i3 Verticals, Inc. 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with our audited financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those under the heading “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K. Certain amounts in this section may not foot due to rounding. Executive Overview Recognizing the convergence of software and payments, i3 Verticals was founded in 2012 with the purpose of delivering seamlessly integrated payment and software solutions to SMBs and organizations in strategic vertical markets. Since commencing operations, we have built a broad suite of payment and software solutions that address the specific needs of SMBs and other organizations in our strategic vertical markets, and we believe our suite of solutions differentiates us from our competition. Our primary strategic vertical markets include education, non-profit, public sector and healthcare. COVID-19 On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout the United States and other parts of the world. The spread of COVID-19 caused several states and cities to declare states of emergency or disaster proclamations. State and local governments, together with public health officials, recommended and mandated precautions to mitigate the spread of the virus, including the closure of local government facilities and parks, schools, restaurants, many businesses and other locations of public assembly. Although many of the restrictions have eased across the country, the pandemic has yet to show substantial signs of decline in the U.S. Some areas are re-imposing closures and other restrictions due to increased rates of COVID-19 cases. As a result, the COVID-19 pandemic is significantly affecting overall economic conditions in the United States. The economic impact of these conditions is materially impacting our business and is expected to continue to adversely impact our strategic verticals and our business in general. For example, beginning in the second half of March 2020 and continuing through the remainder of fiscal 2020, we and our clients have experienced a decline and subsequent partial recovery in payment volume and the number of transactions processed, and therefore, a decline and subsequent partial recovery in revenue in our strategic verticals. Our payment volume was $0.8 billion, $1.0 billion, $1.2 billion, $1.2 billion, $1.5 billion and $1.3 billion for the months of April, May, June, July, 48 August and September 2020, respectively. Further, for the second half of the year ended September 30, 2020, a significant portion of our revenue and payment volume within our Merchant Services segment and our Proprietary Software and Payments segment was derived from our education and public sector strategic verticals. Due to the temporary closure of schools and many local government facilities throughout the nation, we expect the combined revenue and payment volume from multiple of these and other strategic verticals will be adversely impacted for the duration of the closure. There are no reliable estimates of how long the pandemic will last, how many people are likely to be affected by it or the duration or types of restrictions that will be imposed. For that reason, we are unable to predict the long-term impact of the pandemic on our business at this time. On April 3, 2020, we announced certain proactive actions in response to the significant uncertainty around the severity and duration of the COVID-19 pandemic, which included temporarily furloughing a portion of our employees and a workforce reduction program that included the elimination of certain positions as well as a general reduction in headcount. The total number of employees impacted by the furlough and workforce reduction represented approximately 12% of our workforce. A portion of those furloughed have since returned to work. The impact of the COVID-19 pandemic is fluid and continues to evolve, and therefore, we cannot currently predict with certainty the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted. Our top priority is to protect our employees and their families, as well as our vendors and clients. We continue to take precautionary measures as directed by health authorities and local and national governments. Given the dynamic nature of these circumstances, the duration of business disruption and reduced revenues and payment volume, the related financial effect cannot be reasonably estimated at this time but is expected to materially adversely impact our business for the 2021 fiscal year. There could be material changes to estimates as a result of ongoing COVID-19 developments in future periods. Actual results could differ from those estimates. See “Item 1A. Risk Factors—The COVID-19 pandemic is significantly affecting our operations, business and financial condition, and our liquidity could also be negatively impacted, particularly if the U.S. economy remains unstable for a significant amount of time”. At September 30, 2020, we had $15.6 million of cash and cash equivalents and $275.0 million of available capacity under our Senior Secured Credit Facility (as defined in the “Senior Secured Credit Facility” subsection within the “Liquidity and Capital Resources” section below), subject to our financial covenants. Our liquidity profile reflects our completed offering in February 2020 of an aggregate principal amount of $138.0 million in 1.0% Exchangeable Senior Notes due 2025, with substantially all the proceeds being used to pay down outstanding borrowings under our Senior Secured Credit Facility. As of September 30, 2020, $117.0 million of the original aggregate principal amount of $138.0 million was outstanding. As of September 30, 2020, we were in compliance with these covenants with a consolidated interest coverage ratio, total leverage ratio and consolidated senior leverage ratio of 6.71x, 2.59x and 0.0x, respectively. For additional information about our Senior Secured Credit Facility and Exchangeable Notes, see the section entitled “Liquidity and Capital Resources” below. Acquisitions A core component of our growth strategy includes a disciplined approach to acquisitions of companies and technology, evidenced by numerous platform acquisitions and tuck-in acquisitions since our inception in 2012. Our acquisitions have opened new strategic vertical markets, increased the number of businesses and organizations to whom we provide solutions and augmented our existing payment and software solutions and capabilities. Acquisitions subsequent to September 30, 2020 Subsequent to September 30, 2020, we completed the acquisition of four businesses. The first acquisition is within the Company’s Public Sector vertical and provides software services to public safety and law enforcement customers. The second acquisition is within the Company’s Healthcare vertical and offers medical billing and other software. The third acquisition offers proprietary technology that will augment the Company’s existing platform across several verticals. The final acquisition sells a combination of proprietary and third-party software, which eliminates paper-based systems by creating integrated electronic workflows for courts and government agencies. Total purchase consideration included $59.6 million in cash and revolving line of credit proceeds, and an amount of contingent consideration, which is still being valued. 49 Acquisitions during the year ended September 30, 2020 During the year ended September 30, 2020, we completed the acquisitions of three unrelated businesses. Two expand our geographic reach and software capabilities in the public sector vertical. The other adds text-to-pay capabilities and other software solutions in our non-profit vertical. Total purchase consideration was $32.6 million, including $27.9 million in revolving credit facility proceeds and $4.7 million of contingent consideration. Acquisitions during the year ended September 30, 2019 On May 31, 2019, we acquired all the outstanding stock of Pace Payment Systems, Inc. (“Pace”). We acquired Pace to expand our software offerings, primarily in the public sector and education verticals. The total net purchase consideration was $56.1 million, including $52.5 million in cash consideration, funded by proceeds from our revolving credit facility, $3.3 million of contingent consideration, $0.2 million of restricted Class A common stock in i3 Verticals and potential additional consideration of up to $20.0 million to be paid based upon the achievement of certain growth metrics related to the financial performance of Pace in the 24 months from January 1, 2020 through December 31, 2021. During the year ended September 30, 2019, we also completed the acquisitions of additional businesses. These acquisitions expanded the Company's merchant base. Total net purchase consideration for these businesses was $98.9 million, which included $89.2 million of cash consideration funded with proceeds from our revolving credit facility and $9.7 million of contingent cash consideration. The results of operations of these acquired businesses have been included in our financial statements since the applicable acquisition date. For additional information, see Note 4 to our consolidated financial statements. Our Revenue and Expenses Revenues We generate revenue primarily from volume-based payment processing fees (“discount fees”), and to a lesser extent, software licensing subscriptions, ongoing support and other POS-related solutions that we provide to our clients directly and through our distribution partners. Volume-based fees represent a percentage of the dollar amount of each credit or debit transaction processed. 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. Interchange and network fees. Interchange and network fees consist primarily of pass-through fees that make up a portion of discount fee revenue. These include assessment fees payable to card associations, which are a percentage of the processing volume we generate from Visa and Mastercard. Upon our adoption of ASC 606 on October 1, 2019, these fees are presented net within revenue. Expenses Other costs of services . Other costs of services include costs directly attributable to processing and bank sponsorship costs. These also include related costs such as residual payments to our distribution partners, which are based on a percentage of the net revenues (revenue less interchange and network fees) generated from client referrals. Losses resulting from excessive chargebacks against a client are included in other cost of services. The cost of equipment sold is also included in cost of services. Interchange and other costs of services are recognized at the time the client’s transactions are processed. Selling, general and administrative . Selling, general and administrative expenses include salaries and other employment costs, professional services, rent and utilities and other operating costs. Depreciation and amortization . Depreciation expense consists of depreciation on our investments in property, equipment and computer hardware and software. Depreciation expense is recognized on a straight-line basis over the estimated useful life of the asset. Amortization expense for acquired intangible assets and internally developed software is recognized using a proportional cash flow method. Amortization expense for internally developed software is recognized over the estimated useful life of the asset. The useful lives of contract-based intangible assets are equal to the terms of the agreement. 