What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-02-09 compared with 2020-08-10 · 137 added, 283 removed, 221 unchanged (66% of the section changed)

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You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our Annual Report on Form 10-K for the year ended September 30, 2020 (“Form 10-K”), filed with the SEC on November 23, 2020.

The terms “i3 Verticals,” “we,” “us” and “our” and similar references refer (1) before the completion of our IPO or the reorganization transactions entered into in connection therewith (the “Reorganization Transactions”), which are described in the notes to the condensed consolidated financial statements, to i3 Verticals, LLC and, when appropriate, its subsidiaries, and (2) after the Reorganization Transactions to i3 Verticals, Inc.

and, when appropriate, its subsidiaries.

The terms “i3 Verticals,” “we,” “us” and “our” and similar references refer (1) before the completion of our IPO or the reorganization transactions entered into in connection therewith (the “Reorganization Transactions”), which are described in the notes to the condensed consolidated financial statements, to i3 Verticals, LLC and, where appropriate, its subsidiaries, and (2) after the Reorganization Transactions to i3 Verticals, Inc.

and, where appropriate, its subsidiaries.

Note Regarding Forward-looking Statements

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

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

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

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

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

• competition in our industry and our ability to compete effectively;

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• potential degradation of the quality of our products, services and support;

• our ability to retain clients, many of which are SMBs, which can be difficult and costly to retain;

• our ability to retain clients, many of which are small- and medium-sized businesses (“SMBs”), which can be difficult and costly to retain;

• our ability to successfully manage our intellectual property;

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• risks related to laws, regulations and industry standards;

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

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

• operating and financial restrictions imposed by our Senior Secured Credit Facility;

• risks related to the accounting method for i3 Verticals, LLC's 1.0% Exchangeable Notes due February 15, 2025 (the “Exchangeable Notes”);

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

• risks related to the conditional exchange feature of the Exchangeable Notes;

• risks related to the cessation or modification of the London Inter-Bank Offered Rate (“LIBOR”);

• the risk factors included in our Form 10-K and included in Part II, Item 1A of this Quarterly Report on Form 10-Q, if any.

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Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and industry developments may differ materially from statements made in or suggested by the forward-looking statements contained in this Quarterly Report on Form 10-Q.

The matters summarized in “Risk Factors” in our Form 10-K, in this Quarterly Report on Form 10-Q, and in our other filings could cause our actual results to differ significantly from those contained in our forward-looking statements.

The matters summarized in “Risk Factors” in our Form 10-K and in subsequent filings could cause our actual results to differ significantly from those contained in our forward-looking statements.

In addition, even if our results of operations, financial condition and liquidity, and industry developments are consistent with the forward-looking statements contained in this filing, those results or developments may not be indicative of results or developments in subsequent periods.

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

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

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

COVID-19 Recent Developments

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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.

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.

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

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

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

Our payment volume was $0.8 billion, $1.0 billion, $1.2 billion, $1.2 billion, $1.5 billion, $1.3 billion, $1.3 billion, $1.2 billion and $1.3 billion for the months of April, May, June, July, August, September, October, November and December 2020, respectively.

Further, for April through December 2020, a significant portion of our revenue and payment volume within our Merchant Services segment and our Proprietary Software and Payments segment was derived from our education and public sector strategic verticals.

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

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

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

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

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

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

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

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

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

A portion of those furloughed have since returned to work.

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

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

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

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

The testing date was May 1, 2020.

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

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

Actual results could differ from those estimates.

See “Item 1A.

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

economy remains unstable for a significant amount of time”.

Public Equity Offerings

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

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

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

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

At December 31, 2020, we had $10.9 million of cash and cash equivalents and $225.7 million of available capacity under our Senior Secured Credit Facility, subject to our financial covenants.

As of December 31, 2020, we were in compliance with these covenants with a consolidated interest coverage ratio, total leverage ratio and consolidated senior leverage ratio of 16.48x, 3.67x and 0.92x, respectively.

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

Public Equity Offering

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

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

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

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

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

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

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

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

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

Recent acquisitions

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

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

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

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

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

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

Acquisitions during the nine months ended June 30, 2019

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

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

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

We also completed the acquisitions of additional unrelated businesses.

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

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

Subsequent to December 31, 2020, we 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 our public sector vertical.

The aggregate purchase consideration was $87.7 million, consisting of $52.5 million 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 $35.2 million) and an amount of contingent consideration, which is still being valued.

