceeds from our revolving credit facility, $0.7 milling of contingent consideration and $0.1 million of common units in i3 Verticals, LLC.

During the year ended September 30, 2019, we also completed the acquisitions of additional businesses.

4 unchanged sentences

Our Revenue and Expenses

We generate revenue primarily from payment processing services provided to clients, which principally include but are not limited to volume-based fees (“discount fees”), and to a lesser extent, software licensing subscriptions, ongoing support and other POS-related solutions we provide to our clients directly and through our distribution partners.

We generate revenue primarily from volume-based payment processing fees (“discount fees”), and to a lesser extent, software licensing subscriptions, ongoing support and other POS-related solutions that we provide to our clients directly and through our distribution partners.

Volume-based fees represent a percentage of the dollar amount of each credit or debit transaction processed.

3 unchanged sentences

These include assessment fees payable to card associations, which are a percentage of the processing volume we generate from Visa and Mastercard.

Upon our adoption of ASC 606 on October 1, 2019, these fees are presented net within revenue.

Other costs of services .

13 unchanged sentences

Interest expense, net.

Our interest expense consists of interest on our outstanding indebtedness under our Senior Secured Credit Facility.

Our interest expense consists of interest on our outstanding indebtedness under our Senior Secured Credit Facility and Exchangeable Notes, and amortization of debt discount and issuance costs.

How We Assess Our Business

1 unchanged sentence

Our Merchant Services segment provides comprehensive payment solutions to businesses and organizations.

Our Merchant Services segment includes third-party integrated payment solutions as well as traditional payment services across our strategic vertical markets.

Our Merchant Services segment includes third-party integrated payment solutions as well as merchant of record payment services across our strategic vertical markets.

Proprietary Software and Payments

Our Proprietary Software and Payments segment delivers embedded payment solutions to our clients through company-owned software.

Payments are delivered through both the payment facilitator model and the traditional merchant processing model.

Our Proprietary Software and Payments clients are primarily in the education, public sector and property management markets.

Our Proprietary Software and Payments segment delivers solutions, including embedded payments, to our clients through company-owned software.

Payments are delivered through both the payment facilitator model and the merchant of record processing model.

We have Proprietary Software and Payments clients across all of our strategic vertical markets.

Our Other category includes corporate overhead expenses, when presenting reportable segment information.

Effective July 1, 2020, we realigned one component from the Proprietary Software and Payments segment to the Merchant Services segment.

Prior periods have been retroactively adjusted to reflect the Company's current segment presentation.

For additional information on our segments, see Note 16 to our consolidated financial statements.

5 unchanged sentences

Our payment volume for the years ended September 30, 2020 and 2019 was $14.4 billion and $13.1 billion, respectively, representing a period-to-period growth rate of 9%.

Our payment volume for the second half of the year ended September 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, $1.2 billion, $1.2 billion, $1.5 billion and $1.3 billion for the months of April, May, June, July, August and September 2020, respectively.

We focus on 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.

7 unchanged sentences

We experience attrition in payment volume as a result of several factors, including business closures, transfers of clients’ accounts to our competitors and account closures that we initiate due to heightened credit risks.

During the year ended September 30, 2019, we experienced approximately 1% net volume attrition per month.

During the year ended September 30, 2020, our average net volume attrition per month remained below 2%.

Results of Operations

6 unchanged sentences

Interchange and network fees (1)

242,867 (242,867) n/m

Other costs of services 47,230 44,237 2,993 6.8 %

6 unchanged sentences

Interest expense, net 8,926 6,004 2,922 48.7 %

Other expense 2,621 — 2,621 n/m

Total other expenses 11,547 6,004 5,543 92.3 %

(Loss) income before income taxes (3,774) 386 (4,160) (1,077.7) %

Benefit from income taxes (2,795) (177) (2,618) 1,479.1 %

Net (loss) income (979) 563 (1,542) n/m

Net (loss) income attributable to non-controlling interest (560) 3,608 (4,168) n/m

Net loss attributable to i3 Verticals, Inc.

$ (419) $ (3,045) $ 2,626 n/m

n/m = not meaningful

__________________________

Effective October 1, 2019, our revenues are presented net of interchange and network fees in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers .

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

Revenue decreased $226.2 million, or 60.1%, to $150.1 million for the year ended September 30, 2020 from $376.3 million for the year ended September 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 year ended September 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 second half of the year ended September 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 $17.9 million, or 4.8%, to $394.2 million for the year ended September 30, 2020 from $376.3 million for the year ended September 30, 2019.

This increase was principally driven by acquisitions completed during the 2020 and 2019 fiscal years.

These acquisitions contributed an incremental $42.2 million, net of inter-segment eliminations, to our revenue for the year ended September 30, 2020.

Excluding revenues from these acquisitions, revenue without the adoption of ASC 606 decreased $24.3 million, principally driven by the impact of the COVID-19 pandemic.

Without the effect of the adoption of ASC 606, revenue related to a subset of merchant contracts purchased in 2014 and 2017 (“Purchased Portfolios”), which have a higher rate of revenue attrition and payment volume attrition than the rest of our business, decreased $3.8 million, or 30.5%, to $8.6 million for the year ended September 30, 2020 from $12.4 million for the year ended September 30, 2019.

Excluding revenues from the Purchased Portfolios and the effect of the adoption of ASC 606, revenue grew $21.7 million, or 6.0%, to $385.6 million for the year ended September 30, 2020 from $363.9 million for the year ended September 30, 2019.

Without the effect of the adoption of ASC 606, revenue within Merchant Services decreased $1.0 million, or 0.3%, to $338.0 million for the year ended September 30, 2020 from $339.0 million for the year ended September 30, 2019.

This decrease was principally driven by a decrease in other revenue of $5.4 million, partially offset by an increase in payments revenue of $4.5 million for the year ended September 30, 2020.