50 Interest expense, net. Our interest expense consists of interest on our outstanding indebtedness under our Senior Secured Credit Facility and Exchangeable Notes, and amortization of debt discount and issuance costs. How We Assess Our Business Merchant Services Our Merchant Services segment provides comprehensive payment solutions to businesses and organizations. Our Merchant Services segment includes third-party integrated payment solutions as well as merchant of record payment services across our strategic vertical markets. Proprietary Software and Payments Our Proprietary Software and Payments segment delivers solutions, including embedded payments, to our clients through company-owned software. Payments are delivered through both the payment facilitator model and the merchant of record processing model. We have Proprietary Software and Payments clients across all of our strategic vertical markets. Other Our Other category includes corporate overhead expenses, when presenting reportable segment information. Effective July 1, 2020, we realigned one component from the Proprietary Software and Payments segment to the Merchant Services segment. Prior periods have been retroactively adjusted to reflect the Company's current segment presentation. For additional information on our segments, see Note 16 to our consolidated financial statements. Key Operating Metrics We evaluate our performance through key operating metrics, including: • the dollar volume of payments our clients process through us (“payment volume”); • the portion of our payment volume that is produced by integrated transactions; and • period-to-period payment volume attrition. Our payment volume for the years ended September 30, 2020 and 2019 was $14.4 billion and $13.1 billion, respectively, representing a period-to-period growth rate of 9%. Our payment volume for the second half of the year ended September 30, 2020 was adversely impacted by deteriorating economic conditions as a result of the impacts of the COVID-19 pandemic. Our payment volume was $0.8 billion, $1.0 billion, $1.2 billion, $1.2 billion, $1.5 billion and $1.3 billion for the months of April, May, June, July, August and September 2020, respectively. We focus on volume, because it is a reflection of the scale and economic activity of our client base and because a significant part of our revenue is derived as a percentage of our clients’ dollar volume receipts. Payment volume reflects the addition of new clients and same store payment volume growth of existing clients, partially offset by client attrition during the period. Integrated payments represents payment transactions that are generated in situations where payment technology is embedded within our own proprietary software, a client’s software or critical business process. We evaluate the portion of our payment volume that is produced by integrated transactions because we believe the convergence of software and payments is a significant trend impacting our industry. We believe integrated payments create stronger client relationships with higher payment volume retention and growth. Integrated payments grew to 55% of our payment volume for the year ended September 30, 2020 from 50% for the year ended September 30, 2019. We measure period-to-period payment volume attrition as the change in card-based payment volume for all clients that were processing with us for the same period in the prior year. We exclude from our calculations payment volume from new clients added during the period. We experience attrition in payment volume as a result of several factors, including business closures, transfers of clients’ accounts to our competitors and account closures that we initiate due to heightened credit risks. During the year ended September 30, 2020, our average net volume attrition per month remained below 2%. 51 Results of Operations Year Ended September 30, 2020 Compared to Year Ended September 30, 2019 The following table presents our historical results of operations for the periods indicated: Year ended September 30, Change (in thousands) 2020 2019 Amount % Revenue $ 150,134 $ 376,307 $ (226,173) (60.1) % Operating expenses Interchange and network fees (1) 242,867 (242,867) n/m Other costs of services 47,230 44,237 2,993 6.8 % Selling general and administrative 78,323 62,860 15,463 24.6 % Depreciation and amortization 18,217 16,564 1,653 10.0 % Change in fair value of contingent consideration (1,409) 3,389 (4,798) (141.6) % Total operating expenses 142,361 369,917 (227,556) (61.5) % Income from operations 7,773 6,390 1,383 21.6 % Other expenses Interest expense, net 8,926 6,004 2,922 48.7 % Other expense 2,621 — 2,621 n/m Total other expenses 11,547 6,004 5,543 92.3 % (Loss) income before income taxes (3,774) 386 (4,160) (1,077.7) % Benefit from income taxes (2,795) (177) (2,618) 1,479.1 % Net (loss) income (979) 563 (1,542) n/m Net (loss) income attributable to non-controlling interest (560) 3,608 (4,168) n/m Net loss attributable to i3 Verticals, Inc. $ (419) $ (3,045) $ 2,626 n/m n/m = not meaningful __________________________ 1. Effective October 1, 2019, our revenues are presented net of interchange and network fees in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers . See Note 2 to our consolidated financial statements for a description of the recently adopted accounting pronouncement. Revenue Revenue decreased $226.2 million, or 60.1%, to $150.1 million for the year ended September 30, 2020 from $376.3 million for the year ended September 30, 2019. This decrease was driven by the adoption of ASC 606 effective October 1, 2019, which resulted in our revenues being presented net of interchange and network fees prospectively. This change in presentation affected our reported revenues and operating expenses for the year ended September 30, 2020 by the same amount and had no effect on our income from operations. Our revenue in the month of March 2020 and in the second half of the year ended September 30, 2020 was also negatively impacted an overall reduction in consumer spending as a result of the COVID-19 pandemic. 52 Revenue without the effect of the adoption of ASC 606 increased $17.9 million, or 4.8%, to $394.2 million for the year ended September 30, 2020 from $376.3 million for the year ended September 30, 2019. This increase was principally driven by acquisitions completed during the 2020 and 2019 fiscal years. These acquisitions contributed an incremental $42.2 million, net of inter-segment eliminations, to our revenue for the year ended September 30, 2020. Excluding revenues from these acquisitions, revenue without the adoption of ASC 606 decreased $24.3 million, principally driven by the impact of the COVID-19 pandemic. Without the effect of the adoption of ASC 606, revenue related to a subset of merchant contracts purchased in 2014 and 2017 (“Purchased Portfolios”), which have a higher rate of revenue attrition and payment volume attrition than the rest of our business, decreased $3.8 million, or 30.5%, to $8.6 million for the year ended September 30, 2020 from $12.4 million for the year ended September 30, 2019. Excluding revenues from the Purchased Portfolios and the effect of the adoption of ASC 606, revenue grew $21.7 million, or 6.0%, to $385.6 million for the year ended September 30, 2020 from $363.9 million for the year ended September 30, 2019. Without the effect of the adoption of ASC 606, revenue within Merchant Services decreased $1.0 million, or 0.3%, to $338.0 million for the year ended September 30, 2020 from $339.0 million for the year ended September 30, 2019. This decrease was principally driven by a decrease in other revenue of $5.4 million, partially offset by an increase in payments revenue of $4.5 million for the year ended September 30, 2020. The overall decreases in other revenue was related to the COVID-19 pandemic, offset by increases in payments revenue primarily due to the incremental impact of acquisitions completed during the 2019 fiscal year. Without the effect of the adoption of ASC 606, revenue within Proprietary Software and Payments increased $20.7 million, or 55.3%, to $58.0 million for the year ended September 30, 2020 from $37.3 million for the year ended September 30, 2019. This increase was principally driven by an increase in other revenue of $16.6 million for the year ended September 30, 2020, driven by software and related services. In addition, payments revenue increased $4.1 million for the year ended September 30, 2020, driven by increases in payment volume. These increases in Proprietary Software and Payments revenue were primarily due to the incremental impact of acquisitions completed during the 2020 and 2019 fiscal years, despite overall decreases in other revenue related to the COVID-19 pandemic. Payment volume increased $1.2 billion, or 9.4%, to $14.4 billion for the year ended September 30, 2020 from $13.1 billion for the year ended September 30, 2019. This increase was principally driven by acquisitions completed during the 2020 and 2019 fiscal years and organic growth prior to the COVID-19 pandemic. Interchange and Network Fees Interchange and network fees decreased $242.9 million, or 100.0%, to $0.0 million for the year ended September 30, 2020 from $242.9 million for the year ended September 30, 2019. This decrease was driven by the adoption of ASC 606 effective October 1, 2019, which resulted in our revenues being presented net of interchange and network fees prospectively. This change in presentation affected our reported revenues and operating expenses for the year ended September 30, 2020 by the same amount and had no effect on our income from operations. Interchange and network fees without the effect of the adoption of ASC 606 increased $1.2 million, or 0.5%, to $244.1 million for the year ended September 30, 2020 from $242.9 million for the year ended September 30, 2019. Acquisitions completed during the 2020 and 2019 fiscal years contributed an incremental $14.1 million to our interchange and network fees for the year ended September 30, 2020. Excluding interchange and network fees from these acquisitions, interchange and network fees without the adoption of ASC 606 decreased $12.8 million, principally driven by the impact of the COVID-19 pandemic. Without the effect of the adoption of ASC 606, interchange and network fees related to the Purchased Portfolios decreased $1.7 million, or 26.7%, to $4.5 million for the year ended September 30, 2020 from $6.2 million for the year ended September 30, 2019. Excluding interchange and network fees from these Purchased Portfolios and the effect of the adoption of ASC 606, interchange and network fees grew $2.9 million, or 1.2%, to $239.6 million for the year ended September 30, 2020 from $236.7 million for the year ended September 30, 2019. 