What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2020-11-23 compared with 2019-11-22 · 665 added, 399 removed, 1060 unchanged (50% of the section changed)

3 unchanged sentences

and its Subsidiaries

Report of Independent Registered Public Accounting Firm

Report s of Independent Registered Public Accounting Firm s

Consolidated Balance Sheets as of September 30, 20 20 and September 30, 201 9

Consolidated Statements of Operations for the Years Ended September 30, 20 20 , 201 9 and 201 8

Consolidated Statements of Changes in Equity (Deficit) for the Years Ended September 30, 2019 , 2018 and 2017

Consolidated Statements of Cash Flows for the Years Ended September 30, 2019 , 2018 and 2017

Consolidated Statements of Changes in Equity (Deficit) for the Years Ended September 30, 20 20, 20 19 a nd 2018

Consolidated Statements of Cash Flows for the Years Ended September 30, 2020, 2019 a nd 2018

Notes to Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Board of Directors

To the shareholders and the Board of Directors of i3 Verticals, Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of i3 Verticals, Inc.

and subsidiaries (the “Company”) as of September 30, 2020, the related consolidated statements of operations, changes in equity, and cash flows, for the period ended September 30, 2020, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2020, and the results of its operations and its cash flows for the year ended September 30, 2020, in conformity with principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company has adopted Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers”, using the modified retrospective adoption method on October 1, 2019.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audit provides a reasonable basis for our opinion.

/s/ Deloitte & Touche LLP

Nashville, Tennessee

November 23, 2020

We have served as the Company's auditor since 2020.

Report of Independent Registered Public Accounting Firm

Stockholders and Board of Directors

i3 Verticals, Inc.

2 unchanged sentences

We have audited the accompanying consolidated balance sheets of i3 Verticals, Inc.

(the “Company”) and subsidiaries as of September 30, 2019 and 2018, the related consolidated statements of operations, changes in equity, and cash flows for each of the three years in the period ended September 30, 2019, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at September 30, 2019 and 2018, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2019, in conformity with accounting principles generally accepted in the United States of America.

(the “Company”) as of September 30, 2019, the related consolidated statements of operations, changes in equity, and cash flows for each of the two years in the period ended September 30, 2019, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2019, and the results of its operations and its cash flows for each of the two years in the period ended September 30, 2019, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

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/s/ BDO USA, LLP

We have served as the Company's auditor since 2016.

Nashville, Tennessee

November 22, 2019

November 22, 2019, except for Notes 7 and 16

to which the date is November 23, 2020

i3 Verticals, Inc.

5 unchanged sentences

Accounts receivable, net 17,538 15,335

Settlement assets — 863

Prepaid expenses and other current assets 4,869 4,117

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Accounts payable $ 3,845 $ 3,438

Current portion of long-term debt — 5,000

Accrued expenses and other current liabilities 24,064 21,560

Settlement obligations — 863

Deferred revenue 10,986 10,237

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Additional paid-in-capital 157,598 82,380

Accumulated (deficit) earnings ( 2,309 ) 736

Accumulated deficit ( 2,023 ) ( 2,309 )

Total stockholders' equity 155,578 80,073

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Total equity 240,168 142,441

Total liabilities and stockholders' equity $ 349,302 $ 175,142

Total liabilities and equity $ 403,526 $ 349,302

See Notes to the Consolidated Financial Statements

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Interchange and network fees (1)

242,867 214,543

Other costs of services 47,230 44,237 40,314

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Change in fair value of warrant liability — — 8,487

Other expense 2,621 — —

Total other expenses 11,547 6,004 16,985

Income (loss) before income taxes 386 ( 4,624 ) 1,079

(Loss) income before income taxes ( 3,774 ) 386 ( 4,624 )

(Benefit from) provision for income taxes ( 2,795 ) ( 177 ) 337

Net income (loss) 563 ( 4,961 ) 902

Net income attributable to non-controlling interest 3,608 1,937 —

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

Net (loss) income ( 979 ) 563 ( 4,961 )

Net (loss) income attributable to non-controlling interest ( 560 ) 3,608 1,937

Net loss attributable to i3 Verticals, Inc.

$ ( 419 ) $ ( 3,045 ) $ ( 6,898 )

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__________________________

Basic and diluted net income per Class A common stock are presented only for the period after the Company’s Reorganization Transactions.

Effective October 1, 2019, the Company's 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.

Basic and diluted net income per share of Class A common stock are presented only for the period after the Company’s Reorganization Transactions.

See Note 1 for a description of the Reorganization Transactions.

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(In thousands, except share amounts)

Class A Units Common Units Class P Units Accumulated Members' Deficit Total Equity

Balance at September 30, 2016 $ 19,765 $ 965 $ — $ ( 30,240 ) $ ( 9,510 )

Preferred returns on Class A Units 2,223 — — ( 2,223 ) —

Preferred returns on Redeemable Class A Units — — — ( 701 ) ( 701 )

Issuance of Class A Units 13,000 — — — 13,000

Issuance of Common Units — 275 — — 275

Distributions to members — — — ( 756 ) ( 756 )

Equity issuance costs ( 64 ) — — — ( 64 )

Net income — — — 902 902

Balance at September 30, 2017 $ 34,924 $ 1,240 $ — $ ( 33,018 ) $ 3,146

See Notes to the Consolidated Financial Statements

i3 Verticals, Inc.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (CONTINUED)

(In thousands, except share amounts)

Class A Units Common Units Class P Units Class A Common Stock Class B Common Stock Additional Paid-In Capital Accumulated Members' Deficit Retained Earnings Non-Controlling Interest Total Equity

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Sale of Class A common stock in initial public offering, net — — — 7,647,500 1 — — 92,446 — — — 92,447

Purchase of common units in i3 Verticals, LLC from selling shareholder — — — — — ( 383,417 ) — — — — ( 4,635 ) ( 4,635 )

Purchase of common units in i3 Verticals, LLC from selling unitholder — — — — — ( 383,417 ) — — — — ( 4,635 ) ( 4,635 )

Capitalization of initial public offering costs — — — — — — — ( 4,015 ) — — — ( 4,015 )

10 unchanged sentences

(In thousands, except share amounts)

Class A Common Stock Class B Common Stock Additional Paid-In Capital Accumulated Members' Deficit Retained Earnings (Deficit) Non-Controlling Interest Total Equity

Class A Common Stock Class B Common Stock Additional Paid-In Capital Retained Earnings (Deficit) Non-Controlling Interest Total Equity

Shares Amount Shares Amount

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i3 Verticals, Inc.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (CONTINUED)

(In thousands, except share amounts)

Class A Common Stock Class B Common Stock Additional Paid-In Capital Retained Earnings (Deficit) Non-Controlling Interest Total Equity

Shares Amount Shares Amount

Balance at September 30, 2019 14,444,115 $ 1 12,921,637 $ 1 $ 82,380 $ ( 2,309 ) $ 62,368 $ 142,441

Adjustment related to prior periods — — — — ( 2,730 ) — 2,730 —

Cumulative effect of adoption of new accounting standard — — — — — 705 640 1,345

Equity-based compensation — — — — 10,452 — — 10,452

Net loss — — — — — ( 419 ) ( 560 ) ( 979 )

Distributions to non-controlling interest holders — — — — — — ( 3 ) ( 3 )

Redemption of common units in i3 Verticals, LLC 1,021,016 — ( 1,021,016 ) — 5,080 — ( 5,080 ) —

Sale of Class A common stock in public offering, net 3,250,000 1 — — 72,556 — — 72,557

Capitalization of public offering costs — — — — ( 697 ) — — ( 697 )

Deferred tax asset adjustment — — — — ( 941 ) — — ( 941 )

Establishment of liabilities under a tax receivable agreement — — — — 896 — — 896

Exercise of equity-based awards 149,012 — — — 254 — — 254

Allocation of equity to non-controlling interests — — — — ( 24,495 ) — 24,495 —

Equity component of exchangeable notes, net of issuance costs and deferred taxes — — — — 27,578 — — 27,578

Purchases of exchangeable note hedges — — — — ( 28,676 ) — — ( 28,676 )

Issuance of warrants — — — — 14,669 — — 14,669

Repurchases of exchangeable notes — — — — 1,272 — — 1,272

Balance at September 30, 2020 18,864,143 $ 2 11,900,621 $ 1 $ 157,598 $ ( 2,023 ) $ 84,590 $ 240,168

See Notes to the Consolidated Financial Statements

i3 Verticals, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

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Cash flows from operating activities:

Net income (loss) $ 563 $ ( 4,961 ) $ 902

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Net (loss) income $ ( 979 ) $ 563 $ ( 4,961 )

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Depreciation and amortization 18,217 16,564 11,839

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Provision for doubtful accounts 177 30 14

Amortization of deferred financing costs 721 1,072 453

Debt extinguishment costs 152 — —

Amortization of debt discount and issuance costs 3,703 721 1,072

Debt issuance cost write offs 141 152 —

Loss on repurchase of exchangeable notes 2,297 — —

Amortization of capitalized client acquisition costs 398 — —

Loss on disposal of assets 1 8 5

Provision for (benefit from) deferred income taxes ( 586 ) ( 682 ) 56

Benefit from deferred income taxes ( 3,207 ) ( 586 ) ( 682 )

Non-cash change in fair value of warrant liability — — 8,487

Increase (decrease) in non-cash contingent consideration expense from original estimate 3,389 3,866 ( 218 )

(Decrease) increase in non-cash contingent consideration expense from original estimate ( 1,409 ) 3,389 3,866

Changes in operating assets:

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Payments of revolving credit facility ( 313,267 ) ( 51,867 ) ( 95,600 )

Proceeds from borrowings on exchangeable notes 138,000 — —

Payments for purchase of exchangeable senior note hedges ( 28,676 ) — —

Proceeds from issuance of warrants 14,669 — —

Payments for repurchase of exchangeable notes ( 17,414 ) — —

Proceeds from notes payable to banks — — 24,671

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Payment of unsecured notes payable to related and unrelated creditors — — ( 5,489 )

Payment of debt issuance costs ( 168 ) ( 266 ) ( 254 )

Payments of debt issuance costs ( 5,300 ) ( 168 ) ( 266 )

Proceeds from the exercise of Mezzanine Warrants and Junior Subordinated Notes Warrants — — 270

1 unchanged sentence

Proceeds from issuance of Class A common stock sold in initial public offering, net of underwriting discounts and offering costs — — 89,506

Payments for Common Units in i3 Verticals, LLC from selling shareholders ( 90,027 ) ( 4,635 ) —

Proceeds from the issuance of Class A Units — — 12,500

Payment of equity issuance costs for Class A unit issuances — — ( 64 )

Payments for Common Units in i3 Verticals, LLC from selling unitholders ( 10,883 ) ( 90,027 ) ( 4,635 )

Cash paid for contingent consideration ( 3,492 ) ( 2,634 ) ( 977 )

Required distributions to members for tax obligations ( 2,060 ) — ( 1,464 )

Payments for required distributions to members for tax obligations ( 3 ) ( 2,060 ) —

Proceeds from stock option exercises 764 672 —

Payments for employee's tax withholdings from net settled stock option exercises ( 310 ) — —

Net cash provided by financing activities 29,112 119,094 19,244

5 unchanged sentences

Cash paid for income taxes $ 792 $ 1,420 $ 483

i3 Verticals, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(In thousands)

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets to that shown in the Consolidated Statements of Cash Flows:

Year ended September 30,

2020 2019 2018

Beginning balance

Cash and cash equivalents $ 1,119 $ 572 $ 955

Restricted cash 2,081 665 1,013

Total cash, cash equivalents, and restricted cash $ 3,200 $ 1,237 $ 1,968

Ending balance

Cash and cash equivalents $ 15,568 $ 1,119 $ 572

Restricted cash 5,033 2,081 665

Total cash, cash equivalents, and restricted cash $ 20,601 $ 3,200 $ 1,237

See Notes to the Consolidated Financial Statements

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i3 Verticals, Inc.

has a minority economic interest in i3 Verticals, LLC.

Public Offering

has a majority economic interest in i3 Verticals, LLC.

Public Offerings

On June 10, 2019, the Company completed a secondary public offering (the “June 2019 Secondary Public Offering”) of 5,165,527 shares of its 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 the Company.

The Company received approximately $ 111,640 of net proceeds, after deducting underwriting discounts and commissions, but before offering expenses.

The Company 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 $ 20,870 in net proceeds from the sale of Common Units to the Company, which it used to repay outstanding indebtedness.

On September 15, 2020, the Company completed a primary public offering (the “September 2020 Public Offering”) of 3,737,500 shares of its 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 the Company.

The Company received approximately $ 83,400 of net proceeds, after deducting underwriting discounts and commissions, but before offering expenses.

The Company 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 the Company's Class A common stock in the offering.

i3 Verticals, LLC received $ 72,018 in net proceeds from the sale of Common Units to the Company, which it used to repay outstanding indebtedness.

i3 Verticals, Inc.

is the sole managing member of i3 Verticals, LLC and as a result, consolidates the financial results of i3 Verticals, LLC and reports a non-controlling interest representing the Common Units of i3 Verticals, LLC held by the Continuing Equity Owners.

As the Reorganization Transactions are considered transactions between entities under common control, the financial statements retroactively reflect the accounts of i3 Verticals, LLC for periods prior to the IPO and Reorganization Transactions.