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

Without the effect of the adoption of ASC 606, revenue within Proprietary Software and Payments increased $20.7 million, or 55.3%, to $58.0 million for the year ended September 30, 2020 from $37.3 million for the year ended September 30, 2019.

This increase was principally driven by an increase in other revenue of $16.6 million for the year ended September 30, 2020, driven by software and related services.

In addition, payments revenue increased $4.1 million for the year ended September 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 2020 and 2019 fiscal years, despite overall decreases in other revenue related to the COVID-19 pandemic.

Payment volume increased $1.2 billion, or 9.4%, to $14.4 billion for the year ended September 30, 2020 from $13.1 billion for the year ended September 30, 2019.

This increase was principally driven by acquisitions completed during the 2020 and 2019 fiscal years and organic growth prior to the COVID-19 pandemic.

Interchange and Network Fees

Interchange and network fees decreased $242.9 million, or 100.0%, to $0.0 million for the year ended September 30, 2020 from $242.9 million for the year ended September 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 year ended September 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 $1.2 million, or 0.5%, to $244.1 million for the year ended September 30, 2020 from $242.9 million for the year ended September 30, 2019.

Acquisitions completed during the 2020 and 2019 fiscal years contributed an incremental $14.1 million to our interchange and network fees for the year ended September 30, 2020.

Excluding interchange and network fees from these acquisitions, interchange and network fees without the adoption of ASC 606 decreased $12.8 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 $1.7 million, or 26.7%, to $4.5 million for the year ended September 30, 2020 from $6.2 million for the year ended September 30, 2019.

Excluding interchange and network fees from these Purchased Portfolios and the effect of the adoption of ASC 606, interchange and network fees grew $2.9 million, or 1.2%, to $239.6 million for the year ended September 30, 2020 from $236.7 million for the year ended September 30, 2019.

Without the effect of the adoption of ASC 606, interchange and network fees within Merchant Services increased $0.9 million, or 0.4%, to $237.1 million for the year ended September 30, 2020 from $236.2 million for the year ended September 30, 2019.

Without the effect of the adoption of ASC 606, interchange and network fees within Proprietary Software and Payments increased $0.3 million or 5.2%, to $7.0 million for the year ended September 30, 2020 from $6.7 million for the year ended September 30, 2019.

Other Costs of Services

Other costs of services increased $3.0 million, or 6.8%, to $47.2 million for the year ended September 30, 2020 from $44.2 million for the year ended September 30, 2019.

Acquisitions completed during the 2020 and 2019 fiscal years contributed an incremental $6.3 million, net of inter-segment eliminations, to our other costs of services for the year ended September 30, 2020.

Other costs of services within Merchant Services increased $2.5 million, or 5.9%, to $43.9 million for the year ended September 30, 2020 from $41.5 million for the year ended September 30, 2019.

Other costs of services within Proprietary Software and Payments increased $2.3 million, or 83.9%, to $5.1 million for the year ended September 30, 2020 from $2.8 million for the year ended September 30, 2019.

This increase was primarily driven by acquisitions completed during the 2020 and 2019 fiscal years, which contributed an incremental $2.0 million, net of inter-segment eliminations, to our other costs of services within Proprietary Software and Payments for the year ended September 30, 2020.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $15.5 million, or 24.6%, to $78.3 million for the year ended September 30, 2020 from $62.9 million for the year ended September 30, 2019.

This increase was principally driven by a $12.3 million increase in employment expense, primarily resulting from an increase in headcount that resulted from acquisitions and an increase in stock compensation expense.

The majority of the remaining increase was comprised of increases in software and technological services of $1.0 million and professional services and insurance of $0.6 million, partially offset by decreases in travel expenses of $0.9 million.

Depreciation and Amortization

Depreciation and amortization increased $1.7 million, or 10.0%, to $18.2 million for the year ended September 30, 2020 from $16.6 million for the year ended September 30, 2019.

Amortization expense increased $1.0 million to $16.4 million for the year ended September 30, 2020 from $15.4 million for the year ended September 30, 2019 primarily due to greater amortization expense resulting from acquisitions completed during the 2020 and 2019 fiscal years.

Depreciation expense increased $0.6 million to $1.8 million for the year ended September 30, 2020 from $1.2 million for the year ended September 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 $1.4 million for the year ended September 30, 2020 due to some of our acquisitions achieving lower performance as a result of the COVID-19 pandemic.

The change in fair value of contingent consideration for the year ended September 30, 2019 was a charge of $3.4 million.

Interest Expense, net

Interest expense, net, increased $2.9 million, or 48.7%, to $8.9 million for the year ended September 30, 2020 from $6.0 million for the year ended September 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 $2.9 million in interest expense related to the amortization of the debt discount during the year ended September 30, 2020.

The increase also reflected a higher average outstanding debt balance, but was offset by a lower weighted average interest rate for the year ended September 30, 2020 as compared to the year ended September 30, 2019.

Other expense

Other expense was $2.6 million for the year ended September 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 year ended September 30, 2019.

Provision for Income Taxes

The provision for income taxes decreased to a benefit of $2.8 million for the year ended September 30, 2020 from a benefit of $0.2 million for the year ended September 30, 2019.

As described in Note 2 to our consolidated financial statements, we had 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 in the year ended September 30, 2020.

Our effective tax rate was 74% for the year ended September 30, 2020.

Our effective tax rate differs from the federal statutory rate due to the reduction in the valuation allowance on the investment in partnership.

i3 Verticals, Inc.

is subject to federal, state and local income taxes with respect to its allocable share of any taxable income of i3 Verticals, LLC and is taxed at the prevailing corporate tax rates.

