What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-02-09 compared with 2020-08-10 · 399 added, 561 removed, 582 unchanged (62% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

June 30, September 30,

(In thousands, except share amounts)

December 31, September 30,

Current assets

1 unchanged sentence

Accounts receivable, net 23,786 17,538

Settlement assets 84 —

Prepaid expenses and other current assets 9,747 4,869

6 unchanged sentences

Deferred tax asset 44,966 36,755

Operating lease right-of-use assets 10,560 —

Other assets 6,509 5,197

4 unchanged sentences

Accrued expenses and other current liabilities 26,750 24,064

Settlement obligations 84 —

Deferred revenue 23,868 10,986

Current portion of operating lease liabilities 2,813 —

Total current liabilities 59,863 38,895

1 unchanged sentence

Long-term tax receivable agreement obligations 34,299 27,565

Operating lease liabilities, less current portion 8,309 —

Other long-term liabilities 12,388 6,140

3 unchanged sentences

Preferred stock, par value $ 0.0001 per share, 10,000,000 shares authorized;

0 shares issued and outstanding as of June 30, 2020 and September 30, 2019

0 shares issued and outstanding as of December 31, 2020 and September 30, 2020

Class A common stock, par value $ 0.0001 per share, 150,000,000 shares authorized;

15,085,813 and 14,444,115 shares issued and outstanding as of June 30, 2020 and September 30, 2019, respectively

20,004,771 and 18,864,143 shares issued and outstanding as of December 31, 2020 and September 30, 2020, respectively

Class B common stock, par value $ 0.0001 per share, 40,000,000 shares authorized;

12,391,621 and 12,921,637 shares issued and outstanding as of June 30, 2020 and September 30, 2019, respectively

10,881,012 and 11,900,621 shares issued and outstanding as of December 31, 2020 and September 30, 2020, respectively

Additional paid-in-capital 169,097 157,598

Accumulated (deficit) earnings ( 1,372 ) ( 2,309 )

Accumulated deficit ( 4,595 ) ( 2,023 )

Total stockholders' equity 164,505 155,578

1 unchanged sentence

Total equity 241,433 240,168

Total liabilities and stockholders' equity $ 360,473 $ 349,302

Total liabilities and equity $ 497,689 $ 403,526

See Notes to the Interim Condensed Consolidated Financial Statements

2 unchanged sentences

(In thousands, except share and per share amounts)

Three months ended June 30, Nine months ended June 30,

2020 2019 2020 2019

Three months ended December 31,

Revenue $ 43,313 $ 41,111

Operating expenses

Interchange and network fees (1)

63,263 173,777

Other costs of services 13,666 12,918

3 unchanged sentences

Total operating expenses 45,624 37,014

Income from operations 437 1,194 6,575 4,521

Other expenses

(Loss) income from operations ( 2,311 ) 4,097

Interest expense, net 2,029 2,014

Other expense 829 — 829 —

Total other expenses 3,252 1,918 7,450 3,987

(Loss) income before income taxes ( 4,340 ) 2,083

Benefit from income taxes ( 5 ) ( 131 ) ( 1,918 ) ( 2 )

(Benefit from) provision for income taxes ( 219 ) 149

Net (loss) income ( 4,121 ) 1,934

Net (loss) income attributable to non-controlling interest ( 1,549 ) 2,083

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

Net loss attributable to i3 Verticals, Inc.

$ ( 2,572 ) $ ( 149 )

Net (loss) income per share attributable to Class A common stockholders:

Net loss per share attributable to Class A common stockholders:

Basic $ ( 0.13 ) $ ( 0.01 )

3 unchanged sentences

Diluted 19,129,056 14,233,785

__________________________

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 condensed consolidated financial statements for a description of the recently adopted accounting pronouncement.

See Notes to the Interim Condensed Consolidated Financial Statements

i3 Verticals, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

(In thousands, except share amounts)

Class A Common Stock Class B Common Stock Additional Paid-In Capital Accumulated 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

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

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

Equity-based compensation — — — — 3,441 — — 3,441

Net (loss) income — — — — — ( 149 ) 2,083 1,934

Exercise of equity-based awards 53,662 — — — 351 — — 351

Balance at December 31, 2019 14,497,777 1 12,921,637 1 84,855 ( 1,753 ) 65,091 148,195

Equity-based compensation — — — — 2,510 — — 2,510

Net income — — — — — 737 1,182 1,919

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

Redemption of common units in i3 Verticals, LLC 510,016 — ( 510,016 ) — 2,597 — ( 2,597 ) —

Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis — — — — 596 — — 596

Exercise of equity-based awards 31,125 — — — 2 — — 2

Equity component of exchangeable notes, net of issuance costs and deferred taxes — — — — 27,569 — — 27,569

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

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

Balance at March 31, 2020 15,038,918 1 12,411,621 1 104,122 ( 1,016 ) 63,673 166,781

Equity-based compensation — — — — 2,816 — — 2,816

Net loss — — — — — ( 2,572 ) ( 1,549 ) ( 4,121 )

Distributions to non-controlling interest holders — — — — — — — —

Redemption of common units in i3 Verticals, LLC 1,019,609 — ( 1,019,609 ) — 7,185 — ( 7,185 ) —

1 unchanged sentence

Exercise of equity-based awards 121,019 — — — 688 — — 688

Equity component of exchangeable notes, net of issuance costs and deferred taxes — — — — 9 — — 9

Repurchases of exchangeable note hedges — — — — 571 — — 571

Balance at June 30, 2020 15,085,813 $ 1 12,391,621 $ 1 $ 107,654 $ ( 1,372 ) $ 61,144 $ 167,428

Allocation of equity to non-controlling interests — — — — ( 1,072 ) — 1,072 —

Balance at December 31, 2020 20,004,771 $ 2 10,881,012 $ 1 $ 169,097 $ ( 4,595 ) $ 76,928 $ 241,433

See Notes to the Interim Condensed Consolidated Financial Statements

i3 Verticals, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED) (CONTINUED)

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) (CONTINUED)

(In thousands, except share amounts)

Class A Common Stock Class B Common Stock Additional Paid-In Capital Accumulated 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

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

Equity-based compensation — — — — 951 — — 951

Forfeitures of restricted Class A common stock ( 4,010 ) — — — — — — —

Net (loss) income — — — — — 178 2,173 2,351

Distributions to non-controlling interest holders — — — — — — ( 934 ) ( 934 )

Balance at December 31, 2018 9,108,032 1 17,213,806 2 39,513 914 74,136 114,566

Equity-based compensation — — — — 1,363 — — 1,363

Forfeitures of restricted Class A common stock ( 17,644 ) — — — — — — —

Net (loss) income — — — — — ( 1,102 ) ( 120 ) ( 1,222 )

Distributions to non-controlling interest holders — — — — — — ( 89 ) ( 89 )

Redemption of common units in i3 Verticals, LLC 101,642 — ( 101,642 ) — 291 — ( 291 ) —

Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis — — — — 117 — — 117

Balance at March 31, 2019 9,192,030 1 17,112,164 2 41,284 ( 188 ) 73,636 114,735

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

Equity-based compensation — — — — 2,124 — — 2,124

Forfeitures of restricted Class A common stock ( 1,124 ) — — — — — — —

Net (loss) income — — — — — ( 149 ) 2,083 1,934

Distributions to non-controlling interest holders — — — — — — ( 1,037 ) ( 1,037 )

Redemption of common units in i3 Verticals, LLC 4,190,527 — ( 4,190,527 ) ( 1 ) 11,786 — ( 11,786 ) ( 1 )

Sale of Class A common stock in public offering, net 1,000,000 — — — 21,660 — — 21,660

Capitalization of public offering costs — — — — ( 771 ) — — ( 771 )

Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis — — — — 3,962 — — 3,962

Issuance of restricted Class A common stock under Equity Plan 8,799 — — — 225 — — 225

Exercise of equity-based awards 53,662 — — — 351 — — 351

Balance at June 30, 2019 14,420,199 $ 1 12,921,637 $ 1 $ 80,344 $ ( 1,379 ) $ 61,411 $ 140,378

Balance at December 31, 2019 14,497,777 $ 1 12,921,637 $ 1 $ 84,855 $ ( 1,753 ) $ 65,091 $ 148,195

See Notes to the Interim Condensed Consolidated Financial Statements

2 unchanged sentences

(In thousands)

Nine months ended June 30,

Three months ended December 31,

Cash flows from operating activities:

Net income (loss) $ 1,043 $ 536

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

Net (loss) income $ ( 4,121 ) $ 1,934

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

Depreciation and amortization 5,092 4,655

2 unchanged sentences

Amortization of debt discount and issuance costs 1,332 100

Debt issuance costs write offs 141 152

Loss on repurchase of exchangeable notes 828 —

Amortization of capitalized client acquisition costs 288 —

Loss on disposal of assets 1 8

Amortization of capitalized customer acquisition costs 119 88

(Benefit from) provision for deferred income taxes ( 219 ) —

(Decrease) increase in non-cash contingent consideration expense from original estimate ( 1,461 ) 1,736

Non-cash lease expense 694 —

Increase in non-cash contingent consideration expense from original estimate 1,904 154

Changes in operating assets:

6 unchanged sentences

Deferred revenue 7,870 178

Operating lease liabilities ( 782 ) —

Other long-term liabilities 6,038 ( 21 )

12 unchanged sentences

(In thousands)

Nine months ended June 30,

Three months ended December 31,

Cash flows from financing activities:

1 unchanged sentence

Payments of revolving credit facility ( 38,948 ) ( 38,390 )

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 ( 6,807 ) —

Payments of notes payable to banks — ( 35,000 )

Payments of debt issuance costs ( 5,215 ) ( 152 )

Proceeds from issuance of Class A common stock sold in public offering, net of underwriting discounts and offering costs — 21,660

Cash paid for contingent consideration ( 1,736 ) —

Payments for required distributions to members for tax obligations ( 3 ) ( 2,025 )

Proceeds from stock option exercises 851 472

Payments for employee's tax withholdings from net settled stock option exercises ( 200 ) —

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

Net increase (decrease) in cash, cash equivalents, and restricted cash 7,486 1,888

Net cash provided by (used in) financing activities 48,222 ( 6,635 )

Net (decrease) increase in cash, cash equivalents, and restricted cash ( 1,153 ) ( 933 )

Cash, cash equivalents, and restricted cash at beginning of period 20,601 3,200

3 unchanged sentences

Cash paid for income taxes $ — $ 287

$ 404 $ 1,323

____________________

After the issuance of the Form 10-Q for the nine months ended June 30, 2019, Management identified there was a mathematical mistake in the calculation of the cash paid for income taxes for the nine months ended June 30, 2019.

The Company has restated the cash paid for income taxes for the nine months ended June 30, 2019 to the correct amount of $ 1,323 from the originally reported amount of $ 24,611 .

There was no impact on any other disclosures.

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

i3 Verticals, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)

(In thousands)

Nine months ended June 30,

Beginning balance

Cash and cash equivalents $ 1,119 $ 572

Restricted cash 2,081 665

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

Ending balance

Cash and cash equivalents $ 9,136 $ 1,509

Restricted cash 1,550 1,616

Total cash, cash equivalents, and restricted cash $ 10,686 $ 3,125

See Notes to the Interim Condensed Consolidated Financial Statements

34 unchanged sentences

Public Offering

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.

On September 15, 2020, the Company completed a 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) 1,000,000 Common Units directly from i3 Verticals, LLC, and (2) 4,165,527 Common Units (including 673,764 Common Units due to the exercise of the underwriters' option to purchase additional shares in full) and an equivalent number of Class B common stock (which shares were then canceled) from certain Continuing Equity Owners, in each case at a price per Common Unit equal to the price per share paid by the underwriters for shares of our Class A common stock in the offering.

The 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 June 30, 2020, i3 Verticals, Inc.

• As of December 31, 2020, i3 Verticals, Inc.

owned 64.8 % of the economic interest in i3 Verticals, LLC.

As of June 30, 2020, the Continuing Equity Owners owned Common Units in i3 Verticals, LLC representing approximately 45.1 % 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 45.1 % of the voting power in the Company.

• As of December 31, 2020, the Continuing Equity Owners owned Common Units in i3 Verticals, LLC representing approximately 35.2 % of the economic interest in i3 Verticals, LLC, shares of Class A common stock in the Company representing approximately 0.8 % of the economic interest and voting power in the Company, and shares of Class B common stock in i3 Verticals, Inc., representing approximately 35.2 % 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 Owners hold approximately 36.0 % of the economic interest and voting power in i3 Verticals, Inc.

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 has caused several states and cities to declare states of emergency or disaster proclamations.

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

Although many of the restrictions have eased across the country, the pandemic has yet to show substantial signs of decline in the U.S.

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

i3 Verticals, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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 the Company's business and is expected to continue to adversely impact its strategic verticals and its business in general.

For example, the Company and its 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 the Company's strategic verticals.

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, the Company is unable to predict the long-term impact of the pandemic on its business at this time.

Given these conditions, there could be material changes to recorded balances and estimates in the future.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

2 unchanged sentences

Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for fair presentation of the unaudited condensed consolidated financial statements of the Company and its subsidiaries as of June 30, 2020 and for the three and nine months ended June 30, 2020 and 2019.

The results of operations for the three and nine months ended June 30, 2020 and 2019 are not necessarily indicative of the operating results for the full year.

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

for the three months ended December 31, 2020 and 2019.

The results of operations for the three months ended December 31, 2020 and 2019 are not necessarily indicative of the operating results for the full year.

It is recommended that these interim condensed consolidated financial statements be read in conjunction with the Company's consolidated financial statements and related footnotes for the years ended September 30, 2020 and 2019, included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2020.

5 unchanged sentences

It is presented as long-term assets on the accompanying condensed consolidated balance sheets since the related agreements extend beyond the next twelve months.

Following the adoption of Accounting Standards Update (“ASU”) No.

2016-18, Statement of Cash Flows:

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

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 December 31, 2020, settlement assets and settlement obligations were both $ 84 .

As of September 30, 2020, the Company had no settlement assets or settlement obligations.

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

Inventories were $ 1,527 and $ 1,294 at June 30, 2020 and September 30, 2019, respectively, and are included within prepaid expenses and other current assets on the accompanying condensed consolidated balance sheets.

Notes Receivable

Notes receivable consist of loans made to unrelated entities.

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

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Inventories were $ 1,460 and $ 1,309 at December 31, 2020 and September 30, 2020, respectively, and are included within prepaid expenses and other current assets on the accompanying condensed 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.

When relevant, the fair value of contingent consideration included in an acquisition is calculated using a Monte Carlo simulation.

Where relevant, the fair value of 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.

3 unchanged sentences

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

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

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.

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

No acquisitions were completed during the nine months ended June 30, 2020.

Acquisitions completed during the three months ended December 31, 2020 contributed $ 5,744 and $ 540 of revenue and net loss, respectively, to the Company's condensed consolidated statements of operations for the three months then ended.

The Company adopted ASU 2016-02, Leases, (“ASC 842”) on October 1, 2020, using the optional modified retrospective method under which the prior period financial statements were not restated for the new guidance.

The Company elected the accounting policy practical expedients for all classes of underlying assets to (i) combine associated lease and non-lease components in a lease arrangement as a combined lease component and (ii) exclude recording short-term leases as right-of-use assets on the condensed consolidated balance sheets.

At contract inception the Company determines whether an arrangement is, or contains a lease, and for each identified lease, evaluates the classification as operating or financing.

Leased assets and obligations are recognized at the lease commencement date based on the present value of fixed lease payments to be made over the term of the lease.

Renewal and termination options are factored into determination of the lease term only if the option is reasonably certain to be exercised.

The Company’s leases do not provide a readily determinable implicit interest rate and the Company uses its incremental borrowing rate to measure the lease liability and corresponding right-of-use asset.

The incremental borrowing rate is a fully collateralized rate that considers the Company’s credit rating, market conditions and the term of the lease.

The Company accounts for all components in a lease arrangement as a single combined lease component.

Operating lease cost is recognized on a straight-line basis over the lease term.

Total lease costs include variable lease costs, which are primarily comprised of the consumer price index adjustments and other changes based on rates, such as costs of insurance and property taxes.

Variable payments are expensed in the period incurred and not included in the measurement of lease assets and obligations.

Revenue Recognition and Deferred Revenue

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

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.

2 unchanged sentences

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 nine months ended June 30, 2020 and 2019 is derived from volume-based payment processing fees (“discount fees”) and other related fixed transaction or service fees.

The majority of the Company's revenue for the three months ended December 31, 2020 and 2019 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.

15 unchanged sentences

(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 nine months ended June 30, 2020, subsequent to the adoption of ASC 606.

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.

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.

2 unchanged sentences

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.

Revenue from fixed transactions, which principally relate 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.

13 unchanged sentences

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 our revenue recognition.

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.