The transaction includes contingent consideration of up to $16.0 million, subject to the achievement of specified financial performance targets over established time periods.

Acquisitions during the quarter ended December 31, 2020

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

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

Total purchase consideration was $47.0 million, including $40.0 million in cash consideration, funded by proceeds from our revolving credit facility, and $7.0 million in contingent consideration.

During the three months ended December 31, 2020, we also completed the acquisition 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 $23.0 million, including $19.6 million in cash and revolving line of credit proceeds and $3.4 million of contingent consideration.

Our Revenue and Expenses

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Interest expense, net.

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

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

How We Assess Our Business

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

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

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

Proprietary Software and Payments

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

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

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

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

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

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

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

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

For additional information on our segments, see Note 12 to our condensed consolidated financial statements.

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• period-to-period payment volume attrition.

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

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

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

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

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

Our payment volume for both the three months ended December 31, 2020 and 2019 was $3.8 billion, inclusive of a period-to-period decline of 1.0%.

For April through December 2020, our payment volume was adversely impacted by deteriorating economic conditions as a result of the impacts of the COVID-19 pandemic.

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

Payment volume reflects the addition of new clients and same store payment volume growth of existing clients, partially offset by client attrition during the period.

Integrated payments represent payment transactions that are generated in situations in which payment technology is embedded within our own proprietary software, a client’s software or critical business process.

Integrated payments represent payment transactions that are generated in situations where payment technology is embedded within our own proprietary software, a client’s software or critical business process.

We evaluate the portion of our payment volume that is produced by integrated transactions because we believe the convergence of software and payments is a significant trend impacting our industry.

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

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

Integrated payments grew to 56% of our payment volume for the three months ended December 31, 2020 from 55% for the three months ended December 31, 2019.

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

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

Volume attrition provides us useful information regarding our ability to retain clients and volume.

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

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

During the three months ended December 31, 2020, our average net volume attrition per month remained below 2%.

Results of Operations

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

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

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

Three months ended June 30, Change

Three months ended December 31, Change

(in thousands) 2020 2019 Amount %

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Operating expenses

Interchange and network fees (1)

63,263 (63,263) n/m

Other costs of services 13,666 12,918 748 5.8 %

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Depreciation and amortization 5,092 4,655 437 9.4 %

Change in fair value of contingent consideration (1,473) (417) (1,056) n/m

Change in fair value of contingent consideration 1,904 154 1,750 1,136.4 %

Total operating expenses 45,624 37,014 8,610 23.3 %

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

Other expenses

(Loss) income from operations (2,311) 4,097 (6,408) n/m

Interest expense, net 2,029 2,014 15 0.7 %

Other expense 829 — 829 n/m

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

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

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

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

(Loss) income before income taxes (4,340) 2,083 (6,423) n/m

(Benefit from) provision for income taxes (219) 149 (368) n/m

Net (loss) income (4,121) 1,934 (6,055) n/m

Net (loss) income attributable to non-controlling interest (1,549) 2,083 (3,632) n/m

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n/m = not meaningful

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Interchange and Network Fees

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

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

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

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

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

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

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

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

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

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

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

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

Other Costs of Services

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

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

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

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

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

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

Selling, General and Administrative Expenses

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

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

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

Depreciation and Amortization

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

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

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

Change in Fair Value of Contingent Consideration

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

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

Interest Expense, net

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

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

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

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

Other expense

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

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

Benefit from Income Taxes

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

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

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

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

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

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

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

Nine months ended June 30, Change

(in thousands) 2020 2019 Amount %

Revenue $ 111,862 $ 267,745 $ (155,883) (58.2) %

Operating expenses

Interchange and network fees (1)

173,777 (173,777) n/m

Other costs of services 34,874 31,414 3,460 11.0 %

Selling, general and administrative 58,206 44,422 13,784 31.0 %

Depreciation and amortization 13,668 11,875 1,793 15.1 %

Change in fair value of contingent consideration (1,461) 1,736 (3,197) (184.2) %

Total operating expenses 105,287 263,224 (157,937) (60.0) %

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

Other expenses

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

Other expense 829 — 829 n/m

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

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

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

Net income 1,043 536 507 94.6 %

Net income attributable to non-controlling interest 811 2,651 (1,840) (69.4) %

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

$ 232 $ (2,115) $ 2,347 n/m

n/m = not meaningful

__________________________

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Interchange and Network Fees

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

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

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

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

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

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

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

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

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

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

Revenue increased $2.2 million, or 5.4%, to $43.3 million for the three months ended December 31, 2020 from $41.1 million for the three months ended December 31, 2019.