Year Ended September 30, 2019 Compared to Year Ended September 30, 2018

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

Year ended September 30, Change

(in thousands) 2019 2018 Amount %

Revenue $ 376,307 $ 323,508 $ 52,799 16.3 %

Operating expenses

Interchange and network fees 242,867 214,543 28,324 13.2 %

Other costs of services 44,237 40,314 3,923 9.7 %

Selling general and administrative 62,860 40,585 22,275 54.9 %

Depreciation and amortization 16,564 11,839 4,725 39.9 %

Change in fair value of contingent consideration 3,389 3,866 (477) (12.3) %

Total operating expenses 369,917 311,147 58,770 18.9 %

Income from operations 6,390 12,361 (5,971) (48.3) %

Other expenses

Interest expense, net 6,004 8,498 (2,494) (29.3) %

Change in fair value of warrant liability — 8,487 (8,487) n/m

62 unchanged sentences

is subject to federal, state and local income taxes with respect to its allocable share of any taxable income of i3 Verticals, LLC and is taxed at the prevailing corporate tax rates.

Year Ended September 30, 2018 Compared to Year Ended September 30, 2017

For discussion related to the results of operations for the years ended September 30, 2018 and 2017 refer to Part II, Item 7.

“Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018, which was filed with the Securities and Exchange Commission on December 7, 2018.

We have experienced in the past, and may continue to experience, seasonal fluctuations in our revenues as a result of consumer and business spending patterns.

6 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.

Furthermore, we are not able to predict the impact that the COVID-19 pandemic may have on the seasonality of our business.

Liquidity and Capital Resources

We have historically financed our operations and working capital through net cash from operating activities.

As of September 30, 2019 we had $1.1 million of cash and cash equivalents and available borrowing capacity of $158.9 million under our Senior Secured Credit Facility.

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

As of September 30, 2020, we had $15.6 million of cash and cash equivalents and available borrowing capacity of $275.0 million under our Senior Secured Credit Facility, subject to the financial covenants.

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

1 unchanged sentence

Our primary cash needs are to fund working capital requirements, invest in our technology infrastructure, fund acquisitions and related contingent consideration, make scheduled principal and interest payments on our outstanding indebtedness and pay tax distributions to members.

We consistently have positive cash flow provided by operations and 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 a holding company, we depend on distributions or loans from i3 Verticals, LLC to access funds earned by our operations.

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

We historically have had positive cash flow provided by operations.

Our plan for capital expenditures and future acquisitions for the upcoming fiscal year are consistently 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.

We have the ability to pause or terminate much of our anticipated acquisition program should our financial position require it.

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.

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

A portion of those furloughed have since returned to work.

During the year ended September 30, 2020, we repurchased $21.0 million in aggregate principal amount of the Exchangeable Notes for an aggregate purchase price of approximately $17.4 million.

We recorded a loss on retirement of debt of $2.3 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.

Any such debt repurchases will depend upon prevailing market conditions, our liquidity requirements, contractual restrictions, applicable securities law and other factors.

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 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 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.

6 unchanged sentences

Cash Flow from Operating Activities

Net cash provided by operating activities increased $8.5 million to $26.6 million for the year ended September 30, 2019 from $18.1 million for the year ended September 30, 2018.

The increase in net cash provided by operating activities included an increase in net income for the year ended September 30, 2019, from a net loss for the year ended September 30, 2018, of $5.5 million offset by a $8.5 million increase in the change in the fair value of warrant liabilities.

Depreciation and amortization expense increased $4.7 million, equity-based compensation increased $4.6 million, and we experienced a reduction of $0.1 million in benefit from income taxes from the revaluation of deferred taxes related to the federal tax reform enacted on December 22, 2017.

These increases were partially offset by a $0.5 million reduction in increases in non-cash contingent consideration expense from original estimates.

Operating assets and liabilities increased $2.8 million, primarily driven by a $4.8 million decrease in accounts receivable, a $2.7 million increase in deferred revenue and a $0.5 million increase in

contingent consideration paid in excess of original estimates, partially offset by a $2.9 million decrease in accounts payable, a $1.8 million increase in prepaid expenses, a $0.5 million decrease in accrued liabilities and a $0.4 million decrease in other long-term liabilities for the year ended September 30, 2019 compared to the year ended September 30, 2018.

Net cash provided by operating activities decreased $2.9 million to $23.7 million for the year ended September 30, 2020 from $26.6 million for the year ended September 30, 2019.

The decrease in net cash provided by operating activities included a decrease of $1.5 million in net income for the year ended September 30, 2020, comparatively lower increases in liabilities for non-cash contingent consideration of $4.8 million and an increase in the benefit from deferred taxes of $2.6 million.

The decrease in net cash provided by operating activities was partially offset by adjustments to net income including increases to equity-based compensation of $4.3 million, amortization of the debt discount and issuance costs expense of $3.0 million and loss on the repurchase of Exchangeable Notes of $2.3 million.

Operating assets and liabilities decreased $5.7 million, primarily driven by a $3.5 million decrease in contingent consideration paid in excess of original estimates, a $3.5 million increase in accounts receivable and a $2.0 million decrease in deferred revenue, partially offset by a $2.0 million increase in accounts payable and a $1.2 million decrease in other assets for the year ended September 30, 2020 compared to the year ended September 30, 2019.

Cash Flow from Investing Activities

Net cash used in investing activities increased $105.7 million to $143.7 million for the year ended September 30, 2019 from $38.1 million for the year ended September 30, 2018.

The increase in net cash used in investing activities was primarily driven by an increase of $104.7 million in cash used in acquisitions, net of cash acquired, $2.4 million in purchases of merchant portfolios and residual buyouts and $1.1 million in expenditures for capitalized software.

These increases were partially offset by a decrease of $1.4 million in expenditures for property and equipment and $1.1 million in acquisitions of other intangibles for the year ended September 30, 2019 compared to the year ended September 30, 2018.

Net cash used in investing activities decreased $108.3 million to $35.4 million for the year ended September 30, 2020 from $143.7 million for the year ended September 30, 2019.

The decrease in net cash used in investing activities was primarily driven by a decrease of $109.3 million in cash used in acquisitions, net of cash acquired, and a decrease of $1.8 million in purchases of merchant portfolios and residual buyouts.