The Continuing Equity Owners who own Common Units in i3 Verticals, LLC may redeem at each of their options (subject in certain circumstances to time-based vesting requirements) their Common Units for, at the election of i3 Verticals, LLC, cash or newly-issued shares of the Company's Class A common stock.

As of September 30, 2020, i3 Verticals, Inc.

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As of September 30, 2020, the Continuing Equity Owners owned Common Units in i3 Verticals, LLC representing approximately 38.7 % of the economic interest in i3 Verticals, LLC, shares of Class A common stock in the Company representing approximately 0.5 % of the economic interest and voting power in the Company, and shares of Class B common stock in i3 Verticals, Inc., representing approximately 38.7 % of the voting power in the Company.

• The Continuing Equity Owners who own Common Units in i3 Verticals, LLC may redeem at each of their options (subject in certain circumstances to time-based vesting requirements) their Common Units for, at the election of i3 Verticals, LLC, cash or newly-issued shares of the Company's Class A common stock.

Combining the Class A common stock and Class B common stock, the Continuing Equity Holders hold approximately 39.2 % of the economic interest and voting power in i3 Verticals, Inc.

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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All significant intercompany accounts and transactions have been eliminated in consolidation .

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

Cash and Cash Equivalents

7 unchanged sentences

Restricted Cash (Topic 230), the Company includes restricted cash along with the cash and cash equivalents balance for presentation in the consolidated statements of cash flows.

The reconciliation between the consolidated balance sheet and the consolidated statement of cash flows is as follows:

September 30, 2019 September 30, 2018

Cash and cash equivalents on consolidated balance sheet $ 1,119 $ 572

Restricted cash 2,081 665

Total cash, cash equivalents and restricted cash on consolidated statement of cash flows $ 3,200 $ 1,237

Accounts Receivable and Credit Policies

6 unchanged sentences

however, actual write-offs may exceed estimated amounts.

Settlement Assets and Obligations

Settlement assets and obligations result when funds are temporarily held or owed by the Company on behalf of merchants, consumers, schools, and other institutions.

Timing differences, interchange expense, merchant reserves and exceptional items cause differences between the amount received from the card networks and the amount funded to counterparties.

These balances arising in the settlement process are reflected as settlement assets and obligations on the accompanying consolidated balance sheets.

With the exception of merchant reserves, settlement assets or settlement obligations are generally collected and paid within one to four days.

As of September 30, 2019, the Company had no remaining settlement assets or settlement obligations.

As of September 30, 2018, settlement assets and settlement obligations were both $ 863 .

Inventories consist of point-of-sale equipment to be sold to customers and are stated at the lower of cost, determined on a weighted average basis, or net realizable value.

Inventories were $ 1,309 and $ 1,294 at September 30, 2020 and 2019, respectively, and are included within prepaid expenses and other current assets on the accompanying consolidated balance sheets.

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

Property and Equipment

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Expenditures for renewals or betterments are capitalized.

Management reviews long-lived assets for impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.

Management reviews long-lived assets for impairment when events or changes in

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

circumstances indicate the carrying amount of an asset may not be recoverable.

The Company recognizes impairment when the sum of undiscounted estimated future cash flows expected to result from the use of the asset is less than the carrying value of the asset.

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Acquisition technology intangibles’ net book values are included in capitalized software, net in the accompanying consolidated balance sheets.

Notes Receivable

Notes receivable consist of loans made to unrelated entities.

Notes receivable were $ 1,195 and $ 195 at September 30, 2020 and 2019, respectively, and are included within other assets on the accompanying consolidated balance sheets.

Business acquisitions have been recorded using the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”), and, accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair value as of the date of acquisition.

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After the purchase price has been allocated, goodwill is recorded to the extent the total consideration paid for the acquisition, including the acquisition date fair value of contingent consideration, if any, exceeds the sum of the fair values of the separately identifiable acquired assets and assumed liabilities.

Acquisition costs for business combinations are expensed

Acquisition costs for business combinations are expensed when incurred and recorded in selling general and administrative expenses in the accompanying consolidated statements of operations.

i3 VERTICALS, Inc.

1 unchanged sentence

(in thousands, except warrant, unit, share and per share amounts)

when incurred and recorded in selling general and administrative expenses in the accompanying consolidated statements of operations.

Acquisitions not meeting the accounting criteria to be accounted for as a business combination are accounted for as an asset acquisition.

1 unchanged sentence

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

Acquisitions completed during the year ended September 30, 2019 contributed $ 27,820 and $ 2,229 of revenue and net loss, respectively, to the results in the Company's consolidated statements of operations for the year then ended.

Acquisitions completed during the year ended September 30, 2020 contributed $ 1,275 and $ 327 of revenue and net income, respectively, to the results in the Company's consolidated statements of operations for the year then ended.

In accordance with ASC 350, Intangibles—Goodwill and Other, the Company tests 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.

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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.”

The Company has determined that it has nine reporting units.

The Company has determined that it has five reporting units as of the date of the most recent annual good impairment test.

For each of the years ended September 30, 2020, 2019 and 2018 the Company performed a quantitative assessment for each of its reporting units.

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.

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

The Company determined that none of the reporting units were impaired.

Intangible Assets

1 unchanged sentence

Merchant relationships represent the fair value of customer relationships purchased by the Company.

Residual buyouts represent the right to not have to pay a residual to an independent sales agent related to certain future transactions with the agent’s referred merchants.

Residual buyouts represent the right to not have to pay a residual to an independent sales agent related to certain future transactions with the agent’s referred

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

Referral agreements represent the right to exclusively obtain referrals from a partner for their customers' credit card processing services.

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

The Company has no uncertain tax positions that qualify for either recognition or disclosure in the consolidated financial statements.

The Company reports a liability for unrecognized tax positions taken or expected to be taken in a tax return.

The Company recognizes 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

11 unchanged sentences

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”).

The Company accrues for rights of refund, processing errors or penalties, or other related allowances based on historical experience.

The majority of the Company's gross revenue for the years ended September 30, 2019, 2018 and 2017 is derived from volume-based payment processing fees (“discount fees”) and other related fixed transaction or service fees.

The Company 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.

The Company 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 the Company's historic accounting practices under previous guidance.

The majority of the Company's 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 the Company provides to its 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.

The Company follows the requirements of ASC 605-45 Revenue Recognition—Principal Agent Considerations, in determining its merchant processing services revenue reporting.

Generally, where the Company has 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.

The Company frequently enters into agreements with clients under which the client engages the Company 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.

The Company’s core performance obligations are to stand ready to provide continuous access to the Company’s payment authorization services and transaction settlement services in order to be able to process as many transactions as its 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, the Company’s 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, the Company has determined that its 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.

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

The Company follows 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 the Company controls the good or service before it is transferred to the merchant or whether the Company is acting as an agent of a third party.

The assessment is provided separately for each performance obligation identified.

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

The Company has determined that it is acting as an agent with respect to these payment authorization services, based on the following factors:

(1) the Company has no discretion over which card issuing bank will be used to process a transaction and is 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 the Company has 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 the Company's discount fees, generally, where the Company has 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 the Company does 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 the Company’s 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.

The Company establishes estimated selling price, based on the judgment of the Company's 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, the Company determines 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, the Company applies 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.

The Company allocates the fair value

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 the Company’s 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.

The Company generates 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.

The Company also offers access to its 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.

The Company establishes estimated selling price, based on the judgment of the Company's 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, the Company determines allocation of the transaction price at inception of the arrangement and uses the standalone selling prices for the majority of the Company's revenue recognition.

i3 VERTICALS, Inc.

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(in thousands, except warrant, unit, share and per share amounts)

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 the Company ’ s 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 from sales of the Company ’ s 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.

The Company’s training, installation, and repair services are recognized as revenue as these services are performed.

Deferred revenue represents amounts billed to customers by the Company for services contracts.

The Company’s professional services, including training, installation, and repair services are recognized as revenue as these services are performed.

The table below presents a disaggregation of the Company's revenue from contracts with clients by product by segment.

Refer to Note 16 for discussion of the Company's segments.

The Company's products are defined as follows:

• Payments — Includes discount fees, gateway fees and other related fixed transaction or service fees.

• Other — Includes sales of software, sales of equipment, professional services and other revenues.

For the year ended September 30, 2020

Merchant Services Proprietary Software and Payments Other Total

Payments revenue $ 82,913 $ 19,359 $ ( 1,757 ) $ 100,515

Other revenue 18,036 31,594 ( 11 ) 49,619

Total revenue $ 100,949 $ 50,953 $ ( 1,768 ) $ 150,134

The table below presents a disaggregation of the Company's revenue from contracts with clients by timing of transfer of goods or services by segment.

The Company's revenue included in each category are defined as follows:

• Revenue transferred over time — Includes discount fees, gateway fees, sales of SaaS and ongoing support contract revenue.

• Revenue transferred at a point in time — Includes fixed service fees, software licenses sold as functional intellectual property, professional services and other equipment.

For the year ended September 30, 2020

Merchant Services Proprietary Software and Payments Other Total

Revenue earned over time $ 72,800 $ 35,222 $ ( 1,743 ) $ 106,279

Revenue earned at a point in time 28,149 15,731 ( 25 ) 43,855

Total revenue $ 100,949 $ 50,953 $ ( 1,768 ) $ 150,134

Contract Liabilities

Deferred revenue represents amounts billed to clients by the Company for services contracts.

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

The initial prepaid contract agreement balance is deferred.

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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.

The terms for most of the Company's contracts with a deferred revenue component are one year.

Substantially all of the Company's deferred revenue is anticipated to be recognized within the next year.

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

The following table presents the changes in deferred revenue as of and for the year ended September 30, 2020:

Balance at September 30, 2019 $ 10,237

Deferral of revenue 22,963

Recognition of unearned revenue ( 22,146 )

Balance at September 30, 2020 $ 11,054

Costs to Obtain and Fulfill a Contract

The Company capitalizes incremental costs to obtain new contracts and contract renewals and amortizes these costs on a straight-line basis as an expense over the benefit period, which is generally the contract term, unless a commensurate payment is not expected at renewal.

As of September 30, 2020, the Company had $ 3,140 , of capitalized contract costs, which relates to commissions paid to obtain new sales, included within “Prepaid expenses and other current assets” and “Other assets" on the consolidated balance sheets.

The Company recorded commissions expense related to these costs for the year ended September 30, 2020 of $ 398 .

The Company expenses sales commissions as incurred for the Company's sales commission plans that are paid on recurring monthly revenues, portfolios of existing clients, or have a substantive stay requirement prior to payment.

Interchange and Network Fees and Other Cost of Services

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Equity-based compensation was $ 10,452 , $ 6,124 and $ 1,567 for the years ended September 30, 2020, 2019 and 2018, respectively.

There was no equity-based compensation for the year ended September 30, 2017.

i3 VERTICALS, Inc.

3 unchanged sentences

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.

The Company bases its 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 the Company's 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.

During the year ended September 30, 2020, the Company has recorded a $ 2,668 reduction in the valuation allowance on the deferred tax asset related to the Company’s investment in partnership and a corresponding reduction in the Company's income tax expense for the year ended September 30, 2020.

Management has determined an additional portion of the deferred tax asset will be more likely than not realized based off an evaluation of the four sources of taxable income.

During the year ended September 30, 2020, the Company has elected to make a policy change to allocate stock compensation expense to the holders of shares of Class B common stock of i3 Verticals, Inc.

This change resulted in a $ 235 reduction in the benefit from income taxes and a corresponding reduction in the Company's net loss, a $ 3,728 increase to the net loss attributable to non-controlling interest and a $ 3,493 decrease to the net loss attributable to i3 Verticals, Inc.

for the year ended September 30, 2020.

Recently Issued Accounting Pronouncements

In August 2018, the FASB issued ASU No.

2018-15, Intangibles—Goodwill and Other—Internal-Use Software:

Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (Subtopic 350-40).

The amendments in ASU No.

2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.

The amendments in this ASU No.

2018-15 are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted.

As a public business entity, the Company is an emerging growth company and smaller reporting company and has elected to use the extended transition period provided for such companies.

As a result, the Company is not required to adopt this ASU No.

2018-15 until October 1, 2021.

Early adoption is permitted, including adoption in an interim period.

The Company elected to early adopt this standard using the prospective method as of October 1, 2018.

There was no impact on the Company’s consolidated financial statements for the adoption of ASU No.

In August 2018, the FASB issued ASU No.

2018-13, Fair Value Measurement:

Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820).

The amendments in ASU No.

2018-13 provide clarification and modify the disclosure requirements on fair value measurement in Topic 820, Fair Value Measurement.

The amendments in this ASU No.

2018-13 are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted.

As a public business entity, the Company is an emerging growth company and smaller reporting company and has elected to use the extended transition period provided for such companies.

As a result, the Company will not be required to adopt this ASU No.

2018-13 until October 1, 2021.

The Company is currently evaluating the impact of the adoption of this principle on the Company’s consolidated financial statements.

In June 2018, the FASB issued ASU No.

2018-07, Compensation—Stock Compensation:

Improvements to Nonemployee Share-Based Payment Accounting (Topic 718).

The amendments in ASU No.

2018-07 expand the scope of Topic 718, Compensation—Stock Compensation to include share-based payments issued to nonemployees for goods or services.

The amendments in this ASU No.

2018-07 are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.

As a public business entity, the Company is an emerging growth company and smaller reporting company and has elected to use the extended transition period provided for such companies.