53 Without the effect of the adoption of ASC 606, interchange and network fees within Merchant Services increased $0.9 million, or 0.4%, to $237.1 million for the year ended September 30, 2020 from $236.2 million for the year ended September 30, 2019. Without the effect of the adoption of ASC 606, interchange and network fees within Proprietary Software and Payments increased $0.3 million or 5.2%, to $7.0 million for the year ended September 30, 2020 from $6.7 million for the year ended September 30, 2019. Other Costs of Services Other costs of services increased $3.0 million, or 6.8%, to $47.2 million for the year ended September 30, 2020 from $44.2 million for the year ended September 30, 2019. Acquisitions completed during the 2020 and 2019 fiscal years contributed an incremental $6.3 million, net of inter-segment eliminations, to our other costs of services for the year ended September 30, 2020. Other costs of services within Merchant Services increased $2.5 million, or 5.9%, to $43.9 million for the year ended September 30, 2020 from $41.5 million for the year ended September 30, 2019. Other costs of services within Proprietary Software and Payments increased $2.3 million, or 83.9%, to $5.1 million for the year ended September 30, 2020 from $2.8 million for the year ended September 30, 2019. This increase was primarily driven by acquisitions completed during the 2020 and 2019 fiscal years, which contributed an incremental $2.0 million, net of inter-segment eliminations, to our other costs of services within Proprietary Software and Payments for the year ended September 30, 2020. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $15.5 million, or 24.6%, to $78.3 million for the year ended September 30, 2020 from $62.9 million for the year ended September 30, 2019. This increase was principally driven by a $12.3 million increase in employment expense, primarily resulting from an increase in headcount that resulted from acquisitions and an increase in stock compensation expense. The majority of the remaining increase was comprised of increases in software and technological services of $1.0 million and professional services and insurance of $0.6 million, partially offset by decreases in travel expenses of $0.9 million. Depreciation and Amortization Depreciation and amortization increased $1.7 million, or 10.0%, to $18.2 million for the year ended September 30, 2020 from $16.6 million for the year ended September 30, 2019. Amortization expense increased $1.0 million to $16.4 million for the year ended September 30, 2020 from $15.4 million for the year ended September 30, 2019 primarily due to greater amortization expense resulting from acquisitions completed during the 2020 and 2019 fiscal years. Depreciation expense increased $0.6 million to $1.8 million for the year ended September 30, 2020 from $1.2 million for the year ended September 30, 2019. Change in Fair Value of Contingent Consideration Change in fair value of contingent consideration to be paid in connection with acquisitions was a benefit of $1.4 million for the year ended September 30, 2020 due to some of our acquisitions achieving lower performance as a result of the COVID-19 pandemic. The change in fair value of contingent consideration for the year ended September 30, 2019 was a charge of $3.4 million. Interest Expense, net Interest expense, net, increased $2.9 million, or 48.7%, to $8.9 million for the year ended September 30, 2020 from $6.0 million for the year ended September 30, 2019. The increase is driven by the amortization of the debt discount, which was the difference between the principal amount of the Exchangeable Notes and the liability component, recorded in connection with the issuance of the Exchangeable Notes. We recorded $2.9 million in interest expense related to the amortization of the debt discount during the year ended September 30, 2020. The increase also reflected a higher average outstanding debt balance, but was offset by a lower weighted average interest rate for the year ended September 30, 2020 as compared to the year ended September 30, 2019. 54 Other expense Other expense was $2.6 million for the year ended September 30, 2020, primarily relating to a loss on retirement of debt due to the carrying value exceeding the fair value of the repurchased portion of the Exchangeable Notes at the dates of repurchases. There was no other expense for the year ended September 30, 2019. Provision for Income Taxes The provision for income taxes decreased to a benefit of $2.8 million for the year ended September 30, 2020 from a benefit of $0.2 million for the year ended September 30, 2019. As described in Note 2 to our consolidated financial statements, we had a $2.7 million reduction in the valuation allowance on the deferred tax asset related to our investment in partnership and a corresponding increase in the benefit from income taxes in the year ended September 30, 2020. Our effective tax rate was 74% for the year ended September 30, 2020. Our effective tax rate differs from the federal statutory rate due to the reduction in the valuation allowance on the investment in partnership. i3 Verticals, Inc. is subject to federal, state and local income taxes with respect to its allocable share of any taxable income of i3 Verticals, LLC and is taxed at the prevailing corporate tax rates. Year Ended September 30, 2019 Compared to Year Ended September 30, 2018 The following table presents our historical results of operations for the periods indicated: Year ended September 30, Change (in thousands) 2019 2018 Amount % Revenue $ 376,307 $ 323,508 $ 52,799 16.3 % Operating expenses Interchange and network fees 242,867 214,543 28,324 13.2 % Other costs of services 44,237 40,314 3,923 9.7 % Selling general and administrative 62,860 40,585 22,275 54.9 % Depreciation and amortization 16,564 11,839 4,725 39.9 % Change in fair value of contingent consideration 3,389 3,866 (477) (12.3) % Total operating expenses 369,917 311,147 58,770 18.9 % Income from operations 6,390 12,361 (5,971) (48.3) % Other expenses Interest expense, net 6,004 8,498 (2,494) (29.3) % Change in fair value of warrant liability — 8,487 (8,487) n/m Total other expenses 6,004 16,985 (10,981) (64.7) % Income (loss) before income taxes 386 (4,624) 5,010 (108.3) % (Benefit from) provision for income taxes (177) 337 (514) (152.5) % Net income (loss) 563 (4,961) 5,524 n/m Net income attributable to non-controlling interest 3,608 1,937 1,671 n/m Net (loss) income attributable to i3 Verticals, Inc. $ (3,045) $ (6,898) $ 3,853 n/m n/m = not meaningful 55 Revenue Revenue increased $52.8 million, or 16.3%, to $376.3 million for the year ended September 30, 2019 from $323.5 million for the year ended September 30, 2018. This increase was principally driven by acquisitions completed during the 2019 and 2018 fiscal years. These acquisitions contributed an incremental $41.2 million to our revenue for the year ended September 30, 2019. The remaining $11.6 million of increased revenue was due primarily to an increase in payment volume. Revenue related to a subset of merchant contracts purchased in 2014 and 2017 (“Purchased Portfolios”), which have a higher rate of revenue attrition and payment volume attrition than the rest of our business, decreased $5.4 million, or 30.2%, to $12.4 million for the year ended September 30, 2019 from $17.8 million for the year ended September 30, 2018. Excluding revenues from the Purchased Portfolios, revenue grew $58.2 million, or 19.0%, to $363.9 million for the year ended September 30, 2019 from $305.7 million for the year ended September 30, 2018. Revenue within Merchant Services increased $35.3 million, or 11.6%, to $339.0 million for the year ended September 30, 2019 from $303.7 million for the year ended September 30, 2018. This increase was principally driven by acquisitions completed during the 2019 and 2018 fiscal years. These acquisitions contributed an incremental $24.7 million of our revenue within Merchant Services for the year ended September 30, 2019. The remaining $10.6 million of increased revenue was due primarily to an increase in payment volume. Revenue within Proprietary Software and Payments increased $17.5 million or 88.4%, to $37.3 million for the year ended September 30, 2019 from $19.8 million for the year ended September 30, 2018. This increase was partially driven by acquisitions completed during the 2019 and 2018 fiscal years. These acquisitions contributed an incremental $16.6 million of our revenue within Proprietary Software and Payments for the year ended September 30, 2019. The remaining $1.0 million of increased revenue was due primarily to an increase in payment volume. Payment volume increased $1.6 billion, or 13.8%, to $13.1 billion for the year ended September 30, 2019 from $11.6 billion for the year ended September 30, 2018. Interchange and Network Fees Interchange and network fees increased $28.3 million, or 13.2%, to $242.9 million for the year ended September 30, 2019 from $214.5 million for the year ended September 30, 2018. This increase was principally driven by acquisitions completed during the 2019 and 2018 fiscal years. These acquisitions contributed an incremental $17.3 million to our interchange and network fees for the year ended September 30, 2019. The remaining $11.0 million of increased interchange and network fees was due primarily to an increase in payment volume. Interchange and network fees related to the Purchased Portfolios decreased $2.6 million, or 29.3%, to $6.2 million for the year ended September 30, 2019 from $8.8 million for the year ended September 30, 2018. Excluding interchange and network fees from these Purchased Portfolios, interchange and network fees grew $30.9 million, or 15.0%, to $236.7 million for the year ended September 30, 2019 from $205.8 million for the year ended September 30, 2018. Interchange and network fees within Merchant Services increased $26.5 million, or 12.6%, to $236.2 million for the year ended September 30, 2019 from $209.7 million for the year ended September 30, 2018. Interchange and network fees within Proprietary Software and Payments increased $1.9 million or 38.4%, to $6.7 million for the year ended September 30, 2019 from $4.8 million for the year ended September 30, 2018. Other Costs of Services Other costs of services increased $3.9 million, or 9.7%, to $44.2 million for the year ended September 30, 2019 from $40.3 million for the year ended September 30, 2018. This increase was principally driven by acquisitions completed during the 2019 and 2018 fiscal years. These acquisitions contributed an incremental $4.1 million to our other costs of services for the year ended September 30, 2019. 