1 unchanged sentence

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

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

3 unchanged sentences

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

For the Three Months Ended June 30, 2020

Merchant Services Proprietary Software and Payments Other Total

Payments revenue $ 18,060 $ 2,999 $ ( 412 ) $ 20,647

Other revenue 3,471 7,459 ( 4 ) 10,926

Total revenue $ 21,531 $ 10,458 $ ( 416 ) $ 31,573

For the Three Months Ended June 30, 2019

Merchant Services Proprietary Software and Payments Other Total

Payments revenue $ 82,027 $ 5,379 $ — $ 87,406

Other revenue 5,237 4,840 — 10,077

Total revenue $ 87,264 $ 10,219 $ — $ 97,483

For the Nine Months Ended June 30, 2020

For the Three Months Ended December 31, 2020

Merchant Services Proprietary Software and Payments Other Total

2 unchanged sentences

Total revenue $ 24,970 $ 18,776 $ ( 433 ) $ 43,313

For the Nine Months Ended June 30, 2019

For the Three Months Ended December 31, 2019 (1)

Merchant Services Proprietary Software and Payments Other Total

2 unchanged sentences

Total revenue $ 28,239 $ 13,282 $ ( 410 ) $ 41,111

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 business within its segments.

Refer to Note 12 for further discussion.

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

i3 VERTICALS, Inc.

5 unchanged sentences

• 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 Three Months Ended June 30, 2020

Merchant Services Proprietary Software and Payments Other Total

Revenue earned over time $ 15,972 $ 7,319 $ ( 402 ) $ 22,889

Revenue earned at a point in time 5,559 3,139 ( 14 ) 8,684

Total revenue $ 21,531 $ 10,458 $ ( 416 ) $ 31,573

For the Three Months Ended June 30, 2019

Merchant Services Proprietary Software and Payments Other Total

Revenue earned over time $ 79,682 $ 7,559 $ — $ 87,241

Revenue earned at a point in time 7,582 2,660 — 10,242

Total revenue $ 87,264 $ 10,219 $ — $ 97,483

For the Nine Months Ended June 30, 2020

For the Three Months Ended December 31, 2020

Merchant Services Proprietary Software and Payments Other Total

Revenue earned over time $ 52,639 $ 27,702 $ ( 1,336 ) $ 79,005

Revenue earned at a point in time 21,375 11,503 ( 21 ) 32,857

Revenue transferred over time $ 18,011 $ 13,720 $ ( 388 ) $ 31,343

Revenue transferred at a point in time 6,959 5,056 ( 45 ) 11,970

Total revenue $ 24,970 $ 18,776 $ ( 433 ) $ 43,313

For the Nine Months Ended June 30, 2019

For the Three Months Ended December 31, 2019 (1)

Merchant Services Proprietary Software and Payments Other Total

Revenue earned over time $ 217,232 $ 20,557 $ — $ 237,789

Revenue earned at a point in time 24,609 5,347 — 29,956

Revenue transferred over time $ 19,817 $ 9,467 $ ( 408 ) $ 28,876

Revenue transferred at a point in time 8,422 3,815 ( 2 ) 12,235

Total revenue $ 28,239 $ 13,282 $ ( 410 ) $ 41,111

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Refer to Note 12 for further discussion.

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

Contract Liabilities

4 unchanged sentences

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 condensed consolidated balance sheets.

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

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

The following table presents the changes in deferred revenue as of and for the nine months ended June 30, 2020:

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.

The following tables present the changes in deferred revenue as of and for the three months ended December 31, 2020 and 2019, respectively:

Balance at September 30, 2020

2 unchanged sentences

Balance at December 31, 2020

Deferral of revenue 5,004

Recognition of unearned revenue ( 5,753 )

Balance at March 31, 2020 9,666

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Balance at September 30, 2019

Deferral of revenue 5,389

Recognition of unearned revenue ( 5,211 )

Balance at June 30, 2020 $ 9,784

Balance at December 31, 2019

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 June 30, 2020, the Company had $ 2,958 , 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 condensed consolidated balance sheets.

The Company recorded commissions expense related to these costs for the three and nine months ended June 30, 2020 of $ 104 and $ 288 , respectively.

As of December 31, 2020 and 2019, the Company had $ 3,356 and $ 2,668 , respectively, 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 condensed consolidated balance sheets.

The Company recorded commissions expense related to these costs of $ 119 and $ 88 for the three months ended December 31, 2020 and 2019, respectively.

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

Interchange and network fees consist primarily of fees that are directly related to discount fee revenue.

These include interchange fees paid to issuers and assessment fees payable to card networks, which are a percentage of the processing volume the Company generates from Visa and Mastercard, as well as fees charged by card-issuing banks.

As noted above, after adoption of ASC 606 on October 1, 2019, these fees are presented net in discount fee revenue because the Company is acting as an agent in the provision of payment authorization services.

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Other Cost of Services

Other costs of services include third-party processing costs directly attributable to processing and bank sponsorship costs, which may not be based on a percentage of volume.

10 unchanged sentences

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, determination of performance obligations for revenue recognition, 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 uncertainty surrounding estimates is increased due to the development of the COVID-19 pandemic, which is further described in Note 1.

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

The testing date was May 1, 2020.

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

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

Actual results could differ from those estimates.

During the nine months ended June 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 nine months ended June 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 three months ended June 30, 2020, the Company has elected to make a policy change to allocate stock compensation expense to the Class B shareholders of i3 Verticals, LLC.

This change resulted in a $ 557 reduction in the benefit from income taxes and a corresponding reduction in the Company's net loss, a $ 2,439 increase to the net loss attributable to non-controlling interest and a $ 1,882 decrease to the net loss attributable to i3 Verticals, Inc.

for the three and nine months ended June 30, 2020.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

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

The FASB issued updates and clarifications to ASU 2014-09, including ASU 2016-08, Revenue from Contracts with Customers (Topic 606):

Principal versus Agent Considerations (Reporting Gross versus Net) issued in March 2016, ASU 2016-10, Revenue from Contracts with Customers (Topic 606):

Identifying Performance Obligations and Licensing issued in April 2016 and ASU 2016-12, Revenue from Contracts with Customers (Topic 606):

Narrow-Scope Improvements and Practical Expedients issued in May 2016.

ASU 2014-09 supersedes the revenue recognition requirements in ASC 605.

The new standard provides a five-step analysis of

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

transactions to determine when and how revenue is recognized, based upon the core principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

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, 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 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 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 $ 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 $ 63,263 and $ 173,777 were classified in “Operating Expenses” on the Condensed Consolidated Statement of Operations for the three and nine months ended June 30, 2019, respectively.

The Company's interchange and network fees of $ 49,294 and $ 181,595 were included as a reduction to revenue on the Condensed Consolidated Statement of Operations for the three and nine months ended June 30, 2020, respectively.

Under the modified retrospective basis, the Company has not restated its comparative unaudited condensed 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 unaudited condensed consolidated statement of operations for the three months ended June 30, 2020:

Three months ended June 30, 2020

As reported Adjustment Presentation without adoption of ASC 606

Revenue $ 31,573 $ 49,294 $ 80,867

Operating expenses

Interchange and network fees $ — $ 49,294 $ 49,294

The following table presents the material impacts of adopting ASC 606 on the Company's unaudited condensed consolidated statement of operations for the nine months ended June 30, 2020:

In February 2016, the ASC 842 with amendments in 2018 and 2019.

ASC 842 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.

i3 VERTICALS, Inc.

1 unchanged sentence

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

Nine months ended June 30, 2020

As reported Adjustment Presentation without adoption of ASC 606

Revenue $ 111,862 $ 181,595 $ 293,457

Operating expenses

Interchange and network fees $ — $ 181,595 $ 181,595

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

As of June 30, 2020

As reported Adjustment Presentation without adoption of ASC 606

Current assets

Prepaid expenses and other current assets $ 5,789 $ 255 $ 6,044

Deferred tax asset $ 35,671 $ 12 $ 35,683

Other assets $ 5,193 $ ( 1,802 ) $ 3,391

Liabilities and equity

Stockholders' equity

Accumulated deficit $ ( 1,372 ) $ ( 810 ) $ ( 2,182 )

Non-controlling interest $ 61,144 $ ( 725 ) $ 60,419

The adoption of ASC 606 did not have a material impact on the Company’s unaudited condensed consolidated statement of cash flows for the nine months ended June 30, 2020.

The Company has expanded its unaudited condensed 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.

The amendments to ASC 842 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 ASC 842 for certain entities.