As a result, the Company is not required to adopt this ASU No.

2018-07 until October 1, 2020.

Early adoption is permitted, but no earlier than a company’s adoption date of ASU No.

2014-09 (defined below).

The Company is electing to early adopt this standard as of October 1, 2019.

There will be no impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments—Credit Losses (Topic 326).

The amendments in ASU No.

2016-13 require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.

The amendments in this ASU No.

2016-13 are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

business entity, the Company is an emerging growth company and a smaller reporting company and has elected to use the extended transition period provided for such companies.

As a result, the Company will not be required to adopt this ASU No.

2016-13 until October 1, 2023.

The Company is currently evaluating the impact of the adoption of this principle on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No.

2016-02, Leases (Topic 842) (“ASU 2016-02”).

2016-02 amends the existing guidance by recognizing all leases, including operating leases, with a term longer than twelve months on the balance sheet and disclosing key information about the lease arrangements.

The effective date of this update is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.

As a public business entity, the Company is an emerging growth company and smaller reporting company and has elected to use the extended transition period provided for such companies.

As a result, the Company will not be required to adopt this ASU No.

2016-02 until October 1, 2021.

The update requires modified retrospective transition, with the option to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment and elect various practical expedients.

In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, which narrows aspects of the guidance issued in the amendments in ASU 2016-02, and ASU 2018-11, Leases—Targeted Improvements (Topic 842), by allowing lessees and lessors to recognize and measure existing leases at the beginning of the period of adoption without modifying the comparative period financial statements (which therefore will remain under prior GAAP, Topic 840, Leases).

In December 2018, the FASB issued ASU 2018-20, Narrow-Scope Improvements for Lessors, which clarifies or simplifies certain narrows aspects of the guidance issued in the amendments in ASU 2016-02 for lessors.

Since the Company has not yet adopted ASU 2016-02, the effective date and transition requirements will be the same as the effective date and transition requirements in ASU 2016-02.

In March 2019, the FASB issued ASU 2019-01, Codification Improvements, which clarifies certain aspects of the guidance issued in the amendments in ASU 2016-02.

The amendments in this ASU No.

2016-02 are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted.

The Company is currently evaluating the impact of the adoption of these principles on the Company’s consolidated financial statements.

Recently Adopted Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”).

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The new standard also requires additional disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

The new standard, as amended, is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted.

As an emerging growth company and smaller reporting company, the Company will not be required to adopt this ASU No.

2014-09 until October 1, 2019.

The new standard, as amended, became effective for the Company on October 1, 2019.

The amendment allows companies to use either a full retrospective or a modified retrospective approach, through a cumulative adjustment, to adopt this ASU No.

The Company has performed a review of the requirements of the new revenue standard and has monitored the activity of the FASB and the transition resource group as it relates to specific interpretive guidance.

The Company has assessed the effects of the new revenue standard in a multi-phase approach.

In the first phase, the team reviewed revenue sources and evaluated revenue populations by type to determine the appropriate portfolios that will result in materially consistent conclusions as if each revenue type was evaluated on a contract-by-contract basis under the new standard, applying the five-step model of the new standard to each contract category and comparing the results to current accounting practices.

In the second phase, the Company quantified the potential effects, assessed additional contract categories and principal agent considerations, revised

The new standard changed the timing of certain revenue and expenses to be recognized under various arrangement types.

More judgment and estimates are required when applying the requirements of the new standard than were required under prior GAAP, such as estimating the amount of variable consideration to include in transaction price and estimating expected periods of benefit for certain costs.

Through management's review of individual contracts and historical revenue recognition patterns in comparison to the provisions under ASU 2014-09, the Company determined the timing of revenue to be recognized under ASU 2014-09 for each of the Company’s revenue categories, including discount fees, software licensing subscriptions, ongoing support, and

i3 VERTICALS, Inc.

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(in thousands, except warrant, unit, share and per share amounts)

accounting policies and considered the effects on related disclosures and/or internal control over financial reporting.

The third phase, which will complete the adoption and implementation of the new revenue standard, includes quantifying the cumulative-effect adjustment (including tax effects).

The new standard will change the timing of certain revenue and expenses to be recognized under various arrangement types.

In addition, it could increase the administrative burden on the Company’s operations to properly account for customer contracts and provide the more expansive required disclosures.

More judgment and estimates will be required when applying the requirements of the new standard than are required under existing GAAP, such as estimating the amount of variable consideration to include in transaction price and estimating expected periods of benefit for certain costs.

Through management's review of individual contracts and historical revenue recognition patters in comparison to the provisions under ASU 2014-09, the Company expects the timing of revenue to be recognized under ASU 2014-09 for each of the Company’s revenue categories, including discount fees, software licensing subscriptions, ongoing support, and other POS-related solutions, will be similar to the timing of revenue recognized under current accounting practices.

The Company will evaluate, on an ongoing basis, costs to obtain contracts with customers, as well as certain implementation and set-up costs, and, in some cases, may be required to amortize these costs over longer periods than they were historically amortized.

Finally, the new standard requires additional disclosures regarding revenues and related capitalized contract costs, if any.

The Company is adopting the new revenue standard using a modified retrospective basis on October 1, 2019.

The Company has calculated that the adoption will result in a $ 1,821 cumulative increase to retained earnings, due to capitalized costs to obtain contracts with customers being amortized over the expected life of the customer rather than the life of the specific contract.

The Company currently expects 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 the Company's interchange and network fees on a net basis prospectively, as opposed to its gross presentation of $ 242,867 in the year ended September 30, 2019.

The Company does not expect the adoption of the new revenue standard to have a material impact on net income.

The Company 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.

other POS-related solutions, is similar to the timing of revenue recognized under the historical guidance under ASC 605.

The Company will evaluate, on an ongoing basis, costs to obtain contracts with clients, as well as certain implementation and set-up costs, and, in some cases, may be required to amortize these costs over longer periods than they were historically amortized.

Finally, the new standard required additional disclosures regarding revenues and related capitalized contract costs, if any.

The Company adopted the new revenue standard using a modified retrospective basis on October 1, 2019.

The Company has recorded a $ 1,345 cumulative increase to equity, including a $ 705 cumulative increase to accumulated earnings and a $ 640 cumulative increase to non-controlling interest, as a result of the adoption, due to capitalized costs to obtain contracts with clients being amortized over the expected life of the client rather than the life of the specific contract.

The Company determined that the most significant ongoing impact of adopting the new revenue standard was driven by changes in principal versus agent considerations, with the majority of the change overall in total net revenue attributable to reflecting the Company's payment authorization services net of related interchange and network fees prospectively.

The Company's interchange and network fees of $ 242,867 and $ 214,543 were classified in “Operating Expenses” on the consolidated statement of operations for the years ended September 30, 2019, and 2018, respectively.

The Company's interchange and network fees of $ 244,097 were included as a reduction to revenue on the consolidated statement of operations for the year ended September 30, 2020.

Under the modified retrospective basis, the Company has not restated its comparative consolidated financial statements for these effects.

The adoption of the new revenue standard did not have a material impact on net income.

The following table presents the material impacts of adopting ASC 606 on the Company's consolidated statement of operations for the year ended September 30, 2020:

Year ended September 30, 2020

As reported Adjustment Presentation without adoption of ASC 606

Revenue $ 150,134 $ 244,097 $ 394,231

Operating expenses

Interchange and network fees $ — $ 244,097 $ 244,097

The following table presents the material impacts of adoption of ASC 606 on the Company's consolidated balance sheet as of September 30, 2020:

As of September 30, 2020

As reported Adjustment Presentation without adoption of ASC 606

Current assets

Prepaid expenses and other current assets $ 4,869 $ 304 $ 5,173

Deferred tax asset $ 36,755 $ 12 $ 36,767

Other assets $ 5,197 $ ( 1,932 ) $ 3,265

Liabilities and equity

Stockholders' equity

Accumulated deficit $ ( 2,023 ) $ ( 872 ) $ ( 2,895 )

Non-controlling interest $ 84,590 $ ( 744 ) $ 83,846

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

The adoption of ASC 606 did not have a material impact on the Company’s consolidated statement of cash flows for the year ended September 30, 2020.

The Company has expanded its consolidated financial statement disclosures as required by this new standard.

See above for additional disclosures provided as a result of the adoption of ASC 606.

Recently Issued Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued ASU No.

2018-13, Fair Value Measurement:

Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820) (“ASU 2018-13”).

The amendments in ASU 2018-13 provide clarification and modify the disclosure requirements on fair value measurement in Topic 820, Fair Value Measurement.

The amendments in ASU 2018-13 are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted.

As the Company is an emerging growth company and has elected to use the extended transition period of such companies, the Company will not be required to adopt ASU 2018-13 until October 1, 2021.

The Company is currently evaluating the impact of the adoption of this principle on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments—Credit Losses (Topic 326) (“ASU 2016-13”).

The amendments in ASU 2016-13 require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.

The amendments in ASU 2016-13 are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

In November 2019, the FASB issued ASU No.

2019-10 (“ASU 2019-10”), which extends the effective date for adoption of ASU 2016-13 for certain entities.

As a result of the provisions in ASU 2019-10, and as the Company was a smaller reporting company as of November 15, 2019, the Company will not be required to adopt ASU 2016-13 until October 1, 2023.

The Company is currently evaluating the impact of the adoption of this principle on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No.

2016-02, Leases (Topic 842) (“ASU 2016-02”), with amendments in 2018 and 2019.

2016-02 aims to increase transparency and comparability among organizations by requiring recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements.

The amendments in this ASU No.

2016-02 are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted.

In November 2019, the FASB issued ASU No.

2019-10, which extends the effective date for adoption of ASU 2016-02 for certain entities.

In June 2020, the FASB issued ASU No.

2020-05, which further extends the effective date for adoption of ASU 2016-02 for certain entities.

As a result of the provisions in ASU No.

2020-05, and as the Company is an emerging growth company and has elected to use the extended transition period of such companies, the Company would not be required to adopt this ASU No.

2016-02 until October 1, 2022.

The Company has elected to early adopt this ASU No.

2016-02 on October 1, 2020, using the optional modified retrospective transition method, under which the prior period financial statements were not restated for the new guidance.

The Company has elected to apply the package of practical expedients whereby the Company does not reassess whether expired or existing leases contain a lease, does not reassess the lease classification for any expired or existing leases, and does not reassess initial direct costs for any existing leases.

The Company has further elected to account for lease and nonlease components in a lease arrangement as a combined lease component for all classes of leased assets.

The Company has calculated that the adoption of Topic 842 will result in the recognition of the right-of-use assets of $ 9,093 and the lease liabilities of $ 9,760 as of October 1, 2020 on the consolidated balance sheet.

Lease liabilities will be measured as the present value of remaining lease payments, utilizing the Company’s

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

incremental borrowing rate based on the remaining lease term as of the adoption date.

The right-of-use assets will be measured at an amount equal to the lease liabilities adjusted by the amounts of certain assets and liabilities, such as deferred lease obligations and prepaid rent, that were previously recognized on the balance sheet prior to the initial application of Topic 842.

The Company does not expect the adoption of Topic 842 to have an impact on the consolidated statements of operations and comprehensive (loss) income, consolidated statements of changes in equity, and consolidated statements of cash flows.

In March 2020, the FASB issued ASU No.

2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”).

The amendments in ASU 2020-04 provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.

The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022.

An entity may elect to apply the amendments for contract modifications by Topic or Industry Subtopic as of any date from the beginning an interim period that includes or is subsequent to March 12, 2020, or prospectively from the date that the financial statements are available to be issued.

Once elected for a Topic or an Industry Subtopic, the amendments must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic.

The Company may elect to apply ASU 2020-04 as its contracts referenced in London Interbank Offered Rate (“LIBOR”) are impacted by reference rate reform.

The Company is currently evaluating the impact of the adoption of this principle on the Company’s consolidated financial statements.

In August 2020, the FASB issued ASU No.

2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40)—Accounting For Convertible Instruments and Contracts in an Entity's Own Equity (“ASU 2020-06”).

ASU 2020-06 simplifies accounting for convertible instruments by removing major separation models required under current GAAP.

Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features.

ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it.

ASU 2020-06 also simplifies the diluted net income per share calculation in certain areas.

The amendments in ASU 2020-06 are effective for public business entities for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.

As the Company is an emerging growth company and has elected to use the extended transition period of such companies, the Company will not be required to adopt ASU 2020-06 until October 1, 2022.

The Company is currently evaluating the impact of the adoption of this principle on the Company’s consolidated financial statements.

CREDIT RISK AND OTHER CONCENTRATIONS

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During the years ended September 30, 2020, 2019 and 2018, the Company purchased $ 1,788 , $ 3,585 and $ 1,567 , respectively, in residual buyouts using a combination of cash on hand and borrowings on the Company's revolving credit facility.

The acquired residual buyout intangible assets have weighted average estimated amortization periods of seven and two years, respectively.

Merchant Relationships Portfolio Purchase

Effective March 31, 2017, the Company acquired a payment portfolio in an asset acquisition.

The acquisition was completed to expand the Company’s merchant base.

Total purchase consideration was $ 1,156 , including $ 56 in acquisition-related costs, which was funded using a combination of cash on hand and long-term debt.

The purchase consideration of the acquired assets was allocated based on the relative fair values to the merchant relationships intangible asset.

The acquired merchant relationships intangible asset has an estimated amortization period of fifteen years .