These decreases were partially offset by an increase of $2.1 million in expenditures for property and equipment and $0.7 million in expenditures for capitalized software for the year ended September 30, 2020 compared to the year ended September 30, 2019.

Cash Flow from Financing Activities

Net cash provided by financing activities increased $99.9 million to $119.1 million for the year ended September 30, 2019 from $19.2 million for the year ended September 30, 2018.

The increase in net cash provided by financing activities was primarily the result of an increase in proceeds from the revolving credit facility of $161.2 million, a reduction in payments on the revolving credit facility of $43.7 million, proceeds from the issuance of Class A common stock sold in the offering in June 2019 of $111.7 million, a reduction in payments of notes payable to mezzanine lenders of $10.5 million and a decrease in payments of unsecured notes payable to related and unrelated creditors of $5.5 million, The increase in cash provided by financing activities is partially offset by a decrease in proceeds from the issuance of Class A common stock sold in the initial public offering in June 2018 of $89.5 million, an increase in payments for the purchase of Common Units in i3 Verticals, LLC from certain Continuing Equity Owners in connection with our June 2019 Secondary Public Offering of $85.4 million, an increase in payments of notes payable to banks of $30.0 million and a decrease in proceeds from notes payable to banks of $24.7 million for the year ended September 30, 2019 compared to the year ended September 30, 2018.

Net cash provided by financing activities decreased $90.0 million to $29.1 million for the year ended September 30, 2020 from $119.1 million for the year ended September 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 $261.4 million, payments for purchases of exchangeable senior note hedges of $28.7 million and payments for the repurchase of Exchangeable Notes of $17.4 million during the year ended September 30, 2020, a decrease in proceeds from issuance of Class A common stock sold in public offerings of $28.8 million, a decrease in proceeds from the revolving credit facility of $16.4 million and an increase in payments of debt issuance costs of $5.1 million for the year ended September 30, 2020 compared to the year ended September 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 year ended September 30, 2020, as well as a decrease in payments for Common Units in i3 Verticals, LLC from certain Continuing Equity Owners in connection with public offerings of $79.1 million, 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 $2.1 million for the year ended September 30, 2020 from the year ended September 30, 2019.

Year Ended September 30, 2019 Compared to Year Ended September 30, 2018

For discussion related to the cash flows for the year ended September 30, 2018 compared to the year ended September 30, 2017, refer to Part II, Item 7.

“Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018, which was filed with the Securities and Exchange Commission on December 7, 2018.

For a discussion of the cash flows for the year ended September 30, 2019 compared to the year ended September 30, 2018, refer to Part II, Item 7.

“Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, which was filed with the Securities and Exchange Commission on November 22, 2019.

Senior Secured Credit Facility

1 unchanged sentence

For a discussion of our existing 2017 Senior Secured Credit Facility, which consisted of $40.0 million in term loans and a $110.0 million revolving line of credit, please refer to Note 9 to the accompanying consolidated financial statements in this Annual Report on Form 10-K.

The Senior Secured Credit Facility provides for aggregate commitments of $300.0 million in the form of a senior secured revolving credit facility.

The Senior Secured Credit Facility provides that we have the right to seek additional commitments to provide additional term loan facilities or additional revolving credit commitments in an aggregate principal amount up to $50.0 million so long as, among other things, after giving pro forma effect to the incurrence of such additional borrowings and any related transactions, our consolidated interest coverage ratio would not be less than 3.00 to 1.0 and our consolidated senior leverage ratio would not exceed the ratios reflected in the schedule below, based on the applicable quarter and calendar year:

Calendar Year March 31 June 30 September 30 December 31

2019 N/A 3.75 to 1.0 3.75 to 1.0 3.75 to 1.0

2020 3.75 to 1.0 3.75 to 1.0 3.75 to 1.0 3.75 to 1.0

2021 3.75 to 1.0 3.75 to 1.0 3.50 to 1.0 3.50 to 1.0

thereafter 3.50 to 1.0 3.50 to 1.0 3.50 to 1.0 3.50 to 1.0

The Senior Secured Credit Facility, as amended on February 18, 2020 in connection with our offering of Exchangeable Notes, provides for aggregate commitments of $275.0 million in the form of a senior secured revolving credit facility.

The Senior Secured Credit Facility provides that we have the right to seek additional commitments to provide additional term loan facilities or additional revolving credit commitments in an aggregate principal amount up to $50.0 million so long as, among other things, after giving pro forma effect to the incurrence of such additional borrowings and any related transactions, our consolidated interest coverage ratio would not be less than 3.00 to 1.00, our total leverage ratio would not exceed 5.00 to 1.00 and our consolidated senior leverage ratio would not exceed 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.

The provision of any such additional amounts under the additional term loan facilities or additional revolving credit commitments are subject to certain additional conditions and the receipt of certain additional commitments by existing or additional lenders.

3 unchanged sentences

The base rate is a fluctuating rate of interest per annum equal to the highest of (a) the federal funds rate plus ½ of 1%, (b) the interest announced from time to time by Bank of America as its prime rate and (c) the Eurodollar rate plus 1%.

The Eurodollar rate will be the rate of interest per annum equal to LIBOR (based upon an interest period of one, two, three or six months or, under some circumstances, up to twelve months).

The Eurodollar rate will be the rate of

interest per annum equal to LIBOR (based upon an interest period of one, two, three or six months or, under some circumstances, up to twelve months).

The applicable margin is based upon our consolidated total leverage ratio, as reflected in the schedule below:

5 unchanged sentences

In addition to paying interest on outstanding principal under the Senior Secured Credit Facility, we will be required to pay a commitment fee equal to the product of between 0.15% and 0.30% (the applicable percentage depending on our consolidated total leverage ratio as reflected in the schedule above) times the actual daily amount by which $275.0 million exceeds the total amount outstanding under the Senior Secured Credit Facility and available to be drawn under all outstanding letters of credit.