In June 2020, the FASB issued ASU No.

2020-05, which further extends the effective date for adoption of ASC 842 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 was not required to adopt ASC 842 until October 1, 2022.

The Company elected to early adopt ASC 842 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 elected to apply the package of practical expedients whereby the Company did not reassess whether expired or existing leases contain a lease, did not reassess the lease classification for any expired or existing leases, and did not reassess initial direct costs for any existing leases.

The Company 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 also elected to apply the short-term lease exception practical expedient.

The adoption of ASC 842 resulted in the recognition of the right-of-use assets of $ 9,093 and the lease liabilities of $ 9,760 as of October 1, 2020.

The adoption of ASC 842 also resulted in a reduction in existing prepaid expenses and other current assets of $ 202 and in accrued expenses and other current liabilities and other long-term liabilities of $ 869 as of October 1, 2020.

Lease liabilities are measured as the present value of remaining lease payments, utilizing the Company’s incremental borrowing rate based on the remaining lease term as of the adoption date.

The right-of-use assets are 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 ASC 842.

Refer to Note 7 for further information.

Recently Issued Accounting Pronouncements Not Yet Adopted

1 unchanged sentence

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 a result, 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 condensed 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 condensed consolidated financial statements.

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

In February 2016, the FASB issued ASU No.

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

ASU 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 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 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.

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.

In November 2019, the FASB issued ASU No.

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

As a result of the provisions in ASU No.

2019-10, and 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 2016-02 until October 1, 2021.

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

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.

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 condensed 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.

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.

As a public business entity, the Company is an emerging growth 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 condensed consolidated financial statements.

2 unchanged sentences

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

During the nine months ended June 30, 2020, the Company acquired the following intangible assets:

Residual Buyouts

From time to time, the Company acquires future commission streams from sales agents in exchange for an upfront cash payment.

This results in an increase in overall gross processing volume to the Company.

The residual buyouts are treated as asset acquisitions, resulting in recording a residual buyout intangible asset at cost on the date of acquisition.

These assets are amortized using a method of amortization that reflects the pattern in which the economic benefits of the intangible asset are expected to be utilized over their estimated useful lives.

During the nine months ended June 30, 2020, the Company purchased $ 1,677 in residual buyouts using a combination of cash on hand and borrowings on the Company's revolving line of credit.

The acquired residual buyout intangible assets have a weighted-average amortization period of eight years .

2019 Business Combinations

During the year ended September 30, 2019, the Company completed the acquisitions of unrelated businesses, including Pace Payment Systems, Inc.

Certain of the purchase price allocations assigned for these acquisitions were considered preliminary as of September 30, 2019, and are considered preliminary as of June 30, 2020.

Purchase of Pace Payment Systems, Inc.

On May 31, 2019, i3-Holdings Sub, Inc.

acquired all of the stock of Pace Payment Systems, Inc.

(“Pace”) via a reverse triangular merger involving Pace and a special acquisition subsidiary of i3-Holdings Sub, Inc.

The Company acquired Pace to expand its software offerings, primarily in the public sector and education verticals.

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.

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

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

During the three months ended December 31, 2020, the Company completed the acquisitions of unrelated businesses, including substantially all of the assets of ImageSoft, Inc.

Certain of the purchase price allocations assigned for these acquisitions are considered preliminary as of December 31, 2020.

Purchase of ImageSoft, Inc.

On November 17, 2020, the Company completed the acquisition of substantially all of the assets of ImageSoft, Inc.

to expand its software offerings, primarily in the public sector vertical.

Total purchase consideration was $ 47,040 , including $ 40,000 in cash consideration, funded by proceeds from the Company's revolving credit facility, and $ 7,040 in contingent consideration.

The goodwill associated with the acquisition is deductible for tax purposes.

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

The non-compete agreement and trade name have estimated amortization periods of three and five years , respectively.

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

The weighted-average estimated amortization period of all intangibles acquired is nineteen years .

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

The acquisition also included deferred tax assets related to net 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 June 30, 2020.

Acquisition-related costs for Pace amounted to approximately $ 507 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.

Acquisition-related costs for ImageSoft, Inc.

amounted to approximately $ 333 and were expensed as incurred.

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

2 unchanged sentences

Other Business Combinations

The Company completed the acquisitions of other businesses to expand the Company’s software offerings in the public sector vertical market, provide technology that enhances the Company’s Burton Platform and expand the Company's merchant base.

Total purchase consideration was $ 98,887 , including $ 89,191 in revolving credit

On October 1, 2020, the Company completed the acquisitions of three other businesses to expand the Company’s software offerings in the public sector and healthcare vertical markets, and to add proprietary technology that will augment the Company’s existing platform across several verticals.

Total purchase consideration was $ 23,000 , including $ 19,600 in revolving credit facility proceeds and $ 3,400 of contingent consideration.

For each of these businesses acquired, the goodwill associated with the acquisition is deductible for tax purposes.

The acquired merchant relationships intangible assets have estimated weighted-average amortization periods of between eleven and twenty-five years .

The non-compete agreement and trade names have estimated amortization periods of three years .

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

The acquired capitalized software has a weighted-average amortization period of seven years .

Acquisition-related costs for these businesses amounted to approximately $ 639 and were expensed as incurred.

Certain provisions in the purchase agreements provide for additional consideration of up to $ 10,200 , 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 March 2023.

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 8.

i3 VERTICALS, Inc.

1 unchanged sentence

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

facility proceeds and $ 9,696 of contingent consideration.

Summary of Business Combinations during the three months ended December 31, 2020

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

ImageSoft, Inc.

Accounts receivable $ 5,085 $ 369 $ 5,454

Settlement assets 120 — 120

Inventories — 116 116

Prepaid expenses and other current assets 2,897 84 2,981

Property and equipment 433 159 592

Capitalized software 5,200 1,750 6,950

Acquired merchant relationships 16,300 8,550 24,850

Non-compete agreements 610 172 782

Trade name 1,100 200 1,300

Goodwill 20,900 12,139 33,039

Operating lease right-of-use assets 332 — 332

Other assets 6 7 13

Total assets acquired 52,983 23,546 76,529

Accrued expenses and other current liabilities 998 1 999

Settlement obligations 120 — 120

Deferred revenue, current 4,500 545 5,045

Current portion of operating lease liabilities 75 — 75

Operating lease liabilities, less current portion 250 — 250

Net assets acquired $ 47,040 $ 23,000 $ 70,040

Pro Forma Results of Operations for Business Combinations during the three months ended December 31, 2020

The following unaudited supplemental pro forma results of operations have been prepared as though each of the acquired businesses in the three months ended December 31, 2020 had occurred on October 1, 2019.

Pro forma adjustments were made to reflect the impact of depreciation and amortization, changes to executive compensation and the revised debt load, all in accordance with ASC 805.

This supplemental pro forma information does not purport to be indicative of the results of operations that would have been attained had the acquisitions been made on these dates, or of results of operations that may occur in the future.

Three months ended December 31,

Revenue $ 45,919 $ 49,866

Net (loss) income $ ( 4,325 ) $ 839

Business Combinations during the year ended September 30, 2020

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.

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

purchase consideration was $ 32,628 , including $ 27,880 in revolving credit facility proceeds and $ 4,748 of contingent consideration.

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

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

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

The non-compete agreement and trade names have weighted-average amortization periods of three and five years , respectively.

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.

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 six 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.

3 unchanged sentences

See additional disclosures in Note 8.

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Summary of 2019 Business Combinations

The fair values assigned to certain assets and liabilities assumed, as of the acquisition dates, as adjusted for any purchase price allocation adjustments subsequent to September 30, 2019, were as follows:

Pace Other Total

Summary of Business Combinations during the year ended September 30, 2020

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 846

Settlement assets — 18 18

Related party receivable — — —

Inventories 45 61 106

Prepaid expenses and other current assets 54

2 unchanged sentences

Acquired merchant relationships 11,900

Exclusivity Agreements — — —

Non-compete agreements 90

5 unchanged sentences

Accrued expenses and other current liabilities 635

Settlement obligations — 18 18

Deferred revenue, current 200

1 unchanged sentence

Net assets acquired $ 32,628

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

GOODWILL AND INTANGIBLE ASSETS

3 unchanged sentences

$ 115,982 $ 71,023 $ — $ 187,005

Goodwill attributable to acquisition preliminary purchase price adjustments during the nine months ended June 30, 2020 ( 933 ) ( 297 ) — ( 1,230 )

Balance at June 30, 2020 $ 107,539 $ 59,515 $ — $ 167,054

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

Goodwill attributable to preliminary purchase price adjustments and acquisition activity during the three months ended December 31, 2020

2,892 30,015 — 32,907

Balance at December 31, 2020 $ 118,874 $ 101,038 $ — $ 219,912

Intangible assets consisted of the following as of December 31, 2020:

Cost Accumulated

11 unchanged sentences

Total identifiable intangible assets $ 193,157 $ ( 60,333 ) $ 132,824

Amortization expense for intangible assets amounted to $ 3,066 and $ 9,348 during the three and nine months ended June 30, 2020, respectively, and $ 3,233 and $ 9,054 during the three and nine months ended June 30, 2019, respectively.