The acquired residual buyout intangible assets have weighted average estimated amortization periods of eight , seven and two years , respectively.

Referral Agreements

6 unchanged sentences

2018 Business Combinations

During the year ended September 30, 2017, the Company completed the acquisitions of three businesses, including Fairway Payments, LLC, and two additional unrelated businesses which were considered individually immaterial but collectively material.

Fairway Payments, LLC

Effective August 1, 2017, the Company acquired certain assets and assumed certain liabilities of Fairway Payments, LLC (“Fairway”), a privately-held company engaged in business similar to the Company.

The acquisition was completed to add independent software vendor distribution partners, to increase the Company's presence in the healthcare and non-profit verticals and to provide another vendor for the Company's payment processing services.

Net purchase consideration was $ 39,275 , which includes $ 275 of common units issued to the seller and cash payment which was funded using proceeds from the issuance of long-term debt and from proceeds from the issuance of Class A units in i3 Verticals, LLC.

The goodwill associated with the acquisition is not deductible for tax purposes.

The acquired relationships contracts intangible asset has an estimated amortization period of fifteen years .

The non-compete agreement and trade name have an amortization period of three years .

The weighted-average amortization period for all intangibles acquired is fifteen years .

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

Acquisition-related costs for Fairway were $ 284 and were expensed as incurred.

Fairway had a defined benefit pension plan (“Fairway Defined Benefit Plan”).

The Fairway Defined Benefit Plan was frozen as of the date of acquisition and, per the terms of the agreement, the funding obligation of the plan is the sole responsibility of the selling party.

Accordingly, the Company has not recorded a liability for the Fairway Defined Benefit Plan.

Other 2017 Business Combinations

The Company completed the acquisitions of other businesses to expand the Company’s merchant base and to provide additional service to the Company’s customers.

Total purchase consideration for the other acquisitions was $ 6,396 , including $ 5,175 in cash and revolving credit facility proceeds and $ 1,221 of contingent cash consideration.

The goodwill associated with the acquisitions of the other businesses is tax-deductible.

The weighted-average amortization period for all intangibles acquired is fifteen years .

Acquisition-related costs for the other businesses amounted to approximately $ 184 and were expensed as incurred.

Certain provisions in the purchase agreement for one of the two other businesses provided for additional consideration of up to $ 4,700 , in the aggregate, to be paid based upon the achievement of specified financial performance targets, as defined in the purchase agreement, through December 2019.

The Company determined the acquisition date fair value of the liability for the contingent consideration based on a discounted cash flow analysis.

In each subsequent reporting period, the Company reassesses its current estimates of performance relative to the targets and adjusts the contingent liability to its fair value through earnings.

See additional disclosures in Note 11.

Summary of 2017 Business Combinations

The fair values assigned to certain assets and liabilities assumed, as of the acquisition dates, during the year ended September 30, 2017 were as follows:

Fairway Other Total

Accounts receivable $ — $ 30 $ 30

Inventories — 15 15

Prepaid expenses and other current assets 226 — 226

Property and equipment 5 57 62

Acquired merchant relationships 19,200 2,160 21,360

Non-compete agreements 40 40 80

Trade name 500 — 500

Goodwill 19,309 4,152 23,461

Total assets acquired 39,280 6,454 45,734

Deferred rent 5 — 5

Deferred revenue, current — 58 58

Net assets acquired $ 39,275 $ 6,396 $ 45,671

2018 Business Combinations

During the year ended September 30, 2018, the Company completed the acquisitions of businesses, including San Diego Cash Register Company, Inc., and additional unrelated businesses which were considered individually immaterial but collectively material.

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

Purchase of San Diego Cash Register Company, Inc.

12 unchanged sentences

The Company determined the acquisition date fair value of the liability for the contingent consideration based on a discounted cash flow analysis.

In each subsequent reporting period the Company reassesses its current estimates of performance relative to the targets and adjusts the contingent liability to its fair value through earnings.

In each subsequent reporting

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

period the Company reassesses its current estimates of performance relative to the targets and adjusts the contingent liability to its fair value through earnings.

See additional disclosures in Note 11.

3 unchanged sentences

The goodwill associated with the acquisitions of the other businesses is deductible for tax purposes.

The acquired merchant relationships intangible assets have estimated amortization periods of between twelve and 15 years.

The acquired merchant relationships intangible assets have estimated amortization periods of between twelve and fifteen years .

The exclusivity agreement acquired has an estimated amortization period of ten years .

40 unchanged sentences

The total purchase consideration was $ 56,053 , including $ 52,492 in cash consideration, funded by proceeds from the Company's revolving credit facility, $ 3,336 of contingent consideration and $ 225 of restricted shares of Class A common stock in i3 Verticals.

Certain of the purchase price allocations assigned for this acquisition are preliminary.

The goodwill associated with the acquisition is not deductible for tax purposes.

8 unchanged sentences

operating losses and Section 163(j) carryforwards and deferred tax liabilities related to intangibles, which are presented as a total net deferred tax asset as of September 30, 2020.

Acquisition-related costs for Pace amounted to approximately $ 444 and were expensed as incurred.

Acquisition-related costs for Pace amounted to approximately $ 507 ($ 444 during fiscal year 2019) and were expensed as incurred.

Certain provisions in the merger agreement provide for additional consideration of up to $ 20,000 in the aggregate, to be paid based upon achievement of specified financial performance targets, as defined in the purchase agreement, in the 24 months from January 1, 2020 through December 31, 2021.

5 unchanged sentences

Total purchase consideration was $ 98,887 , including $ 89,191 in revolving credit facility proceeds and $ 9,696 of contingent consideration.

Certain of the purchase price allocations assigned for these acquisitions are preliminary.

For some of these business acquired, the goodwill associated with the acquisitions is deductible for tax purposes, and goodwill associated with the acquisitions of others of the businesses is not deductible for tax purposes.

For some of these businesses acquired, the goodwill associated with the acquisitions is deductible for tax purposes, and goodwill associated with the acquisitions of others of the businesses is not deductible for tax purposes.

The acquired merchant relationships intangible assets have estimated amortization periods of between thirteen and twenty years .

2 unchanged sentences

The acquired capitalized software has an estimated amortization period of six years .

Acquisition-related costs for these businesses amounted to approximately $ 1,179 and were expensed as incurred.

Acquisition-related costs for these businesses amounted to approximately $ 1,299 ($ 1,179 during fiscal year 2019) and were expensed as incurred.

Certain provisions in the purchase agreements provide for additional consideration of up to $ 34,900 , in the aggregate, to be paid based upon the achievement of specified financial performance targets, as defined in the purchase agreements, through no later than September 2021.

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Summary of 2019 Business Combinations

The fair values assigned to certain assets and liabilities assumed, as of the acquisition dates, during the year ended September 30, 2019 were as follows:

The fair values assigned to certain assets and liabilities assumed, as of the acquisition dates, were as follows:

Pace Other Total

2 unchanged sentences

Settlement assets — 18 18

Related party receivable — — —

Inventories 45 61 106

3 unchanged sentences

Acquired merchant relationships 13,400 34,480 47,880

Exclusivity Agreements — — —

Non-compete agreements 60 150 210

9 unchanged sentences

Net assets acquired $ 56,053 $ 98,887 $ 154,940

During the year ended September 30, 2020, the Company finalized the purchase price allocations for the 2019 business combinations, which resulted in additional adjustments to increase current assets by $ 153 , increase other assets by $ 933 , decrease liabilities by $ 258 and decrease goodwill by $ 1,227 .

The table above reflects the adjusted amounts.

2020 Business Combinations

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

Two expand the Company's geographic reach and software capabilities in the public sector vertical.

The other adds text-to-pay capabilities and other software solutions in the Company's non-profit vertical.

Total purchase consideration was $ 32,633 , including $ 27,885 in revolving credit facility proceeds and $ 4,748 of contingent consideration.

Certain of the purchase price allocations assigned for these acquisitions are preliminary.

The acquired merchant relationships intangible assets have estimated amortization periods of between fifteen and eighteen years .

The non-compete agreement and trade names both have weighted-average amortization periods three years .

The weighted-average amortization period for all intangibles acquired is sixteen years .

The acquired capitalized software has an estimated amortization period of seven years .

Acquisition-related costs for these businesses amounted to approximately $ 547 and were expensed as incurred.

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

Certain provisions in the purchase agreements provide for additional consideration of up to $ 18,600 , in the aggregate, to be paid based upon the achievement of specified financial performance targets, as defined in the purchase agreements, through no later than September 2022.

The Company determined the acquisition date fair values of the liabilities for the contingent consideration based on probability forecasts and discounted cash flow analyses.

In each subsequent reporting period, the Company will reassess its current estimates of performance relative to the targets and adjust the contingent liabilities to their fair values through earnings.

See additional disclosures in Note 11.

Summary of 2020 Business Combinations

The fair values assigned to certain assets and liabilities assumed, as of the acquisition dates, during the year ended September 30, 2020 were as follows:

Cash and cash equivalents $ 313

Accounts receivable 709

Prepaid expenses and other current assets 54

Property and equipment 122

Capitalized software 1,970

Acquired merchant relationships 11,900

Non-compete agreements 90

Trade name 300

Goodwill 19,948

Other assets 17

Total assets acquired 35,423

Accounts payable 168

Accrued expenses and other current liabilities 623

Deferred revenue, current 200

Other long-term liabilities 1,799

Net assets acquired $ 32,633

Pro Forma Results of Operations for 2020 Business Combinations

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$ 156,036 $ 383,546

Net income (loss)

Net (loss) income $ ( 1,170 ) $ 472

__________________________

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 for a description of the recently adopted accounting pronouncement.

i3 VERTICALS, Inc.

4 unchanged sentences

Estimated Useful Life 2020 2019

Computer equipment and software 2 to 7 years $ 1,990 $ 636

Computer equipment and software (1)

$ 2,382 $ 1,990

Furniture and fixtures 2 to 7 years

5 unchanged sentences

Property and equipment, net $ 5,339 $ 5,026

____________________

Includes computer software of $ 694 and $ 674 as of September 30, 2020 and 2019, respectively.

Depreciation expense for the years ended September 30, 2020, 2019 and 2018 amounted to $ 1,825 , $ 1,195 and $ 802 , respectively.

3 unchanged sentences

Software development costs 1 to 7 years

$ 21,485 $ 20,347

Development in progress 2,638 833

3 unchanged sentences

Amortization expense for capitalized software development costs amounted to $ 3,978 , $ 2,977 and $ 1,696 during the years ended September 30, 2020, 2019 and 2018, respectively.

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

GOODWILL AND INTANGIBLE ASSETS

2 unchanged sentences

Balance at September 30, 2018 (net of accumulated impairment losses of $ 11,458 , $ 0 and $ 0 , respectively)

Goodwill attributable to acquisition activity during the year ended September 30, 2018 20,493 4,944 — 25,437

$ 70,936 $ 13,018 $ — $ 83,954

Goodwill attributable to preliminary purchase price adjustments and acquisition activity during the year ended September 30, 2019 46,398 37,932 — 84,330

Balance at September 30, 2019 117,334 50,950 — 168,284

Goodwill attributable to acquisition activity during the year ended September 30, 2019 38,806 45,524 — 84,330

Goodwill reassigned in segment realignment (1)

( 419 ) 419 — —

Goodwill attributable to preliminary purchase price adjustments and acquisition activity during the year ended September 30, 2020 ( 933 ) 19,654 — 18,721

Balance at September 30, 2020 $ 115,982 $ 71,023 $ — $ 187,005

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

____________________

Represents the reallocation of goodwill related to a component which was realigned from the Proprietary Software and Payments segment to the Merchant Services segment as of July 1, 2020.

See Note 16 for additional information.

Intangible assets consisted of the following as of September 30, 2020:

4 unchanged sentences

Non-compete agreements 1,700 ( 851 ) 849 3 to 5 years – straight-line

Website development costs 77 ( 22 ) 55 3 years – straight-line

Website and brand development costs 215 ( 65 ) 150 3 to 4 years – straight-line

Trade names 3,880 ( 1,538 ) 2,342 3 to 7 years – straight-line

5 unchanged sentences

Total identifiable intangible assets $ 166,681 $ ( 57,448 ) $ 109,233

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

Intangible assets consisted of the following as of September 30, 2019:

1 unchanged sentence

Finite-lived intangible assets:

Merchant relationships $ 94,791 $ ( 34,086 ) $ 60,705 15 years – accelerated or straight-line

Merchant relationships $ 142,671 $ ( 43,579 ) $ 99,092 12 to 20 years – accelerated or straight-line

Non-compete agreements 1,770 ( 619 ) 1,151 2 to 5 years – straight-line

1 unchanged sentence

Trade names 4,292 ( 1,307 ) 2,985 3 to 7 years – straight-line

Residual buyouts 2,043 ( 773 ) 1,270 2 years – straight-line

Residual buyouts 5,346 ( 1,882 ) 3,464 2 to 8 years – straight-line

Referral and exclusivity agreements 900 ( 264 ) 636 5 to 10 years – straight-line

4 unchanged sentences

Amortization expense for intangible assets amounted to $ 12,414 , $ 12,394 and $ 9,341 during the years ended September 30, 2020, 2019 and 2018, respectively.