Secured Credit Facility or under the additional term loan facilities or additional revolving credit facilities, at any time without premium or penalty.

We will be permitted to voluntarily reduce the unutilized portion of the commitment amount and repay outstanding loans under the Senior Secured Credit Facility, whether such amounts are issued under the Senior Secured Credit Facility or under the additional term loan facilities or additional revolving credit facilities, at any time without premium or penalty.

In addition, if the total amount borrowed under the Senior Secured Credit Facility exceeds $275.0 million at any time, the Senior Secured Credit Facility requires us to prepay such excess outstanding amounts.

14 unchanged sentences

The Senior Secured Credit Facility contains customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, certain events of bankruptcy and insolvency, material judgments, certain ERISA events, invalidity of loan documents and certain changes in control.

We were in compliance with such covenants as of September 30, 2019.

Mezzanine Notes

During 2013, we issued notes payable in the aggregate principal amount of $10.5 million (the “Mezzanine Notes”) to three related creditors (the “Mezzanine Lenders”).

The Mezzanine Notes accrued interest at a fixed annual rate of 12.0%, payable monthly, and were due to mature in November 29, 2020.

The Mezzanine Notes were secured by substantially all of our assets in accordance with the terms of a security agreement and were subordinate to the Senior Secured Credit Facility.

In June 2018, all of the outstanding aggregate principal balance and accrued interest on the Mezzanine Notes was repaid with proceeds from our IPO.

As part of the extinguishment of the Mezzanine Notes, $0.1 million of unamortized debt issuance costs were written off.

Junior Subordinated Notes

During 2014, we issued notes payable (“Junior Subordinated Notes”) in the aggregate principal amount of $17.6 million to unrelated and related creditors.

The notes accrued interest, payable monthly, at a fixed rate of 10.0% and were due to mature on February 14, 2019.

In June 2016, $1.0 million of the Junior Subordinated Notes held by Greg Daily, our CEO, were retired and exchanged for 309,598 Class A units in i3 Verticals, LLC.

In July 2017, $0.5 million of the Junior Subordinated Notes held by our CEO were retired and exchanged for 147,929 Class A units in i3 Verticals, LLC.

At September 30, 2017, $16.1 million of the Junior Subordinated Notes remained outstanding.

The Junior Subordinated Notes were subordinate to the Mezzanine Notes and the Senior Secured Credit Facility.

In June 2018, in connection with our IPO and as part of the Reorganization Transactions, we issued 671,167 shares of our Class A common stock pursuant to a voluntary private conversion of Junior Subordinated Notes by certain related and unrelated creditors of i3 Verticals, LLC.

$8.1 million of the Junior Subordinated Notes were converted into newly issued shares of our Class A common stock.

Also in June 2018, the remaining $8.1 million of the Junior Subordinated Notes were repaid with proceeds from our IPO.

As part of the extinguishment of the Junior Subordinated Notes, a nominal amount of unamortized debt issuance costs were written off.

Class A Unit Offerings

During July 2017, we raised $12.5 million from the issuance of a total of 3,698,225 Class A units in i3 Verticals, LLC at a price of $3.38 per unit in a private offering.

As noted above, during July 2016, $0.5 million of the Junior Subordinated Notes held by our CEO were converted into 147,929 Class A units at a price of $3.38 per unit.

The fair value of the Class A units we issued approximated the carrying amount of the Junior Subordinated Notes, and we recognized no extinguishment gain or loss.

Follow-on Offerings

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.

i3 Verticals, LLC received $20.9 million in net proceeds from the sale of Common Units to us, which we used to repay

outstanding indebtedness.

In connection with this offering, we recognized an additional deferred tax asset of $26.2 million related to the Tax Receivable Agreement and a corresponding liability of $22.2 million.

On September 15, 2020, we completed a public offering (the “September 2020 Public Offering”) of 3,737,500 shares of our Class A common stock, at a public offering price of $23.50 per share, which included a full exercise of the underwriters' option to purchase 487,500 additional shares of Class A common stock from us.

We received approximately $83.4 million of net proceeds, after deducting underwriting discounts and commissions, but before offering expenses.

We used the net proceeds to purchase (1) 3,250,000 Common Units directly from i3 Verticals, LLC, and (2) 487,500 Common Units pursuant 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.

i3 Verticals, LLC received $72.0 million in net proceeds from the sale of Common Units to the Company, which we used to repay outstanding indebtedness.

In connection with this offering, we recognized an additional deferred tax asset of $3.0 million related to the Tax Receivable Agreement and a corresponding liability of $2.5 million.

Exchangeable Notes

On February 18, 2020, i3 Verticals, LLC issued $138.0 million aggregate principal amount of its 1.0% Exchangeable Senior Notes due February 15, 2025.

The Exchangeable Notes bear interest at a fixed rate of 1.0% per year, payable semiannually in arrears on February 15 and August 15 of each year, beginning on August 15, 2020.

The Exchangeable Notes are exchangeable on the terms set forth in the Indenture into cash, shares of Class A common stock, or a combination thereof, at i3 Verticals, LLC’s election.

The Exchangeable Notes mature on February 15, 2025, unless earlier exchanged, redeemed or repurchased.

We received approximately $132.8 million in net proceeds from the sale of the Exchangeable Notes, as determined by deducting estimated offering expenses paid to third-parties from the aggregate principal amount.

i3 Verticals, LLC used a portion of the net proceeds of the Exchangeable Notes offering to pay down outstanding borrowings under the Senior Secured Credit Facility in connection with the effectiveness of the operative provisions of the Amendment and to pay the cost of the note hedge transactions.

Contractual Obligations

8 unchanged sentences

Facility leases 10,877 2,726 4,493 2,437 1,221

Loan to third party sales organization (2)

3,500 3,500 — — —

Senior Secured Credit Facility and related interest (3)

2,976 825 1,650 501 —

Exchangeable Notes and related interest (4)

122,119 1,170 2,340 118,609 —

Contingent consideration (5)

5 unchanged sentences

If we submit a number of transactions that is lower than the minimum, we are required to pay to the processor the fees it would have received if we had submitted the required minimum number of transactions.