Based on net carrying amounts at June 30, 2020, the Company's estimate of future amortization expense for intangible assets are presented in the table below for fiscal years ending September 30:

2020 (three months remaining) $ 2,905

Amortization expense for intangible assets amounted to $ 3,360 and $ 3,194 during the three months ended December 31, 2020 and 2019, respectively.

Based on net carrying amounts at December 31, 2020, the Company's estimate of future amortization expense for intangible assets are presented in the table below for fiscal years ending September 30:

2021 (nine months remaining) $ 10,059

Thereafter 78,699

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

LONG-TERM DEBT, NET

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

June 30, September 30,

Maturity 2020 2019

A summary of long-term debt, net as of December 31, 2020 and September 30, 2020 is as follows:

December 31, September 30,

Revolving lines of credit to banks under the Senior Secured Credit Facility May 9, 2024 $ 49,308 $ —

1% Exchangeable Senior Notes due 2025 February 15, 2025 104,313 —

1.0 % Exchangeable Senior Notes due 2025

February 15, 2025 96,422 95,325

Debt issuance costs, net ( 4,332 ) ( 4,567 )

Total long-term debt, net of issuance costs $ 141,398 $ 90,758

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

2020 Exchangeable Notes Offering

12 unchanged sentences

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

As of December 31, 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

i3 VERTICALS, Inc.

1 unchanged sentence

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

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.

Exchangeable Notes to be redeemed plus accrued and unpaid interest on such note to, but not including, the redemption date.

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.

1 unchanged sentence

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 unaudited condensed consolidated balance sheet and accreted over 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 unaudited condensed consolidated balance sheet and is not remeasured as longs as it continues to meet the conditions for equity classification.

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 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 condensed 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.

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 three and nine months ended June 30, 2020 was $ 146 and $ 216 , respectively.

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

Total unamortized debt issuance costs related to the Exchangeable Notes were $ 3,684 as of June 30, 2020.

The estimated fair value of the Exchangeable Notes was $ 124,168 as of June 30, 2020.

Non-cash interest expense, including amortization of debt issuance costs, related to the Exchangeable Notes for the three months ended December 31, 2020 was $ 140 .

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 $ 3,053 as of December 31, 2020.

The estimated fair value of the Exchangeable Notes was $ 120,978 as of December 31, 2020.

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

1 unchanged sentence

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

In April 2020, the Company paid $ 6,807 in aggregate to repurchase $ 8,500 in aggregate principal amount of the Exchangeable Notes and to repay approximately $ 15 in accrued interest on the repurchased portion of the Exchangeable Notes.

The Company recorded a loss on retirement of debt of $ 828 due to the carrying value exceeding the fair value of the repurchased portion of the Exchangeable Notes at the dates of repurchases.

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

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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.

The effect of the repurchase was a decrease in the Company's total leverage ratio.

Exchangeable Note Hedge Transactions

3 unchanged sentences

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

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

with the Counterparties, and are not part of the terms of the Exchangeable Notes.

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.

12 unchanged sentences

Senior Secured Credit Facility

On May 9, 2019, the Company amended and restated its existing 2017 Senior Secured Credit Facility with a new credit agreement (the “Senior Secured Credit Facility”) by and among i3 Verticals, LLC, as the borrower, the Company and certain subsidiaries of the Company, as guarantors, the lenders party thereto, and Bank of America, N.A., as administrative agent for the lenders, as theretofore amended.

The Company concluded that the replacement of the 2017 Senior Secured Credit Facility should be accounted for as a debt modification based on the guidance in ASC 470-50.

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 condensed consolidated statements of operations.

On May 9, 2019, the Company replaced its existing senior secured credit facility with a new credit agreement (the “Senior Secured Credit Facility”).

On February 18, 2020, the Company entered into the second amendment to the Senior Secured Credit Facility in connection with the offering of the Company's Exchangeable Notes.

The second amendment reduced the Company's borrowing capacity under the Senior Secured Credit Facility.

During the nine months ended June 30, 2020, the Company wrote off $ 141 of unamortized debt issuance costs, which was recorded in interest expense in the condensed consolidated statements of operations, due to the decrease in borrowing capacity.

The Senior Secured Credit Facility 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.

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

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

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

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

During the year ended September 30, 2020, the Company wrote off $ 141 of unamortized debt issuance costs, which was recorded in interest expense in the condensed consolidated statements of operations, due to the decrease in borrowing capacity.

i3 VERTICALS, Inc.

1 unchanged sentence

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

Secured Credit Facility requires maintenance of certain financial ratios on a quarterly basis as follows:

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

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

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

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

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.

As of June 30, 2020, the Company was in compliance with these covenants, and there was $ 240,046 available for borrowing under the revolving credit facility, subject to the financial covenants.

As of December 31, 2020, the Company was in compliance with these covenants, and there was $ 225.7 million 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.

1 unchanged sentence

The provisions of the Senior Secured Credit Facility place certain restrictions and limitations upon the Company.

These include, among others, restrictions on liens, investments, indebtedness, fundamental changes and dispositions, dividends and distributions, changes in the nature of the Company's business, transactions with affiliates and prepayment of other indebtedness;

These include, among others, restrictions on liens, investments, indebtedness, fundamental changes and dispositions;

maintenance of certain financial ratios;

and certain non-financial covenants pertaining to the activities of the Company during the period covered.

The Company was in compliance with such covenants as of June 30, 2020.

The Company was in compliance with such covenants as of December 31, 2020.

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) repurchase equity from employees, directors, officers or consultants in an aggregate amount not to exceed $ 3,000 per year, (iii) make certain payments in connection with the Tax Receivable Agreement, and (iv) 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 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 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.

1 unchanged sentence

All other forms of dividends or distributions are prohibited under the Senior Secured Credit Facility.

2017 Senior Secured Credit Facility

On October 30, 2017, the Company replaced its existing credit facility with the 2017 Senior Secured Credit Facility (the “2017 Senior Secured Credit Facility”).

The 2017 Senior Secured Credit Facility consisted of term loans in the original principal amount of $ 40,000 and a $ 110,000 revolving line of credit.

The 2017 Senior Secured Credit Facility accrued interest, payable monthly, at the prime rate plus a margin of 0.50 % to 2.00 % or at the 30-day LIBOR rate plus a margin of 2.75 % to 4.00 %, in each case depending on the ratio of consolidated debt-to-EBITDA, as defined in the agreement.

Additionally, the 2017 Senior Secured Credit Facility required the Company to pay unused commitment fees of 0.15 % to 0.30 % on any undrawn amounts under the revolving line of credit.

The maturity date of the 2017 Senior Secured Credit Facility was October 30, 2022.

Principal payments of $ 1,250 were due on the last day of each calendar quarter until the maturity date, when all outstanding principal and accrued and unpaid interest were due.

The 2017 Senior Secured Credit Facility was secured by substantially all assets of the Company.

The lenders under the 2017 Senior Secured Credit Facility held senior rights to collateral and principal repayment over all other creditors.

As previously mentioned, on May 9, 2019, the Company replaced its existing 2017 Senior Secured Credit Facility with a new credit agreement.

Debt issuance costs

During the nine months ended June 30, 2020, the Company capitalized debt issuance costs totaling $ 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.

The Company's debt issuance costs are being amortized over the related term of the debt using the effective interest method.

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

issuance costs are presented net against long-term debt in the condensed consolidated balance sheets.

The amortization of debt issuance costs is included in interest expense and amounted to approximately $ 242 and $ 514 during the three and nine months ended June 30, 2020, respectively, and $ 154 and $ 619 during the three and nine months ended June 30, 2019, respectively.

The Company incurred no debt issuance costs during the three months ended December 31, 2020 or 2019.

The Company's 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 condensed consolidated balance sheets.

The amortization of deferred debt issuance costs is included in interest expense and amounted to approximately $ 235 and $ 100 during the three months ended December 31, 2020 and 2019, 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.