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

Based on gross carrying amounts at September 30, 2020, the Company's estimate of future amortization expense for intangible assets are presented in this table as follows for each fiscal year ending September 30:

1 unchanged sentence

Thereafter 60,421

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

ACCRUED EXPENSES AND OTHER LIABILITIES

3 unchanged sentences

Accrued contingent consideration — current portion 10,062 10,223

Escrow liabilities 4,363 1,414

Tax receivable agreement liability — current portion — 24

Accrued tax liabilities 50 836

Customer deposits 1,828 1,968

6 unchanged sentences

Total other long-term liabilities $ 6,140 $ 9,124

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

LONG-TERM DEBT, NET

A summary of long-term debt, net as of September 30, 2020 and September 30, 2019 is as follows:

Term loans to bank under the 2017 Senior Secured Credit Facility October 30, 2022 $ — $ 35,000

Revolving lines of credit to banks under the 2017 Senior Secured Credit Facility October 30, 2022 — 3,250

Revolving lines of credit to banks under the Senior Secured Credit Facility May 9, 2024 $ — $ 141,144

1.0 % Exchangeable Senior Notes due 2025

February 15, 2025 95,325 —

Debt issuance costs, net ( 4,567 ) ( 1,846 )

Total long-term debt, net of issuance costs $ 90,758 $ 139,298

Less current portion of long-term debt — ( 5,000 )

Long-term debt, less current portion $ 139,298 $ 31,776

2020 Exchangeable Notes Offering

On February 18, 2020, i3 Verticals, LLC issued $ 138,000 aggregate principal amount of 1.0 % Exchangeable Senior Notes due 2025 (the “Exchangeable Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”).

The Company received approximately $ 132,762 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.

The Exchangeable Notes are senior secured notes and are guaranteed solely by the Company.

The Exchangeable Notes bear interest at a fixed rate of 1.00 % per year, payable semiannually in arrears on February

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

15 and August 15 of each year, beginning on August 15, 2020.

The Exchangeable Notes will mature on February 15, 2025, unless converted or repurchased at an earlier date.

i3 Verticals, LLC issued the Exchangeable Notes pursuant to an Indenture, dated as of February 18, 2020 (the “Indenture”), among i3 Verticals, LLC, the Company and U.S.

Bank National Association, as trustee.

Prior to August 15, 2024, the Exchangeable Notes are exchangeable only upon satisfaction of certain conditions and during certain periods described in the Indenture, and thereafter, the Exchangeable Notes are exchangeable at any time until the close of business on the second scheduled trading day immediately preceding the maturity date.

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 exchange rate is initially 24.4666 shares of Class A common stock per $1,000 principal amount of Exchangeable Notes (equivalent to an initial exchange price of approximately $ 40.87 per share of Class A common stock).

The exchange rate is subject to adjustment in certain circumstances.

In addition, following certain corporate events that occur prior to the maturity date or i3 Verticals, LLC’s delivery of a notice of redemption, i3 Verticals, LLC will increase, in certain circumstances, the exchange rate for a holder who elects to exchange its Exchangeable Notes in connection with such a corporate event or notice of redemption, as the case may be.

If the Company or i3 Verticals, LLC undergoes a fundamental change, holders may require i3 Verticals, LLC to repurchase all or part of their Exchangeable Notes at a repurchase price equal to 100 % of the principal amount of the Exchangeable Notes to be repurchased, plus accrued and unpaid interest to, but not including, the fundamental change repurchase date.

As of September 30, 2020, none of the conditions permitting the holders of the Exchangeable Notes to early convert have been met.

i3 Verticals, LLC may not redeem the Exchangeable Notes prior to February 20, 2023.

On or after February 20, 2023, and prior to the 47th scheduled trading day immediately preceding the maturity date, if the last reported sale price per share of Class A common stock has been at least 130 % of the exchange price for the Exchangeable Notes for at least 20 trading days (whether or not consecutive), i3 Verticals, LLC may redeem all or any portion of the Exchangeable Notes at a cash redemption price equal to 100 % of the principal amount of the Exchangeable Notes to be redeemed plus accrued and unpaid interest on such note to, but not including, the redemption date.

The Exchangeable Notes are general senior unsecured obligations of i3 Verticals, LLC and the guarantee is the Company’s senior unsecured obligation and rank senior in right of payment to all of i3 Verticals, LLC’s and the Company’s future indebtedness that is expressly subordinated in right of payment to the Exchangeable Notes or the guarantee, as applicable.

The Exchangeable Notes and the guarantee rank equally in right of payment with all of i3 Verticals, LLC’s and the Company’s existing and future unsecured indebtedness that is not so expressly subordinated in the right of payment to the Exchangeable Notes or the guarantee, as applicable.

The Exchangeable Notes and the guarantee are effectively subordinated to any of the Companies’ existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness (including obligations under the credit agreement governing the Senior Secured Credit Facility, defined below).

The Exchangeable Notes and the guarantee will be structurally subordinated to all indebtedness and other liabilities and obligations (including the debt and trade payables) of the Company’s subsidiaries, other than i3 Verticals, LLC.

In accounting for the issuance of the Exchangeable Notes, the Company separated the Exchangeable Notes into liability and equity components.

The carrying amount of the liability component before the allocation of any transaction costs was calculated by measuring the fair value of a similar liability that does not have an associated exchangeable feature.

The carrying amount of the equity component (before the allocation of any transaction costs), representing the conversion option, which does not require separate accounting as a derivative as it meets a scope exception for certain contracts involving an entity's own equity, was determined by deducting the fair value of the liability component from the par value of the Exchangeable Notes.

The difference between the principal amount of the Exchangeable Notes and the liability component represents the debt discount, which is recorded as a direct deduction from the related debt liability in the consolidated balance sheet and accreted over

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

the period from the date of issuance to the contractual maturity date, resulting in the recognition of non-cash interest expense.

The equity component of the Exchangeable Notes of approximately $ 28,662 is included in additional paid-in capital in the consolidated balance sheet and is not remeasured as longs as it continues to meet the conditions for equity classification.

Transaction costs were allocated to the liability and equity components in the same proportion as the allocation of the proceeds.

Transaction costs attributable to the liability component were recorded as debt issuance costs in the consolidated balance sheet and are amortized to interest expense using the effective interest method over the term of the Exchangeable Notes, and transaction costs attributable to the equity component were netted with the equity component in stockholders' equity.

The Company incurred third-party issuance costs totaling $ 5,238 , in connection with the issuance of the Exchangeable Notes.

The Company capitalized $ 4,150 of debt issuance costs in connection with the Exchangeable Notes and allocated $ 1,088 of the third-party issuance costs to equity.

Non-cash interest expense, including amortization of debt issuance costs, related to the Exchangeable Notes for the year ended September 30, 2020 was $ 365 , respectively.

The Company also wrote off a portion of the debt issuance costs in connection with the repurchase transactions in April and September 2020, as described below.

Total unamortized debt issuance costs related to the Exchangeable Notes were $ 3,193 as of September 30, 2020.

The estimated fair value of the Exchangeable Notes was $ 102,064 as of September 30, 2020.

The estimated fair value of the Exchangeable Notes was determined through consideration of quoted market prices for similar instruments.

The fair value is classified as Level 2, as defined in Note 11.

The Company can choose to purchase its Exchangeable Notes on the open market.

In April and September 2020, the Company paid $ 17,414 in aggregate to repurchase $ 21,000 in aggregate principal amount of the Exchangeable Notes and to repay approximately $ 24 in accrued interest on the repurchased portion of the Exchangeable Notes.

The Company recorded a loss on retirement of debt of $ 2,297 due to the carrying value exceeding the fair value of the repurchased portion of the Exchangeable Notes at the dates of repurchases.

The Company wrote off $ 592 of debt issuance costs in connection with the repurchase transactions.

Exchangeable Note Hedge Transactions

On February 12, 2020, concurrently with the pricing of the Exchangeable Notes, and on February 13, 2020, concurrently with the exercise by the initial purchasers of their right to purchase additional Exchangeable Notes, i3 Verticals, LLC entered into exchangeable note hedge transactions with respect to Class A common stock (the “Note Hedge Transactions”) with certain financial institutions (collectively, the “Counterparties”).

The Note Hedge Transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Exchangeable Notes, the same number of shares of Class A common stock that initially underlie the Exchangeable Notes in the aggregate and are exercisable upon exchange of the Exchangeable Notes.

The Note Hedge Transactions are intended to reduce potential dilution to the Class A common stock upon any exchange of the Exchangeable Notes.

The Note Hedge Transactions will expire upon the maturity of the Exchangeable Notes, if not earlier exercised.

The Note Hedge Transactions are separate transactions, entered into by i3 Verticals, LLC with the Counterparties, and are not part of the terms of the Exchangeable Notes.

Holders of the Exchangeable Notes will not have any rights with respect to the Note Hedge Transactions.

i3 Verticals, LLC used approximately $ 28,676 of the net proceeds from the offering of the Exchangeable Notes (net of the premiums received for the warrant transactions described below) to pay the cost of the Note Hedge Transactions.

The Note Hedge Transactions do not require separate accounting as a derivative as they meet a scope exception for certain contracts involving an entity's own equity.

The premiums paid for the Note Hedge Transactions have been included as a net reduction to additional paid-in capital within stockholders' equity.

Warrant Transactions

On February 12, 2020, concurrently with the pricing of the Exchangeable Notes, and on February 13, 2020, concurrently with the exercise by the initial purchasers of their right to purchase additional Exchangeable Notes, the Company entered into warrant transactions to sell to the Counterparties warrants (the “Warrants”) to acquire,

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

subject to customary adjustments, up to initially 3,376,391 shares of Class A common stock in the aggregate at an initial exercise price of $ 62.88 per share.

The Company offered and sold the Warrants in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.

The Warrants will expire over a period beginning on May 15, 2025.

The Warrants are separate transactions, entered into by the Company with the Counterparties, and are not part of the terms of the Exchangeable Notes.

Holders of the Exchangeable Notes will not have any rights with respect to the Warrants.

The Company received approximately $ 14,669 from the offering and sale of the Warrants.

The Warrants do not require separate accounting as a derivative as they meet a scope exception for certain contracts involving an entity's own equity.

The premiums paid for the Warrants have been included as a net increase to additional paid-in capital within stockholders' equity.

Senior Secured Credit Facility

2 unchanged sentences

In connection with the replacement of the 2017 Senior Secured Credit Facility, the Company recorded a debt extinguishment charge of $ 152 for the write-off of deferred financing costs, which was recorded in interest expense in the consolidated statements of operations.

The Senior Secured Credit Facility consists of a $ 300,000 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 $ 50,000 in the aggregate (subject to the receipt of additional commitments for any such incremental loan amounts).

The Senior Secured Credit Facility, as amended on February 18, 2020 in connection with our offering of Exchangeable Notes, consists of a $ 275,000 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 $ 50,000 in the aggregate (subject to the receipt of additional commitments for any such incremental loan amounts).

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 September 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 September 30, 2020), in each case depending upon the consolidated total leverage ratio, as defined in the agreement.

1 unchanged sentence

Additionally, the Senior Secured Credit Facility requires the Company to pay unused commitment fees of 0.15 % to 0.30 % ( 0.30 % as of September 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 Senior Secured Credit Facility requires maintenance of certain financial ratios on a quarterly basis as follows:

(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.

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

As of September 30, 2019, there was $ 158,856 available for borrowing under the revolving credit facility.

As of September 30, 2020, there was $ 275,000 available for borrowing under the revolving credit facility, subject to the financial covenants.

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

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In addition, the Senior Secured Credit Facility restricts the Company's ability to make dividends or other distributions to the holders of the Company's equity.

The Company is permitted to (i) make cash distributions to the holders of the Company's equity in order to pay taxes incurred by owners of equity in i3 Verticals, LLC, by reason of such ownership, (ii) move intercompany cash between subsidiaries that are joined to the Senior Secured Credit Facility, (iii) repurchase equity from employees, directors, officers or consultants in an aggregate amount not to exceed $ 3,000 per year, (iv) make certain payments in connection with the Tax Receivable Agreement, and (v) make other dividends or distributions in an aggregate amount not to exceed 5% of

i3 VERTICALS, Inc.

1 unchanged sentence

(in thousands, except warrant, unit, share and per share amounts)

the net cash proceeds received from any additional common equity issuance.

aggregate amount not to exceed $ 3,000 per year, (iv) make certain payments in connection with the Tax Receivable Agreement, and (v) make other dividends or distributions in an aggregate amount not to exceed 5 % of the net cash proceeds received from any additional common equity issuance.

The Company is also permitted to make non-cash dividends in the form of additional equity issuances.

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In connection with the issuance of the Mezzanine Notes, the Company granted the Mezzanine Warrants to purchase 1,423,688 common units in i3 Verticals, LLC.

The Mezzanine Warrants were determined to have no material value as of the grant date.

The intrinsic value of the Mezzanine Warrants was $ 767 as of September 30, 2017, and they had an exercise price of $ 0.01 .

On June 25, 2018, in conjunction with the Reorganization

The Mezzanine Warrants were determined to have no

i3 VERTICALS, Inc.

1 unchanged sentence

(in thousands, except warrant, unit, share and per share amounts)

Transactions described in Note 1, all existing Mezzanine Warrants were exercised for common units in i3 Verticals, LLC.

material value as of the grant date.

The intrinsic value of the Mezzanine Warrants was $ 767 as of September 30, 2017, and they had an exercise price of $ 0.01 .