56 Other costs of services within Merchant Services increased $2.9 million, or 7.6%, to $41.5 million for the year ended September 30, 2019 from $38.6 million for the year ended September 30, 2018. Other costs of services within Proprietary Software and Payments increased $1.0 million, or 57.0%, to $2.8 million for the year ended September 30, 2019 from $1.8 million for the year ended September 30, 2018. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $22.3 million, or 54.9%, to $62.9 million for the year ended September 30, 2019 from $40.6 million for the year ended September 30, 2018. This increase was primarily driven by an increase in employment costs of $16.7 million due to an increase in stock compensation and an increase in headcount resulting from acquisitions. Increases in professional services and insurance, rent, advertising and marketing expenses, and travel expenses comprised the remainder of the increase. Depreciation and Amortization Depreciation and amortization increased $4.7 million, or 39.9%, to $16.6 million for the year ended September 30, 2019 from $11.8 million for the year ended September 30, 2018. Amortization expense increased $4.3 million to $15.4 million for the year ended September 30, 2019 from $11.0 million for the year ended September 30, 2018 primarily due to greater amortization expense resulting from recent acquisitions, which was partially offset by lower amortization expense for historical acquisitions due to our accelerated method of amortization. Depreciation expense increased $0.4 million to $1.2 million for the year ended September 30, 2019 from $0.8 million for the year ended September 30, 2018. Change in Fair Value of Contingent Consideration Change in fair value of contingent consideration to be paid in connection with acquisitions was a charge of $3.4 million for the year ended September 30, 2019 primarily due to the performance of some of our acquisitions exceeding our expectations. The change in fair value of contingent consideration for the year ended September 30, 2018 was a charge of $3.9 million. Interest Expense, net Interest expense, net, decreased $2.5 million, or 29.3%, to $6.0 million for the year ended September 30, 2019 from $8.5 million for the year ended September 30, 2018. The decrease reflects a lower average amount of indebtedness outstanding and payment of all of the outstanding aggregate principal balance and accrued interest on the notes payable to the lenders under our Mezzanine Notes and unsecured notes payable to related and unrelated creditors in connection with the Reorganization Transactions in the second quarter of fiscal year 2018. Change in Fair Value of Warrant Liability The change in fair value of our warrant liabilities corresponds to the value of the warrants issued in connection with our Mezzanine Notes (as defined below). The change in the fair value of the warrants corresponded with their exercise in June 2018 in conjunction with our IPO. The change in fair value of the warrant liabilities was a benefit of $8.5 million for the year ended September 30, 2018. Provision for Income Taxes The provision for income taxes decreased to a benefit of $0.2 million for the year ended September 30, 2019 from a provision of $0.3 million for the year ended September 30, 2018. The provision for income taxes consists primarily of provisions for state income taxes and, for certain subsidiaries of i3 Verticals, LLC which are corporations, provisions for federal income taxes. Our effective tax rate was (46)% for the year ended September 30, 2019. Our effective tax rate differs from the federal statutory rate because significant pre-tax losses related to the change in the fair value of contingent consideration. i3 Verticals, Inc. is subject to federal, state and local income taxes with respect to its allocable share of any taxable income of i3 Verticals, LLC and is taxed at the prevailing corporate tax rates. 57 Seasonality We have experienced in the past, and may continue to experience, seasonal fluctuations in our revenues as a result of consumer and business spending patterns. Revenues during the first quarter of the calendar year, which is our second fiscal quarter, tend to decrease in comparison to the remaining three quarters of the calendar year on a same store basis. This decrease is due to the relatively higher number and amount of electronic payment transactions related to seasonal retail events, such as holiday and vacation spending in their second, third and fourth quarters of the calendar year. The number of business days in a month or quarter also may affect seasonal fluctuations. Revenue in our education vertical fluctuates with the school calendar. Revenue for our education customers is strongest in August, September, October, January and February, at the start of each semester, and generally weakens throughout the semester, with little revenue in the summer months of June and July. Operating expenses show less seasonal fluctuation, with the result that net income is subject to the same seasonal factors as our revenues. The growth in our business may have partially overshadowed seasonal trends to date, and seasonal impacts on our business may be more pronounced in the future. Furthermore, we are not able to predict the impact that the COVID-19 pandemic may have on the seasonality of our business. Liquidity and Capital Resources We have historically financed our operations (not including investments and acquisitions) and working capital through net cash from operating activities. As of September 30, 2020, we had $15.6 million of cash and cash equivalents and available borrowing capacity of $275.0 million under our Senior Secured Credit Facility, subject to the financial covenants. We usually minimize cash balances by making payments on our revolving credit facility to minimize borrowings and interest expense. As of September 30, 2020, we had borrowings outstanding of $0.0 million under the Senior Secured Credit Facility. Our primary cash needs are to fund working capital requirements, invest in our technology infrastructure, fund acquisitions and related contingent consideration, make scheduled principal and interest payments on our outstanding indebtedness and pay tax distributions to members. We historically have had positive cash flow provided by operations. Our plan for capital expenditures and future acquisitions for the upcoming fiscal year are consistently being re-evaluated as we navigate through the economic impact related to the COVID-19 pandemic. We will assess our plans for acquisition opportunities against our cash availability during the crisis to make the most strategic decisions for our business. We have the ability to pause or terminate much of our anticipated acquisition program should our financial position require it. We currently expect that our cash flow from operations, current cash and cash equivalents and available borrowing capacity under the Senior Secured Credit Facility will be sufficient to fund our operations and planned capital expenditures and to service our debt obligations for at least the next twelve months. On April 3, 2020, we announced certain proactive actions in response to the significant uncertainty around the severity and duration of the COVID-19 pandemic, which included temporarily furloughing a portion of our employees and a workforce reduction program that included the elimination of certain positions as well as a general reduction in headcount. The total number of employees impacted by the furlough and workforce reduction represented approximately 12% of our workforce. A portion of those furloughed have since returned to work. Our liquidity profile reflects our completed offering in February 2020 of an aggregate principal amount of $138.0 million in 1.0% Exchangeable Senior Notes due 2025, with substantially all the proceeds being used to pay down outstanding borrowings under our Senior Secured Credit Facility, as well as our September 2020 Public Offering as described below under the heading “Follow-on Offerings”. During the year ended September 30, 2020, we repurchased $21.0 million in aggregate principal amount of the Exchangeable Notes for an aggregate purchase price of approximately $17.4 million. We recorded a loss on retirement of debt of $2.3 million due to the carrying value exceeding the fair value of the repurchased portion of the Exchangeable Notes at the dates of repurchases. We may elect from time to time to purchase our outstanding debt in open market purchases, privately negotiated transactions or otherwise. Any such debt repurchases will depend upon prevailing market conditions, our liquidity requirements, contractual restrictions, applicable securities law and other factors. As amended on February 18, 2020 in connection with our offering of Exchangeable Notes, our Senior Secured Credit Facility requires us to maintain a consolidated interest coverage ratio not less than 3.00 to 1.00, a total leverage ratio not exceeding 5.00 to 1.00 and a consolidated senior secured leverage ratio not exceeding 3.25 to 1.00, provided that for each of the four fiscal quarters immediately following a qualified acquisition, the 58 total leverage ratio and the consolidated senior secured leverage ratio would increase by up to 0.25, subject to certain limitations. As of September 30, 2020, we were in compliance with these covenants with a consolidated interest coverage ratio, total leverage ratio and consolidated senior leverage ratio of 6.71x, 2.59x and 0.0x, respectively. Although