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

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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 Company’s tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period.

When the estimate of the annual effective tax rate is unreliable, the Company records its income tax expense or benefit based upon a period-to-date effective tax rate.

Each quarter, the Company updates its estimate of the annual effective tax rate, and if the Company’s estimated tax rate changes, it makes a cumulative adjustment in that period.

The Company’s provision for income taxes was a benefit of $ 5 and a benefit of $ 1,918 for the three and nine months ended June 30, 2020, respectively, and a benefit of $ 131 and an expense of $ 2 for the three and nine months ended June 30, 2019, respectively.

The Company’s provision for income taxes was a benefit of $ 219 and a provision of $ 149 for the three months ended December 31, 2020 and 2019, respectively.

Tax Receivable Agreement

2 unchanged sentences

These tax benefit payments are not conditioned upon one or more of the Continuing Equity Owners maintaining a continued ownership interest in i3 Verticals, LLC.

If a Continuing Equity Owner transfers Common Units but does not assign to the transferee of such units the rights of the Continuing Equity Owner under the Tax Receivable Agreement, such Continuing Equity Owner generally will continue to be entitled to receive payments under the Tax Receivable Agreement arising in respect of a subsequent exchange of such Common Units.

If a Continuing Equity Owner transfers Common Units but does not assign to the transferee of such units its rights under the Tax Receivable Agreement, such Continuing Equity Owner generally will continue to be entitled to receive payments under the Tax Receivable Agreement arising in respect of a subsequent exchange of such Common Units.

In general, the Continuing Equity Owners’ rights under the Tax Receivable Agreement may not be assigned, sold, pledged or otherwise alienated to any person, other than certain permitted transferees, without (a) the Company's prior written consent, which should not be unreasonably withheld, conditioned or delayed, and (b) such persons becoming a party to the Tax Receivable Agreement and agreeing to succeed to the applicable Continuing Equity Owner’s interest therein.

The Company expects to benefit from the remaining 15 % of the tax benefits, if any, that the Company may realize.

During the nine months ended June 30, 2020, the Company acquired an aggregate of 530,016 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 nine months ended June 30, 2020, the Company recognized an increase to its net deferred tax assets in the amount of $ 3,251 , and corresponding Tax Receivable Agreement liabilities of $ 2,764 , representing 85 % of the tax benefits due to the Continuing Equity Owners.

The deferred tax asset and corresponding Tax Receivable Agreement liability balances were $ 30,064 and $ 25,940 , respectively, as of June 30, 2020.

Payments to the Continuing Equity Owners related to exchanges through June 30, 2020 will range from $ 0 to $ 2,321 per year and are expected to be paid over the next 25 years.

The amounts recorded as of June 30, 2020,

During the three months ended December 31, 2020, the Company acquired an aggregate of 1,019,609 common units in 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 three months ended December 31, 2020, the Company recognized an increase to its net deferred tax assets in the amount of $ 7,922 , and corresponding Tax Receivable Agreement liabilities of $ 6,734 , representing 85 % of the tax benefits due to the Continuing Equity Owners.

The deferred tax asset and corresponding Tax Receivable Agreement liability balances were $ 37,851 and $ 34,299 , respectively, as of December 31, 2020.

Payments to the Continuing Equity Owners related to exchanges through December 31, 2020 will range from $ 0 to $ 2,840 per year and are expected to be paid over the next 25 years.

The amounts recorded as of December 31, 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.

i3 VERTICALS, Inc.

1 unchanged sentence

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

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.

As discussed in Note 2, the Company adopted ASC 842 effective October 1, 2020, using the modified retrospective transition method, under which the prior period financial statements were not restated for the new guidance.

The Company’s leases consist primarily of real estate leases throughout the markets in which the Company operates.

At contract inception, the Company determines whether an arrangement is or contains a lease, and for each identified lease, evaluates the classification as operating or financing.

The Company had no finance leases during the three months ended December 31, 2020.

Leased assets and obligations are recognized at the lease commencement date based on the present value of fixed lease payments to be made over the term of the lease.

Renewal and termination options are factored into determination of the lease term only if the option is reasonably certain to be exercised.

The weighted-average remaining lease term at December 31, 2020 was five years .

The Company had no significant short-term leases during the three months ended December 31, 2020.

The incremental borrowing rates were determined based on a portfolio approach considering the Company’s current secured borrowing rate adjusted for market conditions and the length of the lease term.

The weighted-average discount rate used in the measurement of our lease liabilities was 6.8 % as of December 31, 2020.

Operating lease cost is recognized on a straight-line basis over the lease term.

Operating lease costs for the three months ended December 31, 2020 were $ 854 , which are included in selling, general and administrative expenses in the condensed consolidated statements of operations.

Total operating lease costs for the three months ended December 31, 2020 include variable lease costs of approximately $ 1 , which are primarily comprised of costs of maintenance and utilities and changes in rates, and are determined based on the actual costs incurred during the period.

Variable payments are expensed in the period incurred and not included in the measurement of lease assets and liabilities.

Short-term rent expense for the three months ended December 31, 2020 was $ 58 , and are included in selling, general and administrative expenses in the condensed consolidated statements of operations.

As of December 31, 2020, maturities of lease liabilities are as follows:

Years ending September 30:

2021 (nine months remaining) $ 2,538

Thereafter 1,341

Total future minimum lease payments (undiscounted) (1)

present value discount ( 1,709 )

Present value of lease liability $ 11,122

__________________________

Total future minimum lease payments excludes payments of $ 68 for leases designated as short-term leases, which are excluded from the Company's right-of-use assets.

These payments will be made within the next twelve months.

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

A summary of approximate future minimum payments for leases under ASC 840 as of September 30, 2020, was as follows:

Years ending September 30:

Thereafter 1,221

Total $ 10,877

FAIR VALUE MEASUREMENTS

8 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 June 30, 2020 and 2019, because of the relatively short maturity dates on these instruments.

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

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 December 31, 2020 and 2019, because of the relatively short maturity dates on these instruments.

The carrying amount of debt approximates fair value as of December 31, 2020 and 2019, because interest rates on these instruments approximate market interest rates.

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

5 unchanged sentences

Contingent consideration paid ( 5,851 )

Balance at June 30, 2020 $ 8,738

Balance at December 31, 2020 $ 19,527

Accrued Contingent Consideration

3 unchanged sentences

Contingent consideration paid —

Balance at June 30, 2019 $ 13,856

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Balance at December 31, 2019 $ 18,380

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

6 unchanged sentences

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 $ 6,655 and $ 10,223 of contingent consideration was recorded in accrued expenses and other current liabilities as of June 30, 2020 and September 30, 2019, respectively.

Approximately $ 2,083 and $ 8,003 of contingent consideration was recorded in other long-term liabilities as of June 30, 2020 and September 30, 2019, respectively.

Approximately $ 9,644 and $ 10,062 of contingent consideration was recorded in accrued expenses and other current liabilities as of December 31, 2020 and September 30, 2020, respectively.

Approximately $ 9,883 and $ 2,972 of contingent consideration was recorded in other long-term liabilities as of December 31, 2020 and September 30, 2020, respectively.

Disclosure of Fair Values

1 unchanged sentence

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 $ 124,168 as of June 30, 2020.

The carrying value of other financial instruments, including cash, accounts receivable, accounts payable, funds receivable and seller accounts, and funds payable and amounts due to sellers approximate fair value due to the immediate or short-term maturity associated with these instruments.

The estimated fair value of the Exchangeable Notes was $ 120,978 as of December 31, 2020.

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

EQUITY-BASED COMPENSATION

A summary of equity-based compensation expense recognized during the three and nine months ended June 30, 2020 and 2019 is as follows:

Three months ended June 30, Nine months ended June 30,

2020 2019 2020 2019

A summary of equity-based compensation expense recognized during the three months ended December 31, 2020 and 2019 is as follows:

Three months ended December 31,

Stock options $ 3,441 $ 2,124

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

Income tax expense of $ 164 and benefits of $ 177 were recognized related to equity-based compensation during the three and nine months ended June 30, 2020, respectively.

Income tax benefits of $ 30 were recognized related to equity-based compensation during the three and nine months ended June 30, 2019.

Income tax benefits of $ 205 and $ 148 were recognized during the three months ended December 31, 2020 and 2019, respectively.

Stock Options

1 unchanged sentence

The number of shares of Class A common stock available for issuance under the 2018 Plan includes an annual increase on the first day of each year, beginning with the 2019 calendar year, equal to 4.0 % of the outstanding shares of all classes of the Company's common stock as of the last day of the immediately preceding calendar year, unless the Company’s board of directors determines prior to the last trading day of December of the immediately preceding calendar year that the increase shall be less than 4.0 %.

As of June 30, 2020, there are 384,600 equity awards available for grant under the 2018 Plan.

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

June 30, 2020 September 30, 2019

As of December 31, 2020, there were 115,139 equity awards available for grant under the 2018 Plan.

In September 2020, the Company adopted the 2020 Acquisition Equity Incentive Plan (the “2020 Inducement Plan”) under which the Company may grant up to 1,500,000 stock options and other equity-based awards to individuals that were not previously employees of the Company or its subsidiaries in connection with acquisitions, as a material inducement to the individual's entry into employment with the Company or its subsidiaries within the meaning of Rule 5635(c)(4) of the Nasdaq Listing Rules.

As of December 31, 2020, there were 985,000 equity awards available for grant under the 2020 Inducement Plan.

The fair value of the stock option awards during the three months ended December 31, 2020 and from June 20, 2018 through September 30, 2020 was determined on the grant date using the Black-Scholes valuation model based on the following weighted-average assumptions:

December 31, 2020 September 30, 2020

Expected volatility (1)

7 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 as details of employee exercise behavior are limited due to limited historical data.

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

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

Treasury securities with maturities equivalent to the expected term.

A summary of stock option activity for the nine months ended June 30, 2020 is as follows:

Stock Options Weighted Average Exercise Price

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

A summary of stock option activity for the three months ended December 31, 2020 is as follows:

Stock Options

Weighted Average Exercise Price

Outstanding at beginning of period 5,210,566 $ 21.73

3 unchanged sentences

Outstanding at end of period 5,703,462 $ 22.24

The weighted-average grant date fair value of stock options granted during the nine months ended June 30, 2020 was $ 8.71 .

As of June 30, 2020, there were 5,074,622 stock options outstanding, of which 1,696,850 were exercisable.

As of June 30, 2020, total unrecognized compensation expense related to unvested stock options, including an estimate for pre-vesting forfeitures, was $ 19,170 , which is expected to be recognized over a weighted-average period of 2.0 years.

The weighted-average grant date fair value of stock options granted during the three months ended December 31, 2020 was $ 9.20 .

As of December 31, 2020, there were 5,703,462 stock options outstanding, of which 1,776,841 were exercisable.

As of December 31, 2020, total unrecognized compensation expense related to unvested stock options, including an estimate for pre-vesting forfeitures, was $ 21,069 , which is expected to be recognized over a weighted-average period of two years .

The Company's policy is to account for forfeitures of stock-based compensation awards as they occur.

The total fair value of stock options that vested was $ 4,451 and $ 7,679 during the three and nine months ended June 30, 2020, respectively.

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

The total fair value of stock options that vested during the three months ended December 31, 2020 was $ 1,985 .

COMMITMENTS AND CONTINGENCIES

The Company utilizes office space and equipment under operating leases.

Rent expense under these leases amounted to $ 657 and $ 2,073 during the three and nine months ended June 30, 2020, respectively, and $ 615 and $ 1,640 three and nine months ended June 30, 2019, respectively.

A summary of approximate future minimum payments under these leases as of June 30, 2020 is as follows:

Years ending September 30:

2020 (three months remaining) $ 669

Thereafter 3,778

Total $ 13,229

Rent expense under these leases amounted to $ 912 and $ 741 during the three months ended December 31, 2020 and 2019, respectively.

Refer to Note 7 for further discussion and a table of the future minimum payments under these leases.

Minimum Processing Commitments

The Company has agreements with several processors to provide 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 the Company 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.

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

As of June 30, 2020, such minimum fee commitments were as follows:

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

As of December 31, 2020, such minimum fee commitments were as follows:

Years ending September 30:

2020 (three months remaining) $ 812

2021 (nine months remaining) $ 2,473

Total $ 8,385

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Loan to Third Party Sales Organization

The Company has committed to providing a secured loan to a third party sales organization of up to $ 2,500 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 the third anniversary of March 1, 2020.

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 $ 2,500 in the future, dependent on their achievement of certain financial metrics.

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.

1 unchanged sentence

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 THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

As of June 30, 2020, such knowable loan commitments, dependent on the third party sales organization's achievement of certain financial metrics, were $ 1,000 for the remainder of fiscal year 2020 and $ 1,500 for fiscal year 2021.

As of December 31, 2020, such knowable loan commitments, dependent on the third party sales organization's achievement of certain financial metrics, were $ 2,500 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.

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.

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.

The Company has considered all such ordinary course legal proceedings in formulating its disclosures and assessments.

7 unchanged sentences

On April 29, 2016, the Company entered into a Processing Services Agreement (the “AxiaMed Agreement”) with Axia 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 AxiaMed Agreement of $ 25 and $ 69 during the three and nine months ended June 30, 2020, respectively, and $ 21 and $ 59 during the three and nine months ended June 30, 2019, respectively.

i3 Verticals, LLC, Greg Daily, 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 AxiaMed.

In connection with the Company’s IPO, the Company and i3 Verticals, LLC entered into a Tax Receivable Agreement with the Continuing Equity Owners that provides for the payment by the Company to the Continuing Equity Owners of 85 % of the amount of certain tax benefits, if any, that it actually realizes, or in some circumstances, is deemed to realize in its tax reporting, as a result of (i) future redemptions funded by the

Under the AxiaMed Agreement, the

i3 VERTICALS, Inc.

1 unchanged sentence

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

Company or exchanges, or deemed exchanges in certain circumstances, of Common Units of i3 Verticals, LLC for Class A common stock of i3 Verticals, Inc.

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

In accordance with ASC 606-10-55, revenue from the processing services is recognized net of interchange, residual expense and other fees.

The Company earned net revenues related to the AxiaMed Agreement of $ 26 and $ 22 during the three months ended December 31, 2020 and 2019, respectively.

i3 Verticals, LLC, Greg Daily, the Company’s CEO and Clay Whitson, the Company’s CFO, own 2.0 %, 9.4 % and 0.4 %, respectively, of the outstanding equity of AxiaMed.

or cash, and (ii) certain additional tax benefits attributable to payments made under the Tax Receivable Agreement.

See Note 6 for further information.

As of June 30, 2020, the total amount due under the Tax Receivable Agreement was $ 25,940 .

As of December 31, 2020, the total amount due under the Tax Receivable Agreement was $ 34,299 .

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 proprietary 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.

2 unchanged sentences

The Company primarily uses processing margin to measure operating performance.

The following is a summary of reportable segment operating performance for the three and nine months ended June 30, 2020 and 2019.

As of and for the Three Months Ended June 30, 2020

Merchant Services Proprietary Software and Payments Other Total

Revenue $ 21,531 $ 10,458 $ ( 416 ) $ 31,573

Operating expenses

Other costs of services 9,394 1,023 ( 416 ) 10,001

Selling general and administrative 5,630 6,878 5,625 18,133

Depreciation and amortization 2,821 1,476 178 4,475

Change in fair value of contingent consideration ( 1,345 ) ( 128 ) — ( 1,473 )

Income (loss) from operations $ 5,031 $ 1,209 $ ( 5,803 ) $ 437

Processing margin (1)

$ 16,811 $ 9,554 $ ( 413 ) $ 25,952

Total assets $ 198,048 $ 112,387 $ 50,038 $ 360,473

Goodwill $ 107,539 $ 59,515 $ — $ 167,054

__________________________

Processing margin is equal to revenue less interchange and network fees, less other costs of services.

$ 4,674 , $ 119 and $( 413 ) 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 Nine Months Ended June 30, 2020

Merchant Services Proprietary Software and Payments Other Total

Revenue $ 74,014 $ 39,205 $ ( 1,357 ) $ 111,862

Operating expenses

Other costs of services 32,804 3,426 ( 1,356 ) 34,874

Selling general and administrative 18,421 22,531 17,254 58,206

Depreciation and amortization 8,629 4,513 526 13,668

Change in fair value of contingent consideration ( 2,951 ) 1,490 — ( 1,461 )

Income (loss) from operations $ 17,111 $ 7,245 $ ( 17,781 ) $ 6,575

Processing margin (1)

$ 56,952 $ 36,238 $ ( 1,348 ) $ 91,842

Total assets $ 198,048 $ 112,387 $ 50,038 $ 360,473

Goodwill $ 107,539 $ 59,515 $ — $ 167,054

__________________________

Processing margin is equal to revenue less interchange and network fees, less other costs of services.

$ 15,742 , $ 459 and $( 1,347 ) 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 THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

As of and for the Three Months Ended June 30, 2019

The following is a summary of reportable segment operating performance for the three months ended December 31, 2020 and 2019.

As of and for the Three Months Ended December 31, 2020

Merchant Services Proprietary Software and Payments Other Total

1 unchanged sentence

Operating expenses

Interchange and network fees 61,744 1,519 — 63,263

Other costs of services 10,841 3,257 ( 432 ) 13,666

8 unchanged sentences

__________________________

Processing margin is equal to revenue less interchange and network fees, less other costs of services.

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

$ 5,944 , $ 257 and $( 426 ) 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 Nine Months Ended June 30, 2019

As of and for the Three Months Ended December 31, 2019

Merchant Services Proprietary Software and Payments Other Total

1 unchanged sentence

Operating expenses

Interchange and network fees 169,229 4,548 — 173,777

Other costs of services 12,174 1,154 ( 410 ) 12,918

8 unchanged sentences

__________________________

Processing margin is equal to revenue less interchange and network fees, less other costs of services.

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

$ 5,558 , $ 154 and $( 408 ) 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.

8 unchanged sentences

As such, future redemptions or direct exchanges of Common Units of i3 Verticals, LLC by the Continuing Equity Owners will result in a change in ownership and reduce or increase the amount recorded as non-controlling interest and increase or decrease additional paid-in capital when i3 Verticals, LLC has positive or negative net assets, respectively.

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

As of December 31, 2020, i3 Verticals, Inc.

owned 20,004,771 of i3 Verticals, LLC's Common Units, representing a 64.8 % economic ownership interest in i3 Verticals, LLC.

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

Three months ended December 31,

Net (loss) income attributable to non-controlling interest $ ( 1,549 ) $ 2,083

Transfers to (from) non-controlling interests:

Redemption of common units in i3 Verticals, LLC ( 7,185 ) —

Cumulative effect of adoption of new accounting standard — 640

Allocation of equity to non-controlling interests 1,072 —

Net transfers to (from) non-controlling interests ( 6,113 ) 640

Change from net (loss) income attributable to non-controlling interests and transfers to (from) non-controlling interests $ ( 7,662 ) $ 2,723

EARNINGS PER SHARE

6 unchanged sentences

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

The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per share of Class A common stock for the three and nine months ended June 30, 2020 and 2019:

Three months ended June 30, Nine months ended June 30,

2020 2019 2020 2019

Basic net (loss) income per share:

The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per share of Class A common stock for the three months ended December 31, 2020 and 2019:

Three months ended

December 31, 2020 Three months ended

December 31, 2019

Basic and diluted (2) net loss per share:

Net (loss) income

1 unchanged sentence

Net (loss) income attributable to non-controlling interests ( 1,549 ) 2,083

Net (loss) income attributable to Class A common stockholders $ ( 356 ) $ ( 1,191 ) $ 232 $ ( 2,115 )

Net loss attributable to Class A common stockholders $ ( 2,572 ) $ ( 149 )

Weighted average shares of Class A common stock outstanding (1)

19,129,056 14,233,785

Basic net (loss) income per share (2)

$ ( 0.02 ) $ ( 0.12 ) $ 0.02 $ ( 0.23 )

Dilutive net income per share (2) :

Net income attributable to Class A common stockholders - diluted (3)

Weighted average shares of Class A common stock outstanding (1)

Weighted average effect of dilutive securities (3)

Weighted average shares of Class A common stock outstanding - diluted

Diluted net income per share $ 0.01

Basic and diluted net loss per share $ ( 0.13 ) $ ( 0.01 )

____________________

Excludes 193,709 and 225,985 restricted Class A common stock units for the three and nine months ended June 30, 2020, respectively, and 285,433 restricted Class A common stock units for both the three and nine months ended June 30, 2019.

For the three months ended June 30, 2020 and for the three and nine months ended June 30, 2019, all potentially dilutive securities were anti-dilutive, so diluted net loss per share was equivalent to basic net loss per share.

The following securities were excluded from the weighted average effect of dilutive securities in the computation of diluted net loss per share of Class A common stock:

12,404,368 shares of weighted average Class B common stock for the three months ended June 30, 2020, and 16,184,026 and 16,846,012 shares of weighted average Class B common stock for the three and nine months ended June 30, 2019, respectively, along with the reallocation of net income assuming conversion of these shares, were excluded because the effect would have been anti-dilutive,

1,498,000 stock options for the three months ended June 30, 2020, and 443,000 and 620,500 stock options for the three and nine months ended June 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

1,127,509 shares for the three months ended June 30, 2020, and 1,188,987 and 974,402 shares for the three and nine months ended June 30, 2019, respectively, resulting from estimated stock option exercises as calculated by the treasury stock method, and 193,709 restricted Class A common units for the three months ended June 30, 2020, and 285,433 restricted Class A common units

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

for both the three and nine months ended June 30, 2019, were excluded because the effect of including them would have been anti-dilutive.

For the nine months ended June 30, 2020, the following securities were excluded from the weighted average effect of dilutive securities in the computation of diluted net loss per share of Class A common stock:

12,699,339 shares of weighted average Class B common stock for the nine months ended June 30, 2020, along with the reallocation of net income assuming conversion of these shares, were excluded because the effect would have been anti-dilutive, and

1,105,000 stock options for the nine months ended June 30, 2020, 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.

Excludes 18,869 and 232,828 restricted Class A common stock units for the three months ended December 31, 2020 and 2019, respectively.

For the three months ended December 31, 2020 and 2019, all potentially dilutive securities were anti-dilutive, so diluted net loss per share was equivalent to basic net loss per share.

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:

11,668,199 and 12,921,637 shares of weighted average Class B common stock for the three months ended December 31, 2020 and 2019, respectively, along with the reallocation of net income assuming conversion of these shares, were excluded because the effect would have been anti-dilutive,

1,251,600 and 689,500 stock options for the three months ended December 31, 2020 and 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

1,212,584 and 976,594 shares for the three months ended December 31, 2020 and 2019, respectively, resulting from estimated stock option exercises as calculated by the treasury stock method, and 18,869 and 232,828 restricted Class A common units for the three months ended December 31, 2020 and 2019, respectively, were excluded because the effect of including them would have been anti-dilutive.

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.

6 unchanged sentences

As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented.

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

SIGNIFICANT NON-CASH TRANSACTIONS

The Company engaged in the following significant non-cash investing and financing activities during the nine months ended June 30, 2020 and 2019:

Nine months ended June 30,

Restricted Class A common stock issued as part of acquisitions' purchase consideration (Note 3) $ — $ 225

The Company engaged in the following significant non-cash investing and financing activities during the three months ended December 31, 2020 and 2019:

Three months ended December 31,

Acquisition date fair value of contingent consideration in connection with business combinations $ 3,400 $ —

Replacement of the 2017 Senior Secured Credit Facility with the Senior Secured Credit Facility $ — $ 100,229

Issuance of Exchangeable Notes and related Note Hedge Transactions and Warrants $ 85 $ —

Debt issuance costs financed with proceeds from the Senior Secured Credit Facility $ — $ 1,271

Right-of-use assets obtained in exchange for operating lease obligations $ 11,251 $ —

SUBSEQUENT EVENTS

Recent Acquisitions

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

One expands 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 included $ 16,438 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 $ 13,200 , 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 June 2022.

Subsequent to December 31, 2020, the Company completed the acquisition of substantially all the assets of Business Information Systems, GP, a Tennessee general partnership (“BIS GP”) and Business Information Systems, Inc., a Tennessee corporation (collectively, “BIS”), a business based in east Tennessee that provides software and electronic payment solutions in a variety of states.

BIS will fit within the Company’s public sector vertical.

The aggregate purchase consideration was $ 87,745 , consisting of $ 52,500 in cash on hand and revolving line of credit proceeds, 1,202,914 shares of Class A common stock in i3 Verticals (equivalent to approximately $ 35,245 ) and an amount of contingent consideration, which is still being valued.

Certain provisions in the purchase agreements provide for additional consideration of up to $ 16,000 , 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 January 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 the acquisitions will be included in the consolidated statements of operations beginning July 1, 2020.

The Company is still evaluating the allocation of the preliminary purchase consideration and pro forma results of operations.

The effect of this acquisition will be included in the consolidated statements of operations beginning February 1, 2021.

The Company is still evaluating the allocations of the preliminary purchase consideration and pro forma results of operations.

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

What changed 10-Q

Item 1. Financial Statements