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

The intrinsic value of the Mezzanine Warrants at that date was $ 9,241 .

15 unchanged sentences

Debt issuance costs

During the years ended September 30, 2019 and 2018, the Company incurred debt issuance costs totaling $ 1,245 and $ 1,170 , respectively, in connection with the issuance of long-term debt.

The debt issuance costs are being amortized over the related term of the debt using the straight-line method, which is not materially different than the effective interest rate method, and are presented net against long-term debt in the consolidated balance sheets.

The amortization of deferred debt issuance costs is included in interest expense and amounted to approximately $ 721 , $ 1,072 and $ 453 during the years ended September 30, 2019, 2018 and 2017, respectively.

During the year ended September 30, 2020, the Company capitalized $ 4,212 in connection with the issuance of the Exchangeable Notes, the Note Hedge Transactions and the Warrants and in connection with entering into the second amendment to the Senior Secured Credit Facility.

During the year ended September 30, 2019, the Company incurred debt issuance costs totaling $ 1,245 in connection with the issuance of long-term debt.

The debt issuance costs are being amortized over the related term of the debt using the effective interest rate method, and are presented net against long-term debt in the consolidated balance sheets.

The amortization of debt issuance costs is included in interest expense and amounted to approximately $ 758 , $ 721 and $ 1,072 during the years ended September 30, 2020, 2019 and 2018, respectively.

i3 Verticals, Inc.

1 unchanged sentence

i3 Verticals, LLC's members, including the Company, are liable for federal, state and local income taxes based on their share of i3 Verticals, LLC's pass-through taxable income.

i3 Verticals, LLC is not a taxable entity for federal income tax purposes, but is subject to and reports entity level tax in both Tennessee and Texas.

In addition, certain subsidiaries of i3 Verticals, LLC are corporations that are subject to state and federal income taxes.

i3 Verticals, LLC is not a taxable entity for federal income tax

i3 VERTICALS, Inc.

1 unchanged sentence

(in thousands, except warrant, unit, share and per share amounts)

As of September 30, 2019 and 2018, the Company had accrued no interest and no penalties related to uncertain tax positions.

It is the Company’s policy to recognize interest and/or penalties related to income tax matters in income tax expense.

purposes, but is subject to and reports entity level tax in both Tennessee and Texas.

In addition, certain subsidiaries of i3 Verticals, LLC are corporations that are subject to state and federal income taxes.

Year ended September 30,

2020 2019 2018

Federal tax expense $ 220 $ 668 $ —

Federal tax (benefit) expense $ ( 34 ) $ 220 $ 668

State tax expense 446 189 351

Federal tax benefit ( 3,018 ) ( 487 ) ( 685 )

State tax expense (benefit) ( 99 ) 3 56

Income tax expense $ ( 177 ) $ 337 $ 177

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

State tax (benefit) expense ( 189 ) ( 99 ) 3

Income tax (benefit) expense $ ( 2,795 ) $ ( 177 ) $ 337

A reconciliation of income tax expense from operations computed at the U.S.

7 unchanged sentences

State and local income taxes, net of federal benefit 244 ( 6.5 ) % 104 26.9 % 295 ( 6.4 ) %

Nondeductible expenses 393 101.8 % 398 ( 8.6 ) % 67 6.2 %

Nondeductible expenses and other permanent items 496 ( 13.1 ) % 582 150.8 % 66 ( 1.4 ) %

Revaluation of debt and other debt transaction differences 222 ( 5.9 ) % ( 189 ) ( 49.0 ) % 332 ( 7.2 ) %

Federal tax rate change — — % — — % ( 471 ) 10.2 %

Change in liability for uncertain tax positions 108 ( 2.9 ) % — — % — — %

Federal tax credits ( 431 ) 11.4 % — — % — — %

Other ( 33 ) 0.9 % 1 0.3 % ( 5 ) 0.1 %

Income tax (benefit) expense $ ( 2,795 ) 74.1 % $ ( 177 ) ( 45.9 ) % $ 337 ( 7.3 ) %

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

Deferred income taxes are provided for the temporary differences between the financial reporting basis and tax basis of the Company’s assets and liabilities.

1 unchanged sentence

September 30,

2019 2018 (revised)

Deferred tax assets:

Investment in partnership $ 47,897 $ 40,880

$ 40,880 $ 14,443

Stock-based compensation 1187 811

Tax Receivable Agreement — 193

Deferred revenue 525 564

2 unchanged sentences

Section 163j carryforward 2,498 2,006

Federal tax credits 901 —

Gross deferred tax assets 64,231 50,773

Valuation allowance ( 20,230 ) ( 16,609 )

( 16,609 ) ( 15,517 )

Deferred tax liabilities:

2 unchanged sentences

Net deferred tax asset $ 34,543 $ 27,622

_________________

During the preparation of the Company’s 2019 financial statements, management determined that immaterial adjustments were necessary to correct certain 2018 amounts in the table above as follows.

The deferred tax asset related to the Company’s investment in partnership was decreased by $ 7,515 with an equal decrease in the valuation allowance.

Additionally, the amount associated with net operating loss carryforwards was increased by $ 1,672 with a corresponding increase in the valuation allowance.

These adjustments had no effect on the Company’s consolidated financial position, results of operations or cash flows for any period presented herein.

Federal net operating loss carryforwards as of September 30, 2020 were $ 26,984 and federal tax credits were $ 901 , resulting in a deferred tax benefit of $ 6,568 .

The federal net operating loss carryforwards will begin to expire in 2034 and the federal tax credits will begin to expire in 2033.

The use of federal net operating losses and credits are limited to the future taxable income of separate legal entities.

As a result, a valuation allowance of $ 388 has been provided for certain federal deferred tax assets, an increase of $ 383 during the year ended September 30, 2020.

State net operating loss carryforwards as of September 30, 2020 totaled $ 81,827 , resulting in a deferred tax benefit of $ 5,302 .

The state net operating loss carryforwards will begin to expire in 2024.

The use of certain state net operating losses are limited to future taxable earnings of separate legal entities.

As a result, a valuation allowance of $ 3,571 has been provided for state loss carryforwards, an increase of $ 1,094 during the year ended September 30, 2020.

The Company also considered a valuation allowance on its $ 47,897 outside basis of investment in i3 Verticals, LLC deferred tax benefit as of September 30, 2020.

The Company has recorded a valuation allowance of $ 16,271 against the portion of the deferred tax benefit that is capital in nature, resulting in an increase in valuation allowance of $ 2,143 during the year ended September 30, 2020.

Management believes that it is more likely than not that the results of operations will generate sufficient taxable income to realize the deferred tax assets after giving consideration to the valuation allowance.

i3 VERTICALS, Inc.

1 unchanged sentence

(in thousands, except warrant, unit, share and per share amounts)

Federal and state net operating loss carryforwards for the Company were $ 70,970 as of September 30, 2019 and will begin to expire in 2024.

The net operating loss carryforwards are included in Other assets within the Consolidated Balance Sheets.

The use of these federal and state net operating losses is limited to the future taxable income of separate legal entities.

Based on expectations of future taxable income, management believes that it is more likely than not that the results of operations for certain separate legal entities will not generate sufficient taxable income to realize portions of these net operating loss benefits.

As a result, a valuation allowance has been provided for the loss carryforwards for these specific legal entities.

The components of the Company’s liability for uncertain tax benefits are as follows:

Gross unrecognized tax benefits as of September 30, 2019 $ —

Increase in current year tax positions 108

Increase in prior year tax positions 76

Gross unrecognized tax benefits as of September 30, 2020 $ 184

As of September 30, 2020 and 2019, the Company had accrued interest of $ 7 and $ 0 , respectively, and no accrued penalties in either period related to uncertain tax positions.

It is the Company’s policy to recognize interest and/or penalties related to income tax matters in income tax expense.

The Company is no longer subject to U.S.

federal, state, or local examinations by tax authorities for years before 2016.

As of September 30, 2020 and 2019, there were unrecognized tax benefits of $ 184 and $ 0 that if recognized would affect the annual effective tax rate.

On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law.

16 unchanged sentences

During the year ended September 30, 2019, the Company acquired an aggregate of 4,292,169 common units of i3 Verticals, LLC in connection with the redemption of common units, which resulted in an increase in the tax basis of our investment in i3 Verticals, LLC subject to the provisions of the Tax Receivable Agreement.

Primarily as a result of these exchanges, during the year ended September 30, 2019, the Company recognized an increase to its net deferred tax assets in the amount of $ 25,776 , and corresponding Tax Receivable Agreement liabilities of $ 22,413 , representing 85 % of the tax benefits due to the Continuing Equity Owners.

The results of these transactions brought the deferred tax asset and corresponding Tax Receivable Agreement liability balances to $ 26,736 and $ 23,229 , respectively, as of September 30, 2019.

i3 VERTICALS, Inc.

1 unchanged sentence

(in thousands, except warrant, unit, share and per share amounts)

The results of these transactions brought the deferred tax asset and corresponding Tax Receivable Agreement liability balances to $ 26,736 and $ 23,229 , respectively, as of September 30, 2019.

During the year ended September 30, 2020, the Company acquired an aggregate of 1,021,016 common units of i3 Verticals, LLC in connection with the redemption of common units, which resulted in an increase in the tax basis of our investment in i3 Verticals, LLC subject to the provisions of the Tax Receivable Agreement.

As a result of these exchanges, during the year ended September 30, 2020, the Company recognized an increase to its net deferred tax assets in the amount of $ 6,307 , and corresponding Tax Receivable Agreement liabilities of $ 5,361 , representing 85 % of the tax benefits due to the Continuing Equity Owners.

The deferred tax asset and corresponding Tax Receivable Agreement liability balances were $ 31,626 and $ 27,565 , respectively, as of September 30, 2020.

Payments to the Continuing Equity Owners related to exchanges through September 30, 2020 will range from $ 0 to $ 2,460 per year and are expected to be paid over the next 25 years.

12 unchanged sentences

Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable in active exchange markets.

The carrying value of the Company’s financial instruments, including cash and cash equivalents, restricted cash, settlement assets and obligations, accounts receivable, other assets, accounts payable, and accrued expenses, approximated their fair values as of September 30, 2019 and 2018, because of the relatively short maturity dates on these instruments.

The carrying value of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, other assets, accounts payable, and accrued expenses, approximated their fair values as of September 30, 2020 and 2019, because of the relatively short maturity dates on these instruments.

The carrying amount of debt approximates fair value as of September 30, 2020 and 2019, because interest rates on these instruments approximate market interest rates.

2 unchanged sentences

(in thousands, except warrant, unit, share and per share amounts)

The Company has no Level 1 or Level 2 financial instruments.

The Company has no Level 1 or Level 2 financial instruments measured at fair value on a recurring basis.

The following tables present the changes in the Company's Level 3 financial instruments that are measured at fair value on a recurring basis.

Mezzanine Warrants Accrued Contingent Consideration

Accrued Contingent Consideration

Balance at September 30, 2018 $ 5,999

Exercise of warrant liabilities into Common Units 8,487 —

Change in the fair value of warrant liabilities, included in Other expenses ( 9,254 ) —

Contingent consideration accrued at time of business combination 13,032

6 unchanged sentences

Balance at September 30, 2020 $ 13,034

The fair value of contingent consideration obligations includes inputs not observable in the market and thus represents a Level 3 measurement.

The amount to be paid under these obligations is contingent upon the achievement of certain growth metrics related to the financial performance of the entities subsequent to acquisition.

The fair value of material contingent consideration included in an acquisition is calculated using a Monte Carlo simulation.

The contingent consideration is revalued each period until it is settled.

Management reviews the historical and projected performance of each acquisition with contingent consideration and uses an income probability method to revalue the contingent consideration.

The revaluation requires management to make certain assumptions and represent management's best estimate at the valuation date.

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.

The Company develops the projected future financial results based on an analysis of historical results, market conditions, and the expected impact of anticipated changes in the Company's overall business and/or product strategies.

Approximately $ 10,062 and $ 10,223 of contingent consideration was recorded in accrued expenses and other current liabilities as of September 30, 2020 and 2019, respectively.

Approximately $ 2,972 and $ 8,003 of contingent consideration was recorded in other long-term liabilities as of September 30, 2020 and 2019, respectively.

Disclosure of Fair Values

The Company's financial instruments that are not remeasured at fair value include the Exchangeable Notes (see Note 9).

The Company estimates the fair value of the Exchangeable Notes through consideration of quoted market prices of similar instruments, classified as Level 2 as described above.

The estimated fair value of the Exchangeable Notes was $ 102,064 as of September 30, 2020.

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

EQUITY-BASED COMPENSATION

6 unchanged sentences

Amounts are included in general and administrative expense on the consolidated statements of operations.

Income tax benefits of 160 were recognized related to equity-based compensation during the year ended September 30, 2019.

No income tax benefits were recognized related to equity-based compensation during the years ended September 30, 2018, and 2017.

Income tax benefits of $ 604 and $ 160 were recognized related to equity-based compensation during the years ended September 30, 2020 and 2019, respectively.

No income tax benefits were recognized related to equity-based compensation during the year ended September 30, 2018.

TRA Non-Participation Compensatory Shares

4 unchanged sentences

The Company recognized stock-based compensation expense of $ 741 as part of the Reorganization Transactions as a result of this conversion.

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

Stock Options

2 unchanged sentences

As of September 30, 2020, there were 205,151 options available to grant under the 2018 Plan.