This increase was principally driven by acquisitions completed during the 2020 and 2021 fiscal years.

These acquisitions contributed an incremental $7.5 million, net of intercompany eliminations, to our revenue for the three months ended December 31, 2020, partially offset by a decrease in revenue of $5.3 million, primarily due to a decrease in payment volume driven by an overall reduction in consumer spending as a result of the COVID-19 pandemic.

Revenue related to a subset of merchant contracts purchased in 2014 and 2017 (“Purchased Portfolios”), which have a higher rate of revenue attrition and payment volume attrition than the rest of our business, decreased $0.4 million, or 29.9%, to $0.9 million for the three months ended December 31, 2020 from $1.3 million for the three months ended December 31, 2019.

Excluding revenues from the Purchased Portfolios, revenue grew $2.6 million, or 6.5%, to $42.4 million for the three months ended December 31, 2020 from $39.8 million for the three months ended December 31, 2019.

Revenue within Merchant Services decreased $3.3 million, or 11.6%, to $25.0 million for the three months ended December 31, 2020 from $28.2 million for the three months ended December 31, 2019.

This decrease was comprised of a decrease in payments revenue of $2.2 million and a decrease in other revenue of $1.1 million for the three months ended December 31, 2020.

The decrease in payments revenue was primarily due to a decrease in payment volume.

Revenue within Proprietary Software and Payments increased $5.5 million, or 41.4%, to $18.8 million for the three months ended December 31, 2020 from $13.3 million for the three months ended December 31, 2019.

This increase was principally driven by acquisitions completed during the 2020 and 2021 fiscal years, partially offset by an overall reduction in consumer spending, particularly within the education vertical, as a result of the COVID-19 pandemic.

Payment volume decreased 1.0% but remained at $3.8 billion for the three months ended December 31, 2020 and the three months ended December 31, 2019.

Other Costs of Services

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

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

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

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

Other costs of services increased $0.7 million, or 5.8%, to $13.7 million for the three months ended December 31, 2020 from $12.9 million for the three months ended December 31, 2019.

This increase was driven by acquisitions completed during the 2021 and 2020 fiscal years.

These acquisitions contributed an incremental $2.4 million to our other costs of services for the three months ended December 31, 2020.

Other costs of services within Merchant Services decreased $1.3 million, or 10.9%, to $10.8 million for the three months ended December 31, 2020 from $12.2 million for the three months ended December 31, 2019.

Other costs of services within Proprietary Software and Payments increased $2.1 million, or 182.2%, to $3.3 million for the three months ended December 31, 2020 from $1.2 million for the three months ended December 31, 2019.

This increase was primarily driven by acquisitions completed during the 2020 and 2021 fiscal years, which contributed an incremental $2.4 million, net of intercompany eliminations, to our other costs of services within Proprietary Software and Payments for the three months ended December 31, 2020.

Selling, General and Administrative Expenses

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

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

Selling, general and administrative expenses increased $5.7 million, or 29.4%, to $25.0 million for the three months ended December 31, 2020 from $19.3 million for the three months ended December 31, 2019.

This increase was primarily driven by an increase in employment costs of $4.5 million due to an increase in stock compensation expense and an increase in headcount resulting from acquisitions.

The majority of the remaining increase was comprised of increases in professional services of $1.1 million.

Depreciation and Amortization

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

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

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

Depreciation and amortization increased $0.4 million, or 9.4%, to $5.1 million for the three months ended December 31, 2020 from $4.7 million for the three months ended December 31, 2019.

Amortization expense increased $0.3 million to $4.6 million for the three months ended December 31, 2020 from $4.2 million for the three months ended December 31, 2019 primarily due to acquisitions completed during the three months ended December 31, 2020.

Depreciation expense increased $0.1 million to $0.5 million for the three months ended December 31, 2020 from $0.4 million for the three months ended December 31, 2019.

Change in Fair Value of Contingent Consideration

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

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

Change in fair value of contingent consideration to be paid in connection with acquisitions was a charge of $1.9 million for the three months ended December 31, 2020 primarily due to the performance of some of our acquisitions exceeding our expectations.

The change in fair value of contingent consideration for the three months ended December 31, 2019 was a charge of $0.2 million.