We estimated interest payments through the maturity of our Senior Secured Credit Facility by applying the interest rate of 5.29% in effect on our term loan as of September 30, 2019, plus an unused fee rate of 0.15%.

We have committed to a loan to a third party sales organization in multiple increments, contingent upon the third party sales organization's achievement of certain financial metrics.

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 4.50% in effect on the outstanding balance as of September 30, 2020, plus the unused fee rate of 0.30% in effect as of September 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 September 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.

14 unchanged sentences

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 September 30, 2019, we recognized liabilities related to the Tax Receivable Agreement of $23.2 million.

As of September 30, 2020, the total amount due under the Tax Receivable Agreement was $27.6 million, and payments to the Continuing Equity Owners related to exchanges through September 30, 2020 will range from approximately $0 to $2.5 million per year and are expected to be paid over the next 25 years.

The amounts recorded as of September 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.

Future payments under the Tax Receivable Agreement with respect to subsequent exchanges would be in addition to these amounts.

Critical Accounting Policies

18 unchanged sentences

The operating results of an acquisition are included in our consolidated statements of operations from the date of such acquisition.

Acquisitions completed during the year ended September 30, 2019 contributed $27.8 million and $2.2 million of revenue and net loss, respectively, to the results in consolidated statements of operations for the year then ended.

Acquisitions completed during the year ended September 30, 2020 contributed $1.3 million and $0.3 million of revenue and net income, respectively, to the results in the consolidated statements of operations for the year then ended.

In accordance with ASC 350, Intangibles—Goodwill and Other, we test goodwill for impairment for each reporting unit on an annual basis in the fourth quarter, or when events or circumstances indicate the fair value of a reporting unit is below its carrying value.

Our goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in business combinations.

The goodwill generated from the business combinations is primarily related to

the value placed on the employee workforce and expected synergies.

The goodwill generated from the business combinations is primarily related to the value placed on the employee workforce and expected synergies.

Judgment is involved in determining if an indicator or change in circumstances relating to impairment has occurred.

9 unchanged sentences

For a discussion of the estimation methodology, the qualitative factors considered when performing a qualitative assessment and the significance of various inputs, please see the subheading below titled “Use of Estimates.”

As of our goodwill impairment test date for the year ended September 30, 2019, we have determined that we have nine reporting units.

As of our goodwill impairment test date for the year ended September 30, 2020, we have determined that we have five reporting units as of the date of the most recent annual good impairment test.

For each of the years ended September 30, 2020 and 2019, we performed a quantitative assessment for each reporting unit.

9 unchanged sentences

For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

We have no uncertain tax positions that qualify for either recognition or disclosure in the consolidated financial statements.

We report a liability for unrecognized tax positions taken or expected to be taken in a tax return.

We recognize interest and penalties, if any, related to unrecognized tax benefits as part of income tax expense.

See additional discussion in Note 10.

Valuation of Contingent Consideration

On occasion, we may have acquisitions which include contingent consideration.

Accounting for business combinations requires us to estimate the fair value of any contingent purchase consideration at the acquisition date.

Accounting for business combinations requires us to estimate the fair value of any contingent purchase consideration at the acquisition

For a discussion of the estimate methodology and the significance of various inputs, please see the subheading below titled “Use of Estimates.” Changes in estimates regarding the fair value contingent purchase consideration are reflected as adjustments to the related liability and recognized within operating expenses in the consolidated statements of operations.

1 unchanged sentence

Revenue Recognition and Deferred Revenue

Revenue is recognized when it is realized or realizable and earned, in accordance with ASC 605, Revenue Recognition (“ASC 605”).

Recognition occurs when all of the following criteria are met:

(1) persuasive evidence of an arrangement exists;

(2) delivery has occurred or services have been performed;

(3) the seller’s price to the buyer is fixed or determinable;

and (4) collectability is reasonably assured.

For the year ended September 30, 2020, revenue is recognized as each performance obligation is satisfied, in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”).

We accrue for rights of refund, processing errors or penalties, or other related allowances based on historical experience.

The majority of our gross revenue for the years ended September 30, 2019 and 2018 is derived from volume-based payment processing fees (“discount fees”) and other related fixed transaction or service fees.

We utilized the portfolio approach practical expedient within ASC 606-10-10-4 Revenue from Contracts with Customers—Objectives and the significant financing component practical expedient within ASC 606-10-32-18 Revenue from Contracts with Customers—The Existence of a Significant Financing Component in the Contract in performing the analysis.

We adopted ASC 606 on October 1, 2019, using the modified retrospective method and applying the standard to all contracts not completed on the date of adoption.

Results for the reporting period beginning October 1, 2019 are presented under ASC 606, while prior period amounts continue to be reported in accordance with our historic accounting practices under previous guidance.

The majority of our revenue for the years ended September 30, 2020, 2019 and 2018 is derived from volume-based payment processing fees (“discount fees”) and other related fixed transaction or service fees.

The remainder is comprised of sales of software licensing subscriptions, ongoing support, and other POS-related solutions we provide to our clients directly and through its processing bank relationships.

Discount fees represent a percentage of the dollar amount of each credit or debit transaction processed.

Discount fees are recognized at the time the merchants’ transactions are processed.

We follow the requirements of ASC 605-45 Revenue Recognition—Principal Agent Considerations, in determining our merchant processing services revenue reporting.

Generally, where we have control over merchant pricing, merchant portability, credit risk and ultimate responsibility for the merchant relationship, revenues are reported at the time of sale on a gross basis equal to the full amount of the discount charged to the merchant.

This amount includes interchange fees paid to card issuing banks and assessments paid to payment card networks pursuant to which such parties receive payments based primarily on processing volume for particular groups of merchants.

Revenues are also derived from a variety of fixed transaction or service fees, including authorization fees, convenience fees, statement fees, annual fees, and fees for other miscellaneous services, such as handling chargebacks.

Discount fees represent a percentage of the dollar amount of each credit or debit transaction processed or a specified per transaction amount, depending on the card type.

We frequently enter into agreements with clients under which the client engages us to provide both payment authorization services and transaction settlement services for all of the cardholder transactions of the client, regardless of which issuing bank and card network to which the transaction relates.

Our core performance obligations are to stand ready to provide continuous access to our payment authorization services and transaction settlement services in order to be able to process as many transactions as our clients require on a daily basis over the contract term.

These services are stand ready obligations, as the timing and quantity of transactions to be processed is not determinable.

Under a stand-ready obligation, our performance obligation is defined by each time increment rather than by the underlying activities satisfied over time based on days elapsed.

Because the service of standing ready is substantially the same each day and has the same pattern of transfer to the client, we have determined that our stand-ready performance obligation comprises a series of distinct days of service.

Discount fees are recognized each day based on the volume or transaction count at the time the merchants’ transactions are processed.

We follow the requirements of ASC 606-10-55 Revenue from Contracts with Customers—Principal versus Agent Considerations , which states that the determination of whether a company should recognize revenue based on the gross amount billed to a client or the net amount retained is a matter of judgment that depends on the facts and circumstances of the arrangement.

The determination of gross versus net recognition of revenue requires judgment that depends on whether we control the good or service before it is transferred to the merchant or whether we are acting as an agent of a third party.

The assessment is provided separately for each performance obligation identified.

Under our agreements, we incur interchange and network pass-through charges from the third-party card issuers and card networks, respectively, related to the provision of payment authorization services.

We have determined that we are acting as an agent with respect to these payment authorization services, based on the following factors:

(1) we have no discretion over which card issuing bank will be used to process a transaction and are unable to direct the activity of the merchant to another card issuing bank, and (2) interchange and card network rates are pre-established by the card issuers or card networks, and we have no latitude in determining these fees.

Therefore, revenue allocated to the payment authorization performance obligation is presented net of interchange and card network fees paid to the card issuing banks and card networks, respectively, for the year ended September 30, 2020, subsequent to the adoption of ASC 606.

With regards to our discount fees, generally, where we have control over merchant pricing, merchant portability, credit risk and ultimate responsibility for the merchant relationship, revenues are reported at the time of sale equal to the full amount of the discount charged to the merchant, less interchange and network fees.

Revenues generated from merchant portfolios where we do not have control over merchant pricing, liability for merchant losses or credit risk or rights of portability are reported net of interchange and network fees as well as third-party processing costs directly attributable to processing and bank sponsorship costs.

Revenues are also derived from a variety of fixed transaction or service fees, including authorization fees, convenience fees, statement fees, annual fees, gateway fees, which are charged for accessing our payment and software solutions, and fees for other miscellaneous services, such as handling chargebacks.

Revenues derived from service fees are recognized at the time the services are performed and there are no further performance obligations.

Revenue from the sale of equipment is recognized upon transfer of ownership and delivery to the customer, after which there are no further performance obligations.

Revenues from sales of our software licensing subscriptions are recognized when they are realized or realizable and earned.

Contractual arrangements are evaluated for indications that multiple element arrangements may exist, including instances where more-than-incidental software deliverables are included.

Arrangements may contain multiple elements, such as hardware, software products, maintenance, and professional installation and training services.

Revenues are allocated to each element based on the selling price hierarchy.

The selling price for a deliverable is based on vendor specific objective evidence of selling price, if available, third party evidence, or estimated selling price.

We establish estimated selling price, based on the judgment of our management, considering internal factors such as margin objectives, pricing practices and controls, customer segment pricing strategies and the product life cycle.

In arrangements with multiple elements, we determine allocation of the transaction price at inception of the arrangement based on the relative selling price of each unit of accounting.

In multiple element arrangements where more-than-incidental software deliverables are included, we apply the residual method to determine the amount of software license revenues to be recognized.

Under the residual method, if fair value exists for undelivered elements in a multiple-element arrangement, such fair value of the undelivered elements is deferred with the remaining portion of the arrangement consideration recognized upon delivery of the software license or services arrangement.

We allocate the fair value of each element of a software-related multiple-element arrangement based upon its fair value as determined by vendor specific objective evidence of selling price, with any remaining amount allocated to the software license.

If evidence of the fair value cannot be established for the undelivered elements of a software arrangement, then the entire amount of revenue under the arrangement is deferred until these elements have been delivered or objective evidence can be established.

These amounts, if any, are included in deferred revenue in the consolidated balance sheets.

Revenues related to software licensing subscriptions, maintenance or other support services with terms greater than one month are recognized ratably over the term of the agreement.

Revenues from sales of our combined hardware and software element are recognized when they are realized or realizable and earned which has been determined to be upon the delivery of the product.

Revenues derived from service fees are recognized at the time the services are performed and there are no further performance

Our training, installation, and repair services are recognized as revenue as these services are performed.

Deferred revenue represents amounts we have billed to customers for services contracts.

Revenue from fixed transactions, which principally relates to the sale of equipment, is recognized upon transfer of ownership and delivery to the client, after which there are no further performance obligations.

Revenues from sales of our software are recognized when the related performance obligations are satisfied.

Sales of software licenses are categorized into one of two categories of intellectual property in accordance with ASC 606, functional or symbolic.

The key distinction is whether the license represents a right to use (functional) or a right to access (symbolic) intellectual property.

We generate sales of one-time software licenses, which is functional intellectual property.

Revenue from functional intellectual property is recognized at a point in time, when delivered to the client.

We also offer access to our software under software-as-a-service (“SaaS”) arrangements, which represent services arrangements.

Revenue from SaaS arrangements is recognized over time, over the term of the agreement.

Arrangements may contain multiple performance obligations, such as payment authorization services, transaction settlement services, hardware, software products, maintenance, and professional installation and training services.

Revenues are allocated to each performance obligation based on the standalone selling price of each good or service.

The selling price for a deliverable is based on standalone selling price, if available, the adjusted market assessment approach, estimated cost plus margin approach, or residual approach.

We establish estimated selling price, based on the judgment of our management, considering internal factors such as margin objectives, pricing practices and controls, client segment pricing strategies and the product life cycle.

In arrangements with multiple performance obligations, we determine allocation of the transaction price at inception of the arrangement and use the standalone selling prices for the majority of our revenue recognition.

Revenues from sales of our combined hardware and software element are recognized when each performance obligation has been satisfied which has been determined to be upon the delivery of the product.

Revenues derived from service fees are recognized at the time the services are performed and there are no further performance obligations.

Our professional services, including training, installation, and repair services are recognized as revenue as these services are performed.

Deferred revenue represents amounts billed to clients for services contracts.

Payment is typically collected at the start of the contract term.

The initial prepaid contract agreement balance is deferred.

1 unchanged sentence

Deferred revenue that is expected to be recognized as revenue within one year is recorded as short-term deferred revenue and the remaining portion is recorded as other long-term liabilities in the consolidated balance sheets.

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, with amendments in 2015, 2016 and 2017, which creates new ASC Topic 606 (“ASU 2014-09”) that will replace most existing revenue recognition guidance in GAAP when it becomes effective.

ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.

The new standard will be adopted in our first quarter of fiscal year 2020 with the cumulative effect recognized as of the date of initial application (modified retrospective transition method).

We currently expect the most significant ongoing impact of adopting the new revenue standard in fiscal year 2020 to be driven by changes in principal versus agent considerations, with the majority of the change overall in total net revenue attributable to reflecting our interchange and network fees on a net basis prospectively, as opposed to our gross presentation of $242.9 million in the year ended September 30, 2019.

We do not expect the adoption of the new revenue standard to have a material impact on net income.

We will include additional disclosures of the amount by which each consolidated financial statement line item is affected during fiscal year 2020, as compared to the guidance that was in effect before the change, and an explanation of the reasons for any significant changes.

Refer to Note 2, “Summary of Significant Accounting Policies” in the notes to the accompanying consolidated financial statements for additional information on our revenue recognition policy and ASU 2014-09.

The terms for most of our contracts with a deferred revenue component are one year.

Substantially all of our deferred revenue is anticipated to be recognized within the next year.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.

Such estimates include, but are not limited to, the value of purchase consideration paid and identifiable assets acquired and assumed in acquisitions, goodwill and intangible asset impairment review, warrant valuation, revenue recognition for multiple element arrangements, loss reserves, assumptions used in the calculation of equity-based compensation and in the calculation of income taxes, and certain tax assets and liabilities as well as the related valuation allowances.

Such estimates include, but are not limited to, the value of purchase consideration paid and identifiable assets acquired and assumed in acquisitions, goodwill and intangible asset impairment review, warrant valuation, revenue recognition for contracts with multiple performance obligations, loss reserves, assumptions used in the calculation of equity-based compensation and in the calculation of income taxes, and certain tax assets and liabilities as well as the related valuation allowances.

We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.

Actual results could differ from those estimates.

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 months, could decline further.

If the stock price continues to be depressed or decreases further, it may cause a triggering event for impairment testing of fair-valued assets, including goodwill and intangible assets.

Below is a summary of our critical accounting estimates for which the nature of management’s assumptions are material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and for which the impact of the estimates and assumptions on financial condition or operating performance is material.

7 unchanged sentences

The probabilities are determined based on a management review of the expected likelihood of triggering events that would cause a change in the contingent consideration paid.

For example, if management’s forecasted performance for an acquisition increased, we would

have anticipated a higher probability of contingent consideration being paid on the acquisition and would have recorded additional losses from the change in fair value of contingent consideration.

For example, if management’s forecasted performance for an acquisition increased, we would have anticipated a higher probability of contingent consideration being paid on the acquisition and would have recorded additional losses from the change in fair value of contingent consideration.

Conversely, if management’s forecasted performance for an acquisition decreased, we would have anticipated a higher probability of contingent consideration being paid on the acquisition and would have recorded a gain from change in fair value of contingent consideration.

12 unchanged sentences

The option pricing model required the input of highly subjective assumptions, including the estimated enterprise value of the Company, expected term of the warrants, expected volatility, risk-free interest rates and discount for lack of marketability.

To determine the fair value of the Mezzanine Warrants, we engaged an outside consultant to prepare a valuation of the unit price at each reporting date, using information provided by management and information obtained from private and public sources.

To determine the fair value of the Mezzanine Warrants, we engaged an outside consultant to prepare a valuation of the unit price at each reporting date, using information

provided by management and information obtained from private and public sources.

The fair market value of the warrants was $0.8 million as of September 30, 2017.

7 unchanged sentences

Other inputs, such as expected volatility and the risk free interest rate, had a less material impact of the valuation of the warrant liability.

The change in fair value of the warrant liabilities was an increase of $8.5 million and a reduction of $0.4 million for the years ended September 30, 2018 and 2017, respectively.

The change in fair value of the warrant liabilities was an increase of $8.5 million for the year ended September 30, 2018.

The fair market value of the warrants was $0.8 million as of September 30, 2017.

On June 25, 2018, in conjunction with the Reorganization Transactions described in Note 1 to our consolidated financial statements, all

existing Mezzanine Warrants were exercised for common units in i3 Verticals, LLC.

On June 25, 2018, in conjunction with the Reorganization Transactions described in Note 1 to our consolidated financial statements, all existing Mezzanine Warrants were exercised for common units in i3 Verticals, LLC.

See Note 9 to our consolidated financial statements for additional discussion of the Mezzanine Warrants.

10 unchanged sentences

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-K

Item 7. Management’s Discussion and Analysis