we believe our liquidity position remains strong, there can be no assurance that we will be able to raise additional funds, in the form of debt or equity, or to amend our Senior Secured Credit Facility on terms acceptable to us, if at all, even if we determined such actions were necessary in the future. Any material adverse change in client demand and our ability to retain clients, competitive market forces, or uncertainties caused by the COVID-19 pandemic, as well as other factors listed under the heading “Note Regarding Forward-looking Statements,” and in our risk factors included herein could affect our ability to continue to fund our liquidity needs from business operations. Cash Flows The following table presents a summary of cash flows from operating, investing and financing activities for the following comparative periods. Year Ended September 30, 2020 Compared to Year Ended September 30, 2019 Year ended September 30, 2020 2019 (in thousands) Net cash provided by operating activities $ 23,720 $ 26,597 Net cash used in investing activities $ (35,431) $ (143,728) Net cash provided by financing activities $ 29,112 $ 119,094 Cash Flow from Operating Activities Net cash provided by operating activities decreased $2.9 million to $23.7 million for the year ended September 30, 2020 from $26.6 million for the year ended September 30, 2019. The decrease in net cash provided by operating activities included a decrease of $1.5 million in net income for the year ended September 30, 2020, comparatively lower increases in liabilities for non-cash contingent consideration of $4.8 million and an increase in the benefit from deferred taxes of $2.6 million. The decrease in net cash provided by operating activities was partially offset by adjustments to net income including increases to equity-based compensation of $4.3 million, amortization of the debt discount and issuance costs expense of $3.0 million and loss on the repurchase of Exchangeable Notes of $2.3 million. Operating assets and liabilities decreased $5.7 million, primarily driven by a $3.5 million decrease in contingent consideration paid in excess of original estimates, a $3.5 million increase in accounts receivable and a $2.0 million decrease in deferred revenue, partially offset by a $2.0 million increase in accounts payable and a $1.2 million decrease in other assets for the year ended September 30, 2020 compared to the year ended September 30, 2019. Cash Flow from Investing Activities Net cash used in investing activities decreased $108.3 million to $35.4 million for the year ended September 30, 2020 from $143.7 million for the year ended September 30, 2019. The decrease in net cash used in investing activities was primarily driven by a decrease of $109.3 million in cash used in acquisitions, net of cash acquired, and a decrease of $1.8 million in purchases of merchant portfolios and residual buyouts. These decreases were partially offset by an increase of $2.1 million in expenditures for property and equipment and $0.7 million in expenditures for capitalized software for the year ended September 30, 2020 compared to the year ended September 30, 2019. 59 Cash Flow from Financing Activities Net cash provided by financing activities decreased $90.0 million to $29.1 million for the year ended September 30, 2020 from $119.1 million for the year ended September 30, 2019. The decrease in net cash provided by financing activities was primarily the result of an increase in payments on the revolving credit facility of $261.4 million, payments for purchases of exchangeable senior note hedges of $28.7 million and payments for the repurchase of Exchangeable Notes of $17.4 million during the year ended September 30, 2020, a decrease in proceeds from issuance of Class A common stock sold in public offerings of $28.8 million, a decrease in proceeds from the revolving credit facility of $16.4 million and an increase in payments of debt issuance costs of $5.1 million for the year ended September 30, 2020 compared to the year ended September 30, 2019. The decrease in cash provided by financing activities is partially offset by proceeds from borrowings on exchangeable notes of $138.0 million and proceeds from the issuance of warrants of $14.7 million during the year ended September 30, 2020, as well as a decrease in payments for Common Units in i3 Verticals, LLC from certain Continuing Equity Owners in connection with public offerings of $79.1 million, a decrease in payments of notes payable to banks of $35.0 million and a decrease in payments for required distributions to members for tax obligations of $2.1 million for the year ended September 30, 2020 from the year ended September 30, 2019. Year Ended September 30, 2019 Compared to Year Ended September 30, 2018 For a discussion of the cash flows for the year ended September 30, 2019 compared to the year ended September 30, 2018, refer to Part II, Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, which was filed with the Securities and Exchange Commission on November 22, 2019. Senior Secured Credit Facility On May 9, 2019, we replaced our then existing credit facility (the “2017 Senior Secured Credit Facility”) with a new Amended and Restated Credit Agreement with the guarantors and lenders party thereto and Bank of America, N.A., as administrative agent (the “Senior Secured Credit Facility”). For a discussion of our existing 2017 Senior Secured Credit Facility, which consisted of $40.0 million in term loans and a $110.0 million revolving line of credit, please refer to Note 9 to the accompanying consolidated financial statements in this Annual Report on Form 10-K. The Senior Secured Credit Facility, as amended on February 18, 2020 in connection with our offering of Exchangeable Notes, provides for aggregate commitments of $275.0 million in the form of a senior secured revolving credit facility. The Senior Secured Credit Facility provides that we have the right to seek additional commitments to provide additional term loan facilities or additional revolving credit commitments in an aggregate principal amount up to $50.0 million so long as, among other things, after giving pro forma effect to the incurrence of such additional borrowings and any related transactions, our consolidated interest coverage ratio would not be less than 3.00 to 1.00, our total leverage ratio would not exceed 5.00 to 1.00 and our consolidated senior leverage ratio would not exceed 3.25 to 1.00, provided that for each of the four fiscal quarters immediately following a qualified acquisition, the total leverage ratio and the consolidated senior secured leverage ratio would increase by up to 0.25, subject to certain limitations. The provision of any such additional amounts under the additional term loan facilities or additional revolving credit commitments are subject to certain additional conditions and the receipt of certain additional commitments by existing or additional lenders. The lenders under the Senior Secured Credit Facility are not under any obligation to provide any such additional term loan facilities or revolving credit commitments. The proceeds of the Senior Secured Credit Facility, together with proceeds from any additional amounts under the additional term loan facilities or additional revolving credit commitments, may only be used by us to (i) finance working capital, capital expenditures and other lawful corporate purposes, (ii) finance permitted acquisitions and (iii) to refinance certain existing indebtedness. Borrowings under the Senior Secured Credit Facility will be made, at our option, at the base rate or the Eurodollar rate, plus, in each case, an applicable margin. The base rate is a fluctuating rate of interest per annum equal to the highest of (a) the federal funds rate plus ½ of 1%, (b) the interest announced from time to time by Bank of America as its prime rate and (c) the Eurodollar rate plus 1%. The Eurodollar rate will be the rate of 60 interest per annum equal to LIBOR (based upon an interest period of one, two, three or six months or, under some circumstances, up to twelve months). The applicable margin is based upon our consolidated total leverage ratio, as reflected in the schedule below: Consolidated Total Leverage Ratio Commitment Fee Letter of Credit Fee Eurodollar Rate Loans Base Rate Loans > 3.00 to 1.0 0.30% 3.25% 3.25% 1.25% > 2.50 to 1.0 but < 3.00 to 1.0 0.25% 2.75% 2.75% 0.75% > 2.00 to 1.0 but < 2.50 to 1.0 0.20% 2.50% 2.50% 0.50% < 2.00 to 1.0 0.15% 2.25% 2.25% 0.25% In addition to paying interest on outstanding principal under the Senior Secured Credit Facility, we will be required to pay a commitment fee equal to the product of between 0.15% and 0.30% (the applicable percentage depending on our consolidated total leverage ratio as reflected in the schedule above) times the actual daily amount by which $275.0 million exceeds the total amount outstanding under the Senior Secured Credit Facility and available to be drawn under all outstanding letters of credit. We will be permitted to voluntarily reduce the unutilized portion of the commitment amount and repay outstanding loans under the Senior Secured Credit Facility, whether such amounts are issued under the Senior Secured Credit Facility or under the additional term loan facilities or additional revolving credit facilities, at any time without premium or penalty. In addition, if the total amount borrowed under the Senior Secured Credit Facility exceeds $275.0 million at any time, the Senior Secured Credit Facility requires us to prepay such excess outstanding amounts. All obligations under the Senior Secured Credit Facility are unconditionally guaranteed by i3 Verticals, Inc., a Delaware corporation, and each of i3 Verticals, Inc.’s existing and future direct and indirect material, wholly owned domestic restricted subsidiaries, subject to certain exceptions. The obligations are secured by first-priority security interests in substantially all of our tangible and intangible assets, i3 Verticals, Inc. and each subsidiary guarantor, in each case whether owned on the date of the initial borrowings or thereafter acquired. The Senior Secured Credit Facility places certain restrictions on the ability of us, i3 Verticals, Inc. and their restricted subsidiaries to, among other things, incur debt and liens; merge, consolidate or liquidate; dispose of assets; enter into hedging arrangements; make certain restricted payments; undertake transactions with affiliates; enter into sale-leaseback transactions; make certain investments; prepay or modify the terms of certain indebtedness; and modify the terms of certain organizational