Interest Expense, net

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

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

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

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

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

Other expense

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

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

Benefit from Income Taxes

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

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

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

Interest expense, net, remained flat at $2.0 million for both the three months ended December 31, 2020 and 2019.

Interest expense, net, included $1.1 million during the three months ended December 31, 2020 related to the amortization of the debt discount, which was the difference between the principal amount of the Exchangeable Notes and the liability component, recorded in connection with the issuance of the Exchangeable Notes.

However, the increase in amortization of debt discount was offset by a higher average debt balance during the three months ended December 31, 2019 as compared to the three months ended December 31, 2020.

Provision for Income Taxes

The provision for income taxes was a benefit of $0.2 million for the three months ended December 31, 2020 as compared to a provision of $0.1 million for the three months ended December 31, 2019.

Our effective tax rate was 5% for the three months ended December 31, 2020.

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

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

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

i3 Verticals, Inc.

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

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

Revenues during the first quarter of the calendar year, which is our second fiscal quarter, tend to decrease in comparison to the remaining three quarters of the calendar year on a same store basis.

This decrease is due to the relatively higher number and amount of electronic payment transactions related to seasonal retail events, such as holiday and vacation spending in their second, third and fourth quarters of the calendar year, which respectively are the third, fourth and first quarters of our fiscal year.

The number of business days in a month or quarter also may affect seasonal fluctuations.

Revenue in our education vertical fluctuates with the school calendar.

Revenue for our education clients is strongest in August, September, October, January and February, at the start of each semester, and generally weakens throughout the semester, with little revenue in the summer months of June and July.

Revenue for our education clients is typically strongest in August, September, October, January and February, at the start of each semester, and generally weakens throughout the semester, with little revenue in the summer months of June and July.

Operating expenses show less seasonal fluctuation, with the result that net income is subject to the same seasonal factors as our revenues.

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

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

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

Liquidity and Capital Resources

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

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

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

As of December 31, 2020, we had $10.9 million of cash and cash equivalents and available borrowing capacity of $225.7 million under our Senior Secured Credit Facility, subject to the financial covenants.

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

As of December 31, 2020, we had borrowings outstanding of $49.3 million under the Senior Secured Credit Facility.

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

We historically have had positive cash flow provided by operations.

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

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

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

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

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

Our growth strategy includes acquisitions.

We expect to fund acquisitions through a combination of net cash from operating activities, borrowings under our Senior Secured Credit Facility and through the issuance of equity and debt securities.

As a holding company, we depend on distributions or loans from i3 Verticals, LLC to access funds earned by our operations.

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

employees and a workforce reduction program that included the elimination of certain positions as well as a general reduction in headcount.

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

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

A portion of those furloughed have since returned to work.

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

We recorded a loss on retirement of debt of $2.3 million due to the carrying value exceeding the fair value of the repurchased portion of the Exchangeable Notes at the dates of repurchases.

1 unchanged sentence

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

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

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

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

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

Nine Months Ended June 30, 2020 and 2019

Nine months ended June 30,

Three Months Ended December 31, 2020 and 2019

Three months ended December 31,

(in thousands)

1 unchanged sentence

Net cash used in investing activities $ (61,329) $ (1,782)

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

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

Cash Flow from Operating Activities

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

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

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

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

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

Net cash provided by operating activities increased $4.5 million to $12.0 million for the three months ended December 31, 2020 from $7.5 million for the three months ended December 31, 2019.

While our net income declined from $1.9 million for the three months ended December 31, 2019 to a net loss of $4.1 million for the three months ended December 31, 2020, most of this reduction was driven by non-cash expenses that do not impact cash flows from operating activities.

The primary driver of the increase in cash provided by operating activities was increases in operating assets and liabilities of $5.2 million, which are impacted by the timing of collections and payments.

Other changes include an increase in non-cash contingent consideration of $1.8 million, an increase in equity-based compensation of $1.3 million, an increase in amortization of debt discount and issuance costs of $1.2 million and an increase in non-cash lease expense of $0.7 million for the three months ended December 31, 2020 compared to the three months ended December 31, 2019.

Cash Flow from Investing Activities

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

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

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

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

Net cash used in investing activities increased $59.5 million to $61.3 million for the three months ended December 31, 2020 from $1.8 million for the three months ended December 31, 2019.

The largest driver of cash used in investing activities for the three months ended December 31, 2020 was cash used in acquisitions, net of cash acquired.