In connection with the IPO, the Company granted 2,045,000 stock options to its directors and certain employees.

The stock options were granted with an exercise price of $ 13.00 per share and vest ratably over a three-year period.

The fair value of stock option awards during the year ended September 30, 2019 and from June 20, 2018 through September 30, 2018 was determined on the grant date using the Black-Scholes valuation model based on the following weighted-average assumptions:

The fair value of stock option awards during the years ended September 30, 2020, and 2019, and from June 20, 2018 through September 30, 2018 was determined on the grant date using the Black-Scholes valuation model based on the following weighted-average assumptions:

September 30, 2020 September 30, 2019

8 unchanged sentences

The Company has assumed a dividend yield of zero as management has no plans to declare dividends in the foreseeable future.

Expected term represents the estimated period of time until an award is exercised and was determined using the simplified method.

Expected term represents the estimated period of time until an award is exercised and was determined using the simplified method as details of employee exercise behavior are limited due to limited historical data.

The risk-free rate is an interpolation of yields on U.S.

Treasury securities with maturities equivalent to the expected term.

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

A summary of stock option activity for the year ended September 30, 2020 is as follows:

11 unchanged sentences

The total fair value of stock options that vested during the year ended September 30, 2020 was $ 8,100 .

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

STOCKHOLDERS' / MEMBERS' EQUITY AND REDEEMABLE CLASS A UNITS

14 unchanged sentences

As a result, the Company consolidates i3 Verticals, LLC’s financial results and reports a non-controlling interest related to the economic interest of i3 Verticals, LLC held by the Continuing Equity Owners.

The Amended and Restated Certificate of Incorporation and the i3 Verticals, LLC Limited Liability Company Agreement discussed above require i3 Verticals, LLC and the Company, at all times, to maintain (i) a one-to-one ratio between the number of shares of Class A common stock issued by the Company and the number of Common Units owned by the Company and (ii) a one-to-one ratio between the number of shares of Class B common stock owned by the Continuing Equity Owners and the number of Common Units owned by the Continuing Equity Owners (other than shares of the Company's Class A common stock under unvested options the Company issues, treasury stock and preferred stock (the “Excluded Common Units”)).

The Amended and Restated Certificate of Incorporation and the i3 Verticals, LLC Limited Liability Company Agreement discussed above require i3 Verticals, LLC and the Company, at all times, to maintain (i) a one -to-one ratio between the number of shares of Class A common stock issued by the Company and the number of Common Units owned by the Company and (ii) a one -to-one ratio between the number of shares of Class B common stock owned by the Continuing Equity Owners and the number of Common Units owned by the Continuing Equity Owners (other than shares of the Company's Class A common stock under unvested options

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

the Company issues, treasury stock and preferred stock (the “Excluded Common Units”)).

The Company may issue shares of Class B common stock only to the extent necessary to maintain the one -to-one ratio between the number of Common Units of i3 Verticals, LLC held by the Continuing Equity Owners (other than the Excluded Common Units) and the number of shares of Class B common stock issued to the Continuing Equity Owners.

4 unchanged sentences

The Continuing Equity Owners may exercise such redemption right for as long as their Common Units remain outstanding.

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

name of the redeeming or exchanging Continuing Equity Owner will be canceled for no consideration on a one-for-one basis with the number of Common Units so redeemed or exchanged.

Simultaneously with the payment of cash or shares of Class A common stock, as applicable, in connection with a redemption or exchange of Common Units pursuant to the terms of the i3 Verticals, LLC Limited Liability Company Agreement, a number of shares of the Company's Class B common stock registered in the name of the redeeming or exchanging Continuing Equity Owner will be canceled for no consideration on a one -for-one basis with the number of Common Units so redeemed or exchanged.

Redeemable Class A Units

11 unchanged sentences

As described in Note 1, the Class A units, Class P units and Common Units were converted to Common Units in i3 Verticals, LLC in connection with the Reorganization Transactions.

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

Class A Units

3 unchanged sentences

After preferential payment to the holder of Class A units, any additional distributions declared were distributed pro-rata to the holders of Class A units, common units and Class P units, in proportion to their respective units.

Total cumulative preferred returns included within the carrying amount of the

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

Class A units amounted to $ 7,627 and $ 5,105 as of June 25, 2018, the date of the Reorganization Transactions, and September 30, 2017, respectively.

Total cumulative preferred returns included within the carrying amount of the Class A units amounted to $ 7,627 and $ 5,105 as of June 25, 2018, the date of the Reorganization Transactions, and September 30, 2017, respectively.

During 2017, as obligated under the provisions of its member agreements, the Company declared distributions of approximately $ 625 to its Class A unit holders in connection with the members’ estimated tax liabilities.

29 unchanged sentences

Minimum Processing Commitments

The Company has non-exclusive agreements with several processors to provide it services related to transaction processing and transmittal, transaction authorization and data capture, and access to various reporting tools.

The Company has non-exclusive agreements with several processors to provide its services related to transaction processing and transmittal, transaction authorization and data capture, and access to various reporting tools.

Certain of these agreements require the Company to submit a minimum monthly number of transactions for processing.

3 unchanged sentences

Total $ 9,247

Loan to Third Party Sales Organization

The Company has entered into an agreement as of March 2020, as amended in October 2020, to provide a secured loan to a third party sales organization of up to $ 3,500 in the future, dependent on their achievement of certain financial metrics.

Additionally, the Company has conditionally committed to a future buyout of the third party's business at the earlier of (a) the 60th day following the date upon which the founder of the third party sales organization dies or becomes disabled or (b) the 60th day following July 1, 2023.

The buyout amount is dependent on certain financial metrics but is capped at $ 29,000 , which would be net of repayment of the secured loans.

The buyout also contains certain provisions to provide additional consideration of up to $ 9,000 , in the aggregate, to be paid based on the achievement of specified financial performance targets, following the buyout.

As the eventual financial metrics are not known, the amount of the buyout transaction as well as the additional consideration are not able to be estimated at this time.

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

As of September 30, 2020, such knowable loan commitments, dependent on the third party sales organization's achievement of certain financial metrics, were $ 3,500 for fiscal year 2021.

With respect to all legal, regulatory and governmental proceedings, and in accordance with ASC 450-20, Contingencies—Loss Contingencies , the Company considers the likelihood of a negative outcome.

2 unchanged sentences

However, the Company in some instances may be unable to estimate an amount of possible loss or range of loss based on the significant uncertainties involved in, or the preliminary nature of, the matter, and in these instances the Company will disclose the nature of the contingency and describe why the Company is unable to determine an estimate of possible loss or range of loss.

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

In addition, the Company is involved in ordinary course legal proceedings, which include all claims, lawsuits, investigations and proceedings, including unasserted claims, which are probable of being asserted, arising in the ordinary course of business and otherwise not described below.

9 unchanged sentences

Also in June 2018, the remaining $ 5,234 of the Junior Subordinated Notes held by related parties were repaid with proceeds from the Company's IPO.

Interest expense to related parties for the Company’s Junior Subordinated Notes amounted to $ 457 and $ 632 during the years ended September 30, 2018 and 2017, respectively.

Interest expense to related parties for the Company’s Junior Subordinated Notes amounted to $ 457 during the year ended September 30, 2018.

All lenders party to the Company ’ s Mezzanine Notes are considered related parties, through their ownership interest in the Company and affiliated director relationships.

1 unchanged sentence

In June 2018, the Mezzanine Notes were repaid in full with proceeds from the Company's IPO.

Interest expense to related parties for the Company’s Mezzanine Notes amounted to $ 952 and $ 1,282 during the years ended September 30, 2018 and 2017, respectively.

Interest expense to related parties for the Company’s Mezzanine Notes amounted to $ 952 during the year ended September 30, 2018.

In April 2016, the Company entered into a purchase agreement to purchase certain assets of Axia, LLC.

On April 29, 2016, the Company entered into a Processing Services Agreement (the “Axia Tech Agreement”) with Axia Technologies, LLC (“Axia Tech”), an entity controlled by the previous owner of Axia, LLC.

Under the Axia Tech Agreement, the Company agreed to provide processing services for certain merchants as designated by Axia Tech from time to time.

On April 29, 2016, the Company entered into a Processing Services Agreement (the “AxiaMed Agreement”) with Axia

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

Technologies, LLC (which has since been incorporated as Axia Technologies, Inc., doing business as AxiaMed (“AxiaMed”)), an entity controlled by the previous owner of Axia, LLC.

Under the AxiaMed Agreement, the Company agreed to provide processing services for certain merchants as designated by AxiaMed from time to time.

In accordance with ASC 606, revenue from the processing services is recognized net of interchange, residual expense and other fees.

The Company earned net revenues related to the Axia Tech Agreement of $ 81 , $ 53 and $ 27 during the years ended September 30, 2019, 2018 and 2017 respectively.

The Company earned net revenues related to the AxiaMed Agreement of $ 95 , $ 81 and $ 53 during the years ended September 30, 2020, 2019 and 2018 respectively.

i3 Verticals, LLC, the Company's CEO and Clay Whitson, the Company's CFO, own 2.0 %, 10.5 % and 0.4 %, respectively, of the outstanding equity of Axia Tech.

3 unchanged sentences

As of September 30, 2020, the total amount due under the Tax Receivable Agreement was $ 27,565 .

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

The Company determines its operating segments based on ASC 280, Segment Reporting , how the chief operating decision making group monitors and manages the performance of the business and the level at which financial information is reviewed.

3 unchanged sentences

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

The Merchant Services segment includes third-party integrated payment solutions as well as traditional payment services across the Company's strategic vertical markets.

The Proprietary Software and Payments segment delivers embedded payment solutions to the Company's clients through company-owned software.

The Merchant Services segment includes third-party integrated payment solutions as well as merchant of record payment services across the Company's strategic vertical markets.

The Proprietary Software and Payments segment delivers solutions, including embedded payments, to the Company's clients through company-owned software.

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

The Company's Proprietary Software and Payments clients are primarily in the education, property management and public sector markets.

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

Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's segments with its business operations.

The prior period comparatives reflected in the tables below have been retroactively adjusted to reflect the Company's current segment presentation.

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

The Company primarily uses processing margin to measure operating performance.

4 unchanged sentences

Operating expenses

Interchange and network fees 236,170 6,697 — 242,867

Other costs of services 43,940 5,057 ( 1,767 ) 47,230

8 unchanged sentences

__________________________

Processing margin is equal to revenue less interchange and network fees, less other costs of services, $ 17,022 , $ 641 and $ 0 of residual expense, a component of other costs of services, are added back to the Merchant Services segment, Proprietary Software and Payments segment, and Other category, respectively.

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

Processing margin is equal to revenue less other costs of services.

$ 21,618 , $ 587 and $( 1,757 ) of residual expense, a component of other costs of services, are added back to the Merchant Services segment, Proprietary Software and Payments segment, and Other category, respectively.

As of and for the Year ended September 30, 2019

15 unchanged sentences

$ 17,058 , $ 605 and $ 0 of residual expense, a component of other costs of services, are added back to the Merchant Services segment, Proprietary Software and Payments segment, and Other category, respectively.

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

As of and for the Year ended September 30, 2018

9 unchanged sentences

Processing margin (1)

$ 69,449 $ 13,733 $ ( 2 ) $ 83,180

Total assets $ 143,792 $ 26,524 $ 4,826 $ 175,142

3 unchanged sentences

$ 14,025 , $ 504 and $ 0 of residual expense, a component of other costs of services, are added back to the Merchant Services segment, Proprietary Software and Payments segment, and Other category, respectively.

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

NON-CONTROLLING INTEREST

6 unchanged sentences

owned 18,864,143 and 14,444,115 of i3 Verticals, LLC's Common Units, representing a 61.3 % and 52.8 % economic ownership interest in i3 Verticals, LLC.

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

The following table summarizes the impact on equity due to changes in the Company's ownership interest in i3 Verticals, LLC:

Year ended September 30,

2020 2019 2018

Net (loss) income attributable to non-controlling interest $ ( 560 ) $ 3,608 $ 1,937

Transfers to (from) non-controlling interests:

Allocation of equity to non-controlling interests arising from the reorganization transactions and IPO — — 70,960

Distributions to non-controlling interest holders ( 3 ) ( 2,060 ) —

Redemption of common units in i3 Verticals, LLC ( 5,080 ) ( 12,077 ) —

Adjustment related to prior periods 2,730 — —

Cumulative effect of adoption of new accounting standard 640 — —

Allocation of equity to non-controlling interests 24,495 — —

Net transfers to (from) non-controlling interests 22,782 ( 14,137 ) 70,960

Change from net income attributable to non-controlling interests and transfers to (from) non-controlling interests $ 22,222 $ ( 10,529 ) $ 72,897

During the year ended September 30, 2020, the Company corrected for immaterial misstatements of equity between the Company and non-controlling interest related to its June 2019 Secondary Public Offering by increasing non-controlling interest and reducing additional paid-in capital.

This adjustment related to immaterial errors associated with the ownership percentage change used in the underlying calculation giving effect to the offering.

EARNINGS PER SHARE

11 unchanged sentences

Year ended September 30,

2020 2019 2018

Basic net (loss) income per share:

Net income (1)

Net (loss) income (1)

$ ( 979 ) $ 563 $ 2,673

Net income attributable to non-controlling interests 3,608 1,937

Net (loss) income attributable to non-controlling interests ( 560 ) 3,608 1,937

Net (loss) income attributable to Class A common stockholders $ ( 419 ) $ ( 3,045 ) $ 736

5 unchanged sentences

Net (loss) income attributable to Class A common stockholders $ ( 419 ) $ 736

Reallocation of net income assuming conversion of common units (4)

Net income attributable to Class A common stockholders - diluted $ 2,200

Reallocation of net (loss) income assuming conversion of common units (5)

( 422 ) 1,464

Net (loss) income attributable to Class A common stockholders - diluted $ ( 841 ) $ 2,200

Weighted average shares of Class A common stock outstanding (2)(4)

14,833,378 8,812,630

Weighted average effect of dilutive securities

12,596,423 18,061,248

Weighted average shares of Class A common stock outstanding - diluted

Diluted net income per share $ 0.08

27,429,801 26,873,878

Diluted net (loss) income per share $ ( 0.03 ) $ 0.08

____________________

Basic and diluted earnings per Class A common stock is presented only for the period after the Company’s Reorganization Transactions.

As such, net income used in the calculation for the year ended September 30, 2018 represents the net income attributable to Class A common stockholders for the period from June 25, 2018 through September 30, 2018.

Excludes 282,801 and 299,412 restricted Class A common stock units for the years ended September 30, 2019 and 2018, respectively.

Excludes 204,969 , 282,801 and 299,412 shares of restricted Class A common stock for the years ended September 30, 2020, 2019 and 2018, respectively.

For the year ended September 30, 2019, all potentially dilutive securities were anti-dilutive, so diluted net loss per share was equivalent to basic net loss per share.

1 unchanged sentence

15,856,855 shares of weighted average Class B common stock for the year ended September 30, 2019, along with the reallocation of net income assuming conversion of these shares, were excluded because the effect would have been anti-dilutive,

626,500 stock options for the year ended September 30, 2019, were excluded because the exercise price of these stock options exceeded the average market price of our Class A common stock during the period (“out-of-the-money”) and the effect of including them would have been anti-dilutive, and

1,009,858 shares for the year ended September 30, 2019, resulting from estimated stock option exercises as calculated by the treasury stock method, and 282,801 restricted Class A common units for the year ended September 30, 2019 were excluded because the effect of including them would have been anti-dilutive.

626,500 options to purchase shares of Class A common stock for the year ended September 30, 2019, were excluded because the exercise price of these options exceeded the average market price of our Class A common stock during the period (“out-of-the-money”) and the effect of including them would have been anti-dilutive, and

1,009,858 shares of Class A common stock for the year ended September 30, 2019, resulting from estimated stock option exercises as calculated by the treasury stock method, and 282,801 shares of restricted Class A common stock for the year ended September 30, 2019 were excluded because the effect of including them would have been anti-dilutive.

For the year ended September 30, 2020, the following securities were excluded from the weighted average effect of dilutive securities in the computation of diluted earnings per share of Class A common stock:

1,327,500 options to purchase shares of Class A common stock for the year ended September 30, 2020, were excluded because the exercise price of these options exceeded the average market price of our Class A common stock during the period (“out-of-the-money”) and the effect of including them would have been anti-dilutive, and

1,179,538 shares of Class A common stock for the year ended September 30, 2020, resulting from estimated stock option exercises as calculated by the treasury stock method, and 204,969 shares of restricted Class A common stock for the year ended September 30, 2020 were excluded because the effect of including them would have been anti-dilutive.

i3 VERTICALS, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except warrant, unit, share and per share amounts)

The reallocation of net income assuming conversion of common units represents the tax effected net income attributable to non-controlling interest using the effective income tax rates described in Note 10 above and assuming all common units of i3 Verticals, LLC were exchanged for Class A common stock at the beginning of the year.

The common units of i3 Verticals, LLC held by the Continuing Equity Owners are potentially dilutive securities, and the computations of pro forma diluted net income per share assume that all common units of i3 Verticals, LLC were exchanged for shares of Class A common stock at the beginning of the year.

Since the Company expects to settle the principal amount of its outstanding Exchangeable Notes in cash and any excess in cash or shares of the Company's Class A common stock, the Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable.

The conversion spread will have a dilutive impact on diluted net income per share of common stock when the average market price of the Company's Class A common stock for a given period exceeds the exchange price of $ 40.87 per share for the Exchangeable Notes.

The Warrants sold in connection with the issuance of the Exchangeable Notes are considered to be dilutive when the average price of the Company's Class A common stock during the period exceeds the Warrants' stock price of $ 62.88 per share.

The effect of the additional shares that may be issued upon exercise of the Warrants will be included in the weighted average shares of Class A common stock outstanding—diluted using the treasury stock method.

The Note Hedge Transactions purchased in connection with the issuance of the Exchangeable Notes are considered to be anti-dilutive and therefore do not impact our calculation of diluted net income per share.

Refer to Note 9 for further discussion regarding the Exchangeable Notes.

Shares of the Company's Class B common stock do not participate in the earnings or losses of the Company and are therefore not participating securities.

7 unchanged sentences

2020 2019 2018

Exchange of Junior Subordinated Notes for Class A Units $ — $ — $ 500

Common Units issued as part of acquisitions' purchase consideration (Note 4) $ — $ — $ 104

22 unchanged sentences

Revenue $ 84,868 $ 85,394 $ 97,483 $ 108,562

Income from operations $ 3,347 $ 2,596 $ 2,923 $ 3,495

(Loss) income before income taxes $ ( 721 ) $ ( 6,586 ) $ 37 $ 2,646

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

Income (loss) from operations $ 3,530 $ ( 203 ) $ 1,194 $ 1,869

Income (loss) before income taxes $ 2,616 $ ( 1,358 ) $ ( 724 ) $ ( 148 )

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

$ 178 $ ( 1,102 ) $ ( 1,191 ) $ ( 930 )

Basic (loss) earnings per share attributable to i3 Verticals, Inc.

Basic earnings (loss) per share attributable to i3 Verticals, Inc.

$ 0.02 $ ( 0.12 ) $ ( 0.12 ) $ ( 0.07 )

Diluted (loss) earnings per share attributable to i3 Verticals, Inc.

Diluted earnings (loss) per share attributable to i3 Verticals, Inc.

$ 0.02 $ ( 0.12 ) $ ( 0.12 ) $ ( 0.07 )

1 unchanged sentence

Revenue $ 41,111 $ 39,178 $ 31,573 $ 38,272

Income (loss) from operations $ 3,530 $ ( 203 ) $ 1,194 $ 1,869

Income from operations $ 4,097 $ 2,041 $ 437 $ 1,198

Income (loss) before income taxes $ 2,083 $ ( 143 ) $ ( 2,815 ) $ ( 2,899 )

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

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

$ ( 149 ) $ 737 $ ( 356 ) $ ( 651 )

Basic earnings (loss) per share attributable to i3 Verticals, Inc.

Basic (loss) earnings per share attributable to i3 Verticals, Inc.

$ ( 0.01 ) $ 0.05 $ ( 0.02 ) $ ( 0.04 )

Diluted earnings (loss) per share attributable to i3 Verticals, Inc.

Diluted (loss) earnings per share attributable to i3 Verticals, Inc.

$ ( 0.01 ) $ 0.05 $ ( 0.02 ) $ ( 0.06 )

____________________

Represents net loss of i3 Verticals, LLC for the periods prior to the Company's Reorganization Transactions.

Basic and diluted (loss) earnings per Class A common stock is presented only for the period after the Company’s Reorganization Transactions.

As such, net loss used in the calculation for the quarter ended June 30, 2018 represents the loss for the period from June 25 through June 30, 2018.

Basic (loss) earnings per share excludes 279,273 and 299,412 restricted Class A common units from the calculation for the quarters ended June 30, 2018, and September 20, 2018, respectively, and 295,405 , 277,758 , 285,433 and 271,881 restricted Class A common stock units from the calculation for the quarters ended December 31, 2018, March 31, 2019, June 30, 2019, and September 30, 2019, respectively.

For the quarters ended June 30, 2018, and September 30, 2018, the following securities were excluded from the weighted average effect of dilutive securities in the computation of diluted earnings per share of Class A common stock:

17,213,806 shares of weighted average Class B common stock for the quarters ended June 30, 2018 and September 30, 2018, along with the reallocation of net income assuming conversion of these shares, were excluded from the calculation of diluted earnings per share of Class A common stock because the effect would have been anti-dilutive, and

377,537 and 565,840 shares for the quarters ended June 30, 2018, and September 30, 2018, respectively, resulting from estimated stock option exercises as calculated by the treasury stock method, and 279,273 and 299,412 restricted Class A common units for the quarters ended June 30, 2018, and September 30, 2018, respectively, were excluded because the effect of including them would have been anti-dilutive.

Basic (loss) earnings per share excludes 295,405 , 277,758 , 285,433 and 271,881 shares of restricted Class A common stock from the calculation for the quarters ended December 31, 2018, March 31, 2019, June 30, 2019, and September 30, 2019, respectively, and 232,828 , 215,564 , 193,709 and 94,577 shares of restricted Class A common stock from the calculation for the quarters ended December 31, 2019, March 31, 2020, June 30, 2020, and September 30, 2020, respectively.

For the quarters ended December 31, 2018, and March 31, June 30, and September 30, 2019, the following securities were excluded from the weighted average effect of dilutive securities in the computation of diluted earnings per share of Class A common stock:

17,213,806 , 17,112,164 , 16,184,026 and 12,921,637 shares of weighted average Class B common stock for the quarters ended December 31, 2018, and March 31, June 30, and September 30, 2019, respectively, along with the reallocation of net income assuming conversion of these shares, were excluded from the calculation of diluted earnings per share of Class A common stock because the effect would have been anti-dilutive,

754,750 , 30,500 , 443,000 and 446,000 options to purchase shares of Class A common stock for the quarters ended December 31, 2018, and March 31, June 30, and September 30, 2019, respectively, were excluded because the exercise price of these options exceeded the average market price of our Class A common stock during the period (“out-of-the-money”) and the effect of including them would have been anti-dilutive, and

1,012,916 , 1,188,987 and 1,131,760 shares of Class A common stock for the quarters ended March 31, June 30, and September 30, 2019, respectively, resulting from estimated stock option exercises as calculated by the treasury stock method, and 277,758 , 285,433 and 271,881 shares of restricted Class A common stock for the quarters ended March 31, June 30, and September 30, 2019, respectively, were excluded because the effect of including them would have been anti-dilutive.

For the quarters ended December 31, 2019, and March 31, June 30, and September 30, 2020, the following securities were excluded from the weighted average effect of dilutive securities in the computation of diluted earnings per share of Class A common stock:

12,921,637 , 12,769,568 and 12,404,368 shares of weighted average Class B common stock for the quarters ended December 31, 2019, and March 31, and June 30, 2020, respectively, along with the reallocation of net income assuming conversion of these shares, were excluded from the calculation of diluted earnings per share of Class A common stock because the effect would have been anti-dilutive,

689,500 , 959,000 , 1,498,000 and 1,297,500 options to purchase shares of Class A common stock for the quarters ended December 31, 2019, and March 31, June 30, and September 30, 2020, respectively, were excluded because the exercise price

i3 VERTICALS, Inc.

1 unchanged sentence

(in thousands, except warrant, unit, share and per share amounts)

754,750 , 30,500 , 443,000 and 446,000 stock options for the quarters ended December 31, 2018, and March 31, June 30, and September 30, 2019, respectively, were excluded because the exercise price of these stock options exceeded the average market price of our Class A common stock during the period (“out-of-the-money”) and the effect of including them would have been anti-dilutive, and

1,012,916 , 1,188,987 and 1,131,760 shares for the quarters ended March 31, June 30, and September 30, 2019, respectively, resulting from estimated stock option exercises as calculated by the treasury stock method, and 277,758 , 285,433 and 271,881 restricted Class A common units for the quarters ended March 31, June 30, and September 30, 2019, respectively, were excluded because the effect of including them would have been anti-dilutive.

of these options exceeded the average market price of our Class A common stock during the period (“out-of-the-money”) and the effect of including them would have been anti-dilutive, and

976,594 , 1,127,509 and 1,225,697 shares of Class A common stock for the quarters ended December 31, 2019, and June 30, and September 30, 2020, respectively, resulting from estimated stock option exercises as calculated by the treasury stock method, and 232,828 , 193,709 and 94,577 shares of restricted Class A common stock for the quarters ended December 31, 2019, and June 30, and September 30, 2020, respectively, were excluded because the effect of including them would have been anti-dilutive.

SUBSEQUENT EVENTS

Recent Acquisitions

Subsequent to September 30, 2020, the Company 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 for the four businesses included $ 59,600 in cash and revolving line of credit proceeds, and an amount of contingent consideration, which is still being valued.

Certain provisions in the purchase agreements provide for additional consideration of up to $ 30,200 , in the aggregate, to be paid based upon the achievement of specified financial performance targets, as defined in the purchase agreements, through no later than April 2023.

The Company is in process of determining the acquisition date fair values of the liabilities for the contingent consideration based on discounted cash flow analyses.

The effect of three of the acquisitions will be included in the consolidated statements of operations beginning October 1, 2020.

The effect of the fourth acquisition will be included in the consolidated statements of operations beginning November 1, 2020.

The Company is still evaluating the allocations of the preliminary purchase consideration and pro forma results of operations.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

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 8. Financial Statements and Supplementary Data