agreements. The Senior Secured Credit Facility contains customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, certain events of bankruptcy and insolvency, material judgments, certain ERISA events, invalidity of loan documents and certain changes in control. As of September 30, 2020, we were in compliance with these covenants with a consolidated interest coverage ratio, total leverage ratio and consolidated senior leverage ratio of 6.71x, 2.59x and 0.0x, respectively. Follow-on Offerings On June 10, 2019, we completed the June 2019 Secondary Public Offering of 5,165,527 shares of our Class A common stock, at a public offering price of $22.75 per share, which included a full exercise of the underwriters' option to purchase 673,764 additional shares of Class A common stock from us. We received approximately $111.6 million of net proceeds, after deducting underwriting discounts and commissions, but before offering expenses. We used the net proceeds to purchase (1) 1,000,000 Common Units directly from i3 Verticals, LLC, and (2) 4,165,527 Common Units (including 673,764 Common Units due to the exercise of the underwriters' option to purchase additional shares in full) and an equivalent number of Class B common stock (which shares were then canceled) from certain Continuing Equity Owners, in each case at a price per Common Unit equal to the price per share paid by the underwriters for shares of our Class A common stock in the offering. i3 Verticals, LLC received $20.9 million in net proceeds from the sale of Common Units to us, which we used to repay 61 outstanding indebtedness. In connection with this offering, we recognized an additional deferred tax asset of $26.2 million related to the Tax Receivable Agreement and a corresponding liability of $22.2 million. On September 15, 2020, we completed a public offering (the “September 2020 Public Offering”) of 3,737,500 shares of our Class A common stock, at a public offering price of $23.50 per share, which included a full exercise of the underwriters' option to purchase 487,500 additional shares of Class A common stock from us. We received approximately $83.4 million of net proceeds, after deducting underwriting discounts and commissions, but before offering expenses. We used the net proceeds to purchase (1) 3,250,000 Common Units directly from i3 Verticals, LLC, and (2) 487,500 Common Units pursuant to the exercise of the underwriters' option to purchase additional shares in full and an equivalent number of Class B common stock (which shares were then canceled) from certain Continuing Equity Owners, in each case at a price per Common Unit equal to the price per share paid by the underwriters for shares of our Class A common stock in the offering. i3 Verticals, LLC received $72.0 million in net proceeds from the sale of Common Units to the Company, which we used to repay outstanding indebtedness. In connection with this offering, we recognized an additional deferred tax asset of $3.0 million related to the Tax Receivable Agreement and a corresponding liability of $2.5 million. Exchangeable Notes On February 18, 2020, i3 Verticals, LLC issued $138.0 million aggregate principal amount of its 1.0% Exchangeable Senior Notes due February 15, 2025. The Exchangeable Notes bear interest at a fixed rate of 1.0% per year, payable semiannually in arrears on February 15 and August 15 of each year, beginning on August 15, 2020. The Exchangeable Notes are exchangeable on the terms set forth in the Indenture into cash, shares of Class A common stock, or a combination thereof, at i3 Verticals, LLC’s election. The Exchangeable Notes mature on February 15, 2025, unless earlier exchanged, redeemed or repurchased. We received approximately $132.8 million in net proceeds from the sale of the Exchangeable Notes, as determined by deducting estimated offering expenses paid to third-parties from the aggregate principal amount. i3 Verticals, LLC used a portion of the net proceeds of the Exchangeable Notes offering to pay down outstanding borrowings under the Senior Secured Credit Facility in connection with the effectiveness of the operative provisions of the Amendment and to pay the cost of the note hedge transactions. 62 Contractual Obligations The following table summarizes our contractual obligations and commitments as of September 30, 2020 related to leases and borrowings: Payments Due by Period Contractual Obligations Total Less than 1 year 1 to 3 years 3 to 5 years More than 5 years (in thousands) Processing minimums (1) $ 9,247 $ 3,334 $ 5,463 $ 450 $ — Facility leases 10,877 2,726 4,493 2,437 1,221 Loan to third party sales organization (2) 3,500 3,500 — — — Senior Secured Credit Facility and related interest (3) 2,976 825 1,650 501 — Exchangeable Notes and related interest (4) 122,119 1,170 2,340 118,609 — Contingent consideration (5) 13,034 10,062 2,972 — — Total $ 161,753 $ 21,617 $ 16,918 $ 121,997 $ 1,221 __________________________ 1. We have non-exclusive agreements with several processors to provide us services related to transaction processing and transmittal, transaction authorization and data capture, and access to various reporting tools. Certain of these agreements require us to submit a minimum monthly number of transactions for processing. If we submit a number of transactions that is lower than the minimum, we are required to pay to the processor the fees it would have received if we had submitted the required minimum number of transactions. 2. We have committed to a loan to a third party sales organization in multiple increments, contingent upon the third party sales organization's achievement of certain financial metrics. The amount reflected in this table includes the maximum commitment for the loan. 3. We estimated interest payments through the maturity of our Senior Secured Credit Facility by applying the interest rate of 4.50% in effect on the outstanding balance as of September 30, 2020, plus the unused fee rate of 0.30% in effect as of September 30, 2020. 4. We calculated interest payments through the maturity of our Exchangeable Notes by applying the coupon interest rate of 1.00% on the principal balance as of September 30, 2020 of $138.0 million. 5. In connection with certain of our acquisitions, we may be obligated to pay the seller of the acquired entity certain amounts of contingent consideration as set forth in the relevant purchasing documents, whereby additional consideration may be due upon the achievement of certain specified financial performance targets. i3 Verticals, Inc. accounts for the fair values of such contingent payments in accordance with the Level 3 financial instrument fair value hierarchy at the close of each subsequent reporting period. The acquisition-date fair value of contingent consideration is valued using a Monte Carlo simulation. i3 Verticals, Inc. subsequently reassesses such fair value based on probability estimates with respect to the acquired entity’s likelihood of achieving the respective financial performance targets. Potential payments under the Tax Receivable Agreement are not reflected in this table. See “—Tax Receivable Agreement” below. Tax Receivable Agreement We are a party to a Tax Receivable Agreement with i3 Verticals, LLC and each of the Continuing Equity Owners, as described in Note 10 of our consolidated financial statements. As a result of the Tax Receivable Agreement, we have been required to establish a liability in our consolidated financial statements. That liability, which will increase upon the redemptions or exchanges of Common Units for our Class A common stock, generally represents 85% of the estimated future tax benefits, if any, relating to the increase in tax basis associated with the Common Units we received as a result of the Reorganization Transactions and other redemptions or exchanges by holders of Common Units. If this election is made, the accelerated payment will be based on the present value of 100% of the estimated future tax benefits and, as a result, the associated liability reported on our consolidated financial statements may be increased. We expect that the payments required under the Tax Receivable Agreement will be substantial. The actual increase in tax basis, as well as the amount and timing of any payments under the Tax Receivable Agreement, will vary depending upon a number of factors, including the timing of redemptions or exchanges by the holders of Common Units, the price of our Class A common stock at the time of the redemption or exchange, whether such redemptions or exchanges are taxable, the amount and timing of the taxable income we generate in the future and the tax rate then applicable as well as the portion of our payments under the Tax Receivable Agreement constituting imputed interest. We intend to fund the payment of the amounts due under the Tax Receivable Agreement out of the cash savings that we actually realize in respect of the attributes to which Tax Receivable Agreement relates. 63 As of September 30, 2020, the total amount due under the Tax Receivable Agreement was $27.6 million, and payments to the Continuing Equity Owners related to exchanges through September 30, 2020 will range from approximately $0 to $2.5 million per year and are expected to be paid over the next 25 years. The amounts recorded as of September 30, 2020, approximate the current estimate of expected tax savings and are subject to change after the filing of the Company’s U.S. federal and state income tax returns. Future payments under the Tax Receivable Agreement with respect to subsequent exchanges would be in addition to these amounts. Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting policies generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, goodwill and intangible assets, contingent consideration, and equity-based compensation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies we believe to be most critical to understanding our financial condition and results of operations are discussed below. For a list of all significant accounting policies refer to Note 2, “Summary of Significant Accounting Policies” in the notes to the accompanying consolidated financial statements in this Annual Report. Emerging Growth Company Refer to Item 1A, “Risk Factors” for discussion of the reduced disclosure requirements and extended transition period to comply with new or revised accounting standards applicable to public companies, afforded to us by our status as an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the JOBS Act. Acquisitions 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. Where relevant, the fair value of material contingent consideration included in an acquisition is calculated using a Monte Carlo simulation. The fair value of merchant relationships and non-compete assets acquired is identified using the Income Approach. The fair value of trade names acquired is identified using the Relief from Royalty Method. For a discussion of the estimation methodology and the significance of various inputs, please see the subheading below titled “Use of Estimates.” The fair value of deferred revenue is identified using the Adjusted Fulfillment Cost Method. 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 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. An asset acquisition is recorded at its purchase price, inclusive of acquisition costs, which is allocated among the acquired assets and assumed liabilities based upon their relative fair values at the date of acquisition. The operating results of an acquisition are included in our consolidated statements of operations from the date of such acquisition. Acquisitions completed during the year ended September 30, 2020 contributed $1.3 million and $0.3 million of revenue and net income, respectively, to the results in the consolidated statements of operations for the year then ended. 64 Goodwill In accordance with ASC 350, Intangibles—Goodwill and Other, we test goodwill for impairment for each reporting unit on an annual basis in the fourth quarter, or when events or circumstances indicate the fair value of a reporting unit is below its carrying value. Our goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in business combinations. The goodwill generated from the business combinations is primarily related to the value placed on the employee workforce and expected synergies. Judgment is involved in determining if an indicator or change in circumstances relating to impairment has occurred. Such changes may include, among others, a significant decline in expected future cash flows, a significant adverse change in the business climate, and unforeseen competition. No goodwill impairment charges were recognized during the years ended September 30, 2020 and 2019. We have the option of performing a qualitative assessment of impairment to determine whether any further quantitative testing for impairment is necessary. The option of whether or not to perform a qualitative assessment is made annually and may vary by reporting unit. If we determine not to perform the qualitative assessment or if we determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying value, then we perform a quantitative test for that reporting unit. The fair value of each reporting unit is compared to the reporting unit’s carrying value, including goodwill. Subsequent to the adoption on January 1, 2017 of Accounting Standards Update (“ASU”) No. 2017-04, Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment, if the fair value of a reporting unit is less than its carrying value, we recognize an impairment equal to the excess carrying value, not to exceed the total amount of goodwill allocated to that reporting unit. For a discussion of the estimation methodology, the qualitative factors considered when performing a qualitative assessment and the significance of various inputs, please see the subheading below titled “Use of Estimates.” As of our goodwill impairment test date for the year ended September 30, 2020, we have determined that we have five reporting units as of the date of the most recent annual good impairment test. For each of the years ended September 30, 2020 and 2019, we performed a quantitative assessment for each reporting unit. We determined that none of the reporting units were impaired and fair values of all of our reporting units substantially exceeded their carrying values at the assessment date. Income Taxes i3 Verticals, Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from i3 Verticals, LLC based on i3 Verticals, Inc.'s economic interest in i3 Verticals, LLC. i3 Verticals, LLC's members, including i3 Verticals, Inc., 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. The amount provided for state income taxes is based upon the amounts of current and deferred taxes payable or refundable at the date of the consolidated financial statements as a result of all events recognized in the financial statements as measured by the provisions of enacted tax laws. Under GAAP, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. We report a liability for unrecognized tax positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any, related to unrecognized tax benefits as part of income tax expense. See additional discussion in Note 10. Valuation of Contingent Consideration On occasion, we may have acquisitions which include contingent consideration. Accounting for business combinations requires us to estimate the fair value of any contingent purchase consideration at the acquisition 65 date. For a discussion of the estimate methodology and the significance of various inputs, please see the subheading below titled “Use of Estimates.” Changes in estimates regarding the fair value contingent purchase consideration are reflected as adjustments to the related liability and recognized within operating expenses in the consolidated statements of operations. Short and long-term contingent liabilities are presented within accrued expenses and other current liabilities and other long-term liabilities on our consolidated balance sheets, respectively. Revenue Recognition and Deferred Revenue For the year ended September 30, 2020, revenue is recognized as each performance obligation is satisfied, in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). We accrue for rights of refund, processing errors or penalties, or other related allowances based on historical experience. We utilized the portfolio approach practical expedient within ASC 606-10-10-4 Revenue from Contracts with Customers—Objectives and the significant financing component practical expedient within ASC 606-10-32-18 Revenue from Contracts with Customers—The Existence of a Significant Financing Component in the Contract in performing the analysis. We adopted ASC 606 on October 1, 2019, using the modified retrospective method and applying the standard to all contracts not completed on the date of adoption. Results for the reporting period beginning October 1, 2019 are presented under ASC 606, while prior period amounts continue to be reported in accordance with our historic accounting practices under previous guidance. The majority of our revenue for the years ended September 30, 2020, 2019 and 2018 is derived from volume-based payment processing fees (“discount fees”) and other related fixed transaction or service fees. The remainder is comprised of sales of software licensing subscriptions, ongoing support, and other POS-related solutions we provide to our clients directly and through its processing bank relationships. Discount fees represent a percentage of the dollar amount of each credit or debit transaction processed or a specified per transaction amount, depending on the card type. We frequently enter into agreements with clients under which the client engages us to provide both payment authorization services and transaction settlement services for all of the cardholder transactions of the client, regardless of which issuing bank and card network to which the transaction relates. Our core performance obligations are to stand ready to provide continuous access to our payment authorization services and transaction settlement services in order to be able to process as many transactions as our clients require on a daily basis over the contract term. These services are stand ready obligations, as the timing and quantity of transactions to be processed is not determinable. Under a stand-ready obligation, our performance obligation is defined by each time increment rather than by the underlying activities satisfied over time based on days elapsed. Because the service of standing ready is substantially the same each day and has the same pattern of transfer to the client, we have determined that our stand-ready performance obligation comprises a series of distinct days of service. Discount fees are recognized each day based on the volume or transaction count at the time the merchants’ transactions are processed. We follow the requirements of ASC 606-10-55 Revenue from Contracts with Customers—Principal versus Agent Considerations , which states that the determination of whether a company should recognize revenue based on the gross amount billed to a client or the net amount retained is a matter of judgment that depends on the facts and circumstances of the arrangement. The determination of gross versus net recognition of revenue requires judgment that depends on whether we control the good or service before it is transferred to the merchant or whether we are acting as an agent of a third party. The assessment is provided separately for each performance obligation identified. Under our agreements, we incur interchange and network pass-through charges from the third-party card issuers and card networks, respectively, related to the provision of payment authorization services. We have determined that we are acting as an agent with respect to these payment authorization services, based on the following factors: (1) we have no discretion over which card issuing bank will be used to process a transaction and are unable to direct the activity of the merchant to another card issuing bank, and (2) interchange and card network rates are pre-established by the card issuers or card networks, and we have no latitude in determining these fees. Therefore, revenue allocated to the payment authorization performance obligation is presented net of interchange and card network fees paid to the card issuing banks and card networks, respectively, for the year ended September 30, 2020, subsequent to the adoption of ASC 606. With regards to our discount fees, generally, where we have control over merchant pricing, merchant portability, credit risk and ultimate responsibility for the merchant relationship, revenues are reported at the time of sale equal to the full amount of the discount charged to the merchant, less interchange and network fees. 66 Revenues generated from merchant portfolios where we do not have control over merchant pricing, liability for merchant losses or credit risk or rights of portability are reported net of interchange and network fees as well as third-party processing costs directly attributable to processing and bank sponsorship costs. Revenues are also derived from a variety of fixed transaction or service fees, including authorization fees, convenience fees, statement fees, annual fees, gateway fees, which are charged for accessing our payment and software solutions, and fees for other miscellaneous services, such as handling chargebacks. Revenues derived from service fees are recognized at the time the services are performed and there are no further performance obligations. Revenue from fixed transactions, which principally relates to the sale of equipment, is recognized upon transfer of ownership and delivery to the client, after which there are no further performance obligations. Revenues from sales of our software are recognized when the related performance obligations are satisfied. Sales of software licenses are categorized into one of two categories of intellectual property in accordance with ASC 606, functional or symbolic. The key distinction is whether the license represents a right to use (functional) or a right to access (symbolic) intellectual property. We generate sales of one-time software licenses, which is functional intellectual property. Revenue from functional intellectual property is recognized at a point in time, when delivered to the client. We also offer access to our software under software-as-a-service (“SaaS”) arrangements, which represent services arrangements. Revenue from SaaS arrangements is recognized over time, over the term of the agreement. Arrangements may contain multiple performance obligations, such as payment authorization services, transaction settlement services, hardware, software products, maintenance, and professional installation and training services. Revenues are allocated to each performance obligation based on the standalone selling price of each good or service. The selling price for a deliverable is based on standalone selling price, if available, the adjusted market assessment approach, estimated cost plus margin approach, or residual approach. We establish estimated selling price, based on the judgment of our management, considering internal factors such as margin objectives, pricing practices and controls, client segment pricing strategies and the product life cycle. In arrangements with multiple performance obligations, we determine allocation of the transaction price at inception of the arrangement and use the standalone selling prices for the majority of our revenue recognition. Revenues from sales of our combined hardware and software element are recognized when each performance obligation has been satisfied which has been determined to be upon the delivery of the product. Revenues derived from service fees are recognized at the time the services are performed and there are no further performance obligations. Our professional services, including training, installation, and repair services are recognized as revenue as these services are performed. Deferred revenue represents amounts billed to clients for services contracts. Payment is typically collected at the start of the contract term. The initial prepaid contract agreement balance is deferred. The balance is then recognized as the services are provided over the contract term. 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 our contracts with a deferred revenue component are one year. Substantially all of our deferred revenue is anticipated to be recognized within the next year. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include, but are not limited to, the value of purchase consideration paid and identifiable assets acquired and assumed in acquisitions, goodwill and intangible asset impairment review, warrant valuation, revenue recognition for contracts with multiple performance obligations, loss reserves, assumptions used in the calculation of equity-based compensation and in the calculation of income taxes, and certain tax assets and liabilities as well as the related valuation allowances. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. The impact of the COVID-19 pandemic on certain of our estimates, including goodwill and intangible assets, is uncertain at this time. If general economic conditions continue to deteriorate or remain uncertain for an extended period of time, the trading price of our common stock, 67 which has already declined in recent months, could decline further. If the stock price continues to be depressed or decreases further, it may cause a triggering event for impairment testing of fair-valued assets, including goodwill and intangible assets. Below is a summary of our critical accounting estimates for which the nature of management’s assumptions are material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and for which the impact of the estimates and assumptions on financial condition or operating performance is material. Contingent Consideration in Acquisitions On occasion, we may have acquisitions that include contingent consideration. Accounting for business combinations requires us to estimate the fair value of any contingent purchase consideration at the acquisition date. Where relevant, 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. For example, if management’s forecasted performance for an acquisition increased, we would have anticipated a higher probability of contingent consideration being paid on the acquisition and would have recorded additional losses from the change in fair value of contingent consideration. Conversely, if management’s forecasted performance for an acquisition decreased, we would have anticipated a higher probability of contingent consideration being paid on the acquisition and would have recorded a gain from change in fair value of contingent consideration. Goodwill We test goodwill for impairment using a fair value approach at least annually, absent some triggering event that would require an interim impairment assessment. Absent any impairment indicators, we perform our goodwill impairment testing as of July 1 each year. In our goodwill impairment review, we use significant estimates and assumptions that include the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units and determining the fair value of each reporting unit. Our assessment of qualitative factors involves significant judgments about expected future business performance and general market conditions. In a quantitative assessment, the fair value of each reporting unit is determined based on a combination of techniques, including the present value of future cash flows, applicable multiples of competitors and multiples from sales of like businesses, and requires management to make estimates and assumptions regarding discount rates, growth rates and our future long-term business plans. Changes in any of these estimates or assumptions could materially affect the determination of fair value and the associated goodwill impairment charge for each reporting unit. For example, if management’s forecasted earnings decreased for a reporting unit, we may have recorded an impairment loss for that reporting unit. Warrant Valuation As of September 30, 2017 there were in the aggregate $1.4 million of warrants (the “Mezzanine Warrants”) outstanding and exercisable to purchase common units in i3 Verticals, LLC related to the issuance of the Mezzanine Notes. The Mezzanine Warrants were mandatorily redeemable and embodied a conditional obligation to redeem the instrument by a transfer of assets. The Mezzanine Warrants were remeasured at each reporting date through the settlement of the instrument and changes in value were reflected in earnings. We used the Black-Scholes option pricing model to determine the fair market value of the Mezzanine Warrants at each reporting period. The option pricing model required the input of highly subjective assumptions, including the estimated enterprise value of the Company, expected term of the warrants, expected volatility, risk-free interest rates and discount for lack of marketability. To determine the fair value of the Mezzanine Warrants, we engaged an outside consultant to prepare a valuation of the unit price at each reporting date, using information 68 provided by management and information obtained from private and public sources. The fair market value of the warrants was $0.8 million as of September 30, 2017. We used an expected volatility based on the historical volatilities of a group of guideline companies and estimated a liquidity event in June 2018 to determine the term of the warrants. The risk-free interest rates were obtained from publicly available U.S. Treasury yield curve rates. The discount for lack of marketability was determined using the Finnerty Model. Based on our analysis, the most highly sensitive input in our option pricing model related to management’s forecasted earnings. For example, if management’s forecasted earnings increased, we would have recorded additional losses from the change in fair value of warrant liability. Conversely, if management’s forecasted earnings decreased, we would have recorded a gain from change in fair value of warrant liability. Other inputs, such as expected volatility and the risk free interest rate, had a less material impact of the valuation of the warrant liability. The change in fair value of the warrant liabilities was an increase of $8.5 million for the year ended September 30, 2018. The fair market value of the warrants was $0.8 million as of September 30, 2017. On June 25, 2018, in conjunction with the Reorganization Transactions described in Note 1 to our consolidated financial statements, all existing Mezzanine Warrants were exercised for common units in i3 Verticals, LLC. See Note 9 to our consolidated financial statements for additional discussion of the Mezzanine Warrants. Related Parties Transactions involving related parties cannot be presumed to be carried out at an arm's length- basis, as the requisite conditions of competitive, free-dealing markets may not exist. A description of related-party transactions is provided in Note 15 in our audited consolidated financial statements. Recently Issued Accounting Pronouncements Refer to Note 2, “Summary of Significant Accounting Policies” in the notes to the accompanying consolidated financial statements for further discussion. Off-Balance Sheet Arrangements As of September 30, 2020, we did not have any off-balance sheet financing arrangements. Effects of Inflation While inflation may impact our revenues and cost of services, we believe the effects of inflation, if any, on our results of operations and financial condition have not been significant. However, there can be no assurance that our results of operations and financial condition will not be materially impacted by inflation in the future.