For the three months ended December 31, 2020, we used $59.6 million of cash for acquisitions, net of cash acquired.

Cash Flow from Financing Activities

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

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

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

Net cash provided by financing activities increased $54.9 million to $48.2 million net cash provided by financing activities for the three months ended December 31, 2020 from $6.6 million net cash used in financing activities for the three months ended December 31, 2019.

The increase in net cash provided by financing activities was primarily the result of an increase in proceeds from the revolving credit facility of $57.0 million, partially offset by an increase in cash paid for contingent consideration of $1.7 million for the three months ended December 31, 2020 compared to the three months ended December 31, 2019.

Senior Secured Credit Facility

On October 30, 2017, we entered into a new credit facility (the “2017 Senior Secured Credit Facility”).

Bank of America Corporation served as administrative agent with Bank of America Corporation, Wells Fargo & Co.

and Fifth Third Bank served as joint lead arrangers and joint bookrunners.

The 2017 Senior Secured Credit Facility consisted of $40.0 million in term loans and a $110.0 million revolving line of credit.

For a summary of the 2017 Senior Secured Credit Facility, please refer to Note 5 to the accompanying condensed consolidated financial statements and to “Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” of Part II, Item 7 of our Form 10-K.

On May 9, 2019, we amended and restated our existing 2017 Senior Secured Credit Facility with a new credit agreement, which we amended on February 18, 2020, in connection with our offering of Exchangeable Notes (the “Senior Secured Credit Facility”).

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

The Senior Secured Credit Facility accrues interest at LIBOR (based upon an interest period of one, two, three or six months or, under some circumstances, up to twelve months) plus an applicable margin of 2.25% to 3.25% (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.

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

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

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

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

Additionally, the Senior Secured Credit Facility requires us 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, we were in compliance with these covenants, and there was $240.0 million available for borrowing under the revolving credit facility, subject to the financial covenants.

As of December 31, 2020, we were 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 of our assets.

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

These include, among others, restrictions on liens, investments, indebtedness, fundamental changes and dispositions, dividends and distributions, changes in the nature of our 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;

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Follow-on Offering

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

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

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

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

We used the net proceeds to purchase (1) 3,250,000 Common Units directly from i3 Verticals, LLC, and (2) 487,500 Common Units pursuant to the exercise of the underwriters' option to purchase additional shares in full and an equivalent number of Class B common stock (which shares were then canceled) from certain Continuing Equity Owners, in each case at a price per Common Unit equal to the price per share paid by the underwriters for shares of the Company's Class A common stock in the offering.

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

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

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Contractual Obligations

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

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

Payments Due by Period

Contractual Obligations Total

Contractual Obligations

Less than 1 year

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__________________________

We have agreements with several processors to provide us services related to transaction processing and transmittal, transaction authorization and data capture, and access to various reporting tools.

We have non-exclusive agreements with several processors to provide us services related to transaction processing and transmittal, transaction authorization and data capture, and access to various reporting tools.

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

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

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

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

We estimated interest payments through the maturity of our Senior Secured Credit Facility by applying the interest rate of 3.35% in effect on the outstanding balance as of December 31, 2020, plus an unused fee rate of 0.25% in effect as of December 31, 2020.

We calculated interest payments through the maturity of our Exchangeable Notes by applying the coupon interest rate of 1.0% on the outstanding principal balance as of December 31, 2020 of $117.0 million.

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

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accounts for the fair values of such contingent payments in accordance with the Level 3 financial instrument fair value hierarchy at the close of each subsequent reporting period.

The acquisition-date fair value of material contingent consideration is valued using a Monte Carlo simulation.

The acquisition-date fair value of contingent consideration is valued using a Monte Carlo simulation.

i3 Verticals, Inc.

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

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

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

As of December 31, 2020, the total amount due under the Tax Receivable Agreement was $34.3 million, and payments to the Continuing Equity Owners related to exchanges through December 31, 2020 will range from $0 to $2.8 million 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.

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

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

As of December 31, 2020, there have been no significant changes to our critical accounting estimates disclosed in the Form 10-K filed with the SEC on November 23, 2020, except regarding the adoption of ASC 842 on October 1, 2020, as described in Note 2 to our condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

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

As of December 31, 2020, there have been no significant changes to our recently issued accounting pronouncements disclosed in the Form 10-K filed with the SEC on November 23, 2020, except as described in Note 2 to our condensed consolidated financial statements.

Off-Balance Sheet Arrangements

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

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis