What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-09 compared with 2021-05-10 · 119 added, 131 removed, 300 unchanged (45% of the section changed)

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These factors include, but are not limited to, the following:

• the anticipated impact to our business operations, payment volume and volume attrition due to the global pandemic of a novel strain of the coronavirus (COVID-19), including the impact of social distancing, shelter-in-place, shutdowns of non-essential businesses and similar measures imposed or undertaken by governments;

• the anticipated impact to our business operations, payment volume and volume attrition due to the global pandemic of a novel strain of the coronavirus (COVID-19), including variant strains thereof, including the impact of social distancing, shelter-in-place, shutdowns of non-essential businesses and similar measures imposed or undertaken by governments;

• our indebtedness and our ability to maintain compliance with the financial covenants in our Senior Secured Credit Facility (as defined below) in light of the impacts of the COVID-19 pandemic;

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In March 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 brought about many precautions at the state and local government levels 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.

In recent months, many of the restrictions have eased across the country;

however, the potential for future closures and other restrictions related to COVID-19 remains.

The spread of COVID-19 and its variant strains has brought about many precautions at the state and local government levels 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.

During the first half of calendar year 2021, many of the restrictions eased across the country;

however, recently some jurisdictions have begun to reimpose restrictions in response to variant strains of COVID-19.

Furthermore, the potential for future closures and other restrictions related to COVID-19 and its variants remains.

The COVID-19 pandemic has significantly affected overall economic conditions in the United States.

The economic impact of these conditions materially impacted our business and is expected to continue to adversely impact our strategic verticals and our business in general.

For example, beginning in the second half of March 2020 and continuing into the current period, we and our clients 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 has fluctuated since March 2020 as a result of the impacts of the COVID-19 pandemic.

Further, 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.

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Despite positive developments, such as the availability of vaccines, there are no reliable estimates of how long the pandemic will continue, how many people are likely to be affected by it or the duration or types of restrictions that will be imposed.

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

For that reason, we are unable to predict the long-term impact of COVID-19 and its variant strains on our business at this time.

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

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

At March 31, 2021, we had $2.4 million of cash and cash equivalents and $190.0 million of available capacity under our Senior Secured Credit Facility 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 March 31, 2021, we were in compliance with these covenants with a consolidated interest coverage ratio, total leverage ratio and consolidated senior leverage ratio of 6.19x, 3.80x and 1.57x, respectively.

At June 30, 2021, we had $4.7 million of cash and cash equivalents and $157.2 million of available capacity under our Senior Secured Credit Facility subject to our financial covenants.

As of June 30, 2021, we were in compliance with these covenants with a consolidated interest coverage ratio, total leverage ratio and consolidated senior leverage ratio of 8.23x, 3.81x and 1.87x, respectively.

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

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Exchangeable Notes Offering

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

On February 18, 2020, i3 Verticals, LLC issued $138.0 million aggregate principal amount of the Exchangeable Notes.

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

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

Recent acquisitions

Subsequent to March 31, 2021, we completed the acquisition of three businesses.

Two of these businesses further strengthen our focus in our healthcare vertical.

The third business expands our software capabilities in the public sector vertical.

Total purchase consideration included $37.4 million in cash consideration, funded by proceeds from our revolving line of credit, and an amount of contingent consideration, which is still being valued.

Acquisitions during the six months ended March 31, 2021

On February 1, 2021, we completed the acquisition of substantially all of the assets of Business Information Systems, GP, a Tennesee general partnership and Business Information Systems, Inc., a Tennessee corporation (collectively “BIS”) to expand our software offerings, primarily in the public sector vertical.

Acquisitions during the nine months ended June 30, 2021

On February 1, 2021, we completed the acquisition of substantially all of the assets of Business Information Systems, GP, a Tennessee general partnership and Business Information Systems, Inc., a Tennessee corporation (collectively “BIS”) to expand our software offerings, primarily in the Public Sector vertical.

Total purchase consideration was $95.5 million, including $52.5 million in cash on hand and proceeds from the Company's revolving credit facility, 1,202,914 shares of the Company's Class A Common Stock, and $7.8 million in contingent consideration.

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.

(“ImageSoft”) to expand our software offerings, primarily in the Public Sector vertical.

Total purchase consideration was $46.3 million, including $40.0 million in cash consideration, funded by proceeds from our revolving credit facility, and $6.3 million in contingent consideration.

During the six months ended March 31, 2021, 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.

During the nine months ended June 30, 2021, we also completed the acquisition of six 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 $65.4 million, including $57.0 million in cash consideration, funded by proceeds from our revolving line of credit, and $8.4 million of contingent consideration.

Acquisitions during the nine months ended June 30, 2020

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.

Our Revenue and Expenses

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• period-to-period payment volume attrition.

Our payment volume for the three months ended March 31, 2021 and 2020 was $4.3 billion and $3.6 billion, respectively, representing a period-to-period growth rate of 19.2%.

Our payment volume for the six months ended March 31, 2021 and 2020 was $8.1 billion and $7.4 billion, respectively, representing a period-to-period growth rate of 8.7%.

Our payment volume for the three months ended June 30, 2021 and 2020 was $5.1 billion and $3.0 billion, respectively, representing a period-to-period growth rate of 72.3%.

Our payment volume for the nine months ended June 30, 2021 and 2020 was $13.2 billion and $10.4 billion, respectively, representing a period-to-period growth rate of 27.0%.

Our payment volume has fluctuated since March 2020 as a result of the impacts of the COVID-19 pandemic.

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

Integrated payments grew to 59% and 55% of our payment volume for the three months ended March 31, 2021 and 2020, respectively, and were 57% and 55% of our payment volume for the six months ended March 31, 2021 and 2020, respectively.

Integrated payments grew to 60% and 51% of our payment volume for the three months ended June 30, 2021 and 2020, respectively.

Integrated payments grew to 58% and 54%of our payment volume for the nine months ended June 30, 2021 and 2020, respectively.

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.

During the six months ended March 31, 2021, our average net volume attrition per month remained below 2%.

During the nine months ended June 30, 2021, our average net volume attrition per month remained below 1%.

Results of Operations

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

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

Three months ended March 31, Change

Three months ended June 30, Change

(in thousands) 2021 2020 Amount %

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Total operating expenses 63,964 31,136 32,828 105.4 %

Income from operations (135) 2,041 (2,176) n/m

(Loss) income from operations (2,000) 437 (2,437) n/m

Other expenses

Interest expense, net 2,704 2,423 281 11.6 %

Other income (2,353) — (2,353) n/m

Other expenses — 829 (829) n/m

Total other expenses 2,704 3,252 (548) (16.9) %

Loss before income taxes (4,704) (2,815) (1,889) 67.1 %

Benefit from income taxes (87) (2,062) 1,975 (95.8) %

Net (loss) income (53) 1,919 (1,972) n/m

Net (loss) income attributable to non-controlling interest (493) 1,182 (1,675) n/m

Benefit from income taxes (110) (5) (105) n/m

Net (loss) (4,594) (2,810) (1,784) 63.5 %

Net (loss) attributable to non-controlling interest (1,286) (2,454) 1,168 (47.6) %

Net income attributable to i3 Verticals, Inc.

$ 440 $ 737 $ (297) (40.3) %

$ (3,308) $ (356) $ (2,952) n/m

n/m = not meaningful

Revenue increased $8.7 million, or 22.2%, to $47.9 million for the three months ended March 31, 2021 from $39.2 million for the three months ended March 31, 2020.

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

These acquisitions contributed an incremental $9.6 million, net of intercompany eliminations, to our revenue for the three months ended March 31, 2021, partially offset by a decrease in revenue from existing business lines of $1.0 million, primarily due to 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 $0.3 million, or 25.7%, to $0.8 million for the three months ended March 31, 2021 from $1.0 million for the three months ended March 31, 2020.

Excluding revenues from the Purchased Portfolios, revenue grew $9.0 million, or 23.5%, to $47.1 million for the three months ended March 31, 2021 from $38.1 million for the three months ended March 31, 2020.

Revenue within Merchant Services increased $0.3 million, or 1.0%, to $26.0 million for the three months ended March 31, 2021 from $25.7 million for the three months ended March 31, 2020.

Revenue within Proprietary Software and Payments increased $8.6 million, or 61.3%, to $22.5 million for the three months ended March 31, 2021 from $14.0 million for the three months ended March 31, 2020.

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 increased $0.7 billion, or 19%, to $4.3 billion for the three months ended March 31, 2021 from $3.6 billion for the three months ended March 31, 2020.

Acquisitions completed during the 2020 and 2021 fiscal years contributed an incremental $0.2 billion to payment volume for the three months ended March 31, 2021.

Revenue increased $30.4 million, or 96.3%, to $62.0 million for the three months ended June 30, 2021 from $31.6 million for the three months ended June 30, 2020.

This increase was principally driven by an increase in revenue from existing businesses of $10.1 million, primarily due to an overall increase in consumer spending as a result of recovery from the COVID-19 pandemic.

Acquisitions completed during the 2020 and 2021 fiscal years contributed an incremental $20.3 million, net of intercompany eliminations, to our revenue for the three months ended June 30, 2021.

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 $0.1 million, or 5.4%, to $0.8 million for the three months ended June 30, 2021 from $0.9 million for the three months ended June 30, 2020.

Excluding revenues from the Purchased Portfolios, revenue grew $30.4 million, or 99.1%, to $61.2 million for the three months ended June 30, 2021 from $30.7 million for the three months ended June 30, 2020.

Revenue within Merchant Services increased $7.7 million, or 34.6%, to $29.9 million for the three months ended June 30, 2021 from $22.2 million for the three months ended June 30, 2020.

Revenue within Proprietary Software and Payments increased $22.8 million, or 233.9%, to $32.6 million for the three months ended June 30, 2021 from $9.8 million for the three months ended June 30, 2020.

This increase was principally driven by acquisitions completed during the 2020 and 2021 fiscal years, in addition to an overall increase in consumer spending, as a result of recovery from the COVID-19 pandemic.

Payment volume increased $2.2 billion, or 72%, to $5.1 billion for the three months ended June 30, 2021 from $3.0 billion for the three months ended June 30, 2020.

Acquisitions completed during the 2020 and 2021 fiscal years contributed an incremental $0.3 billion to payment volume for the three months ended June 30, 2021.

Other Costs of Services

Other costs of services decreased $0.6 million, or 5.4%, to $11.3 million for the three months ended March 31, 2021 from $12.0 million for the three months ended March 31, 2020.

This decrease was primarily driven by a decrease in other cost of services within the Proprietary Software and Payments segment.

Other costs of services within Merchant Services increased $0.4 million, or 3.8%, to $11.8 million for the three months ended March 31, 2021 from $11.4 million for the three months ended March 31, 2020.

Other costs of services within Proprietary Software and Payments decreased $0.9 million, or 81.4%, to $0.2 million for the three months ended March 31, 2021 from $1.1 million for the three months ended March 31, 2020.

Other costs of services increased $6.1 million, or 60.6%, to $16.1 million for the three months ended June 30, 2021 from $10.0 million for the three months ended June 30, 2020.

This increase was primarily driven by an increase in other cost of services within the Merchant Services segment driven by the increase in payment volume.

Other costs of services within Merchant Services increased $4.8 million, or 50.4%, to $14.2 million for the three months ended June 30, 2021 from $9.4 million for the three months ended June 30, 2020.

Other costs of services within Proprietary Software and Payments increased $1.4 million, or 147.4%, to $2.4 million for the three months ended June 30, 2021 from $1.0 million for the three months ended June 30, 2020.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $9.7 million, or 46.8%, to $30.5 million for the three months ended March 31, 2021 from $20.8 million for the three months ended March 31, 2020.

Selling, general and administrative expenses increased $19.2 million, or 105.7%, to $37.3 million for the three months ended June 30, 2021 from $18.1 million for the three months ended June 30, 2020.

This increase was primarily driven by a $16.6 million increase in employment expenses, primarily resulting from an increase in headcount that resulted from acquisitions and an increase in stock compensation expense.

Depreciation and Amortization

Depreciation and amortization increased $1.3 million, or 28.9%, to $5.9 million for the three months ended March 31, 2021 from $4.5 million for the three months ended March 31, 2020.

Amortization expense increased $1.2 million to $5.3 million for the three months ended March 31, 2021 from $4.1 million for the three months ended March 31, 2020 primarily due to acquisitions completed during the 2020 and 2021 fiscal years.

Depreciation expense increased $0.1 million to $0.6 million for the three months ended March 31, 2021 from $0.5 million for the three months ended March 31, 2020.

Depreciation and amortization increased $2.5 million, or 56.3%, to $7.0 million for the three months ended June 30, 2021 from $4.5 million for the three months ended June 30, 2020.

Amortization expense increased $2.4 million to $6.4 million for the three months ended June 30, 2021 from $4.0 million for the three months ended June 30, 2020 primarily due to acquisitions completed during the 2020 and 2021 fiscal years.

Depreciation expense increased $0.1 million to $0.6 million for the three months ended June 30, 2021 from $0.5 million for the three months ended June 30, 2020.

Change in Fair Value of Contingent Consideration

Change in fair value of contingent consideration to be paid in connection with acquisitions was a charge of $0.3 million for the three months ended March 31, 2021 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 March 31, 2020 was a benefit of $0.1 million.

Change in fair value of contingent consideration to be paid in connection with acquisitions was a charge of $3.6 million for the three months ended June 30, 2021 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 June 30, 2020 was a benefit of $1.5 million.

Interest Expense, net

Interest expense, net, increased $0.2 million, or 8.0%, to $2.4 million for the three months ended March 31, 2021 from $2.2 million for the three months ended March 31, 2020.

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 $1.1 million and $0.6 million in interest expense related to the amortization of the debt discount during the three months ended March 31, 2021 and 2020, respectively.

The increase in amortization of debt discount was partially offset by a debt extinguishment charge of $0.1 million for the write-off of deferred financing costs during the three months ended March 31, 2020.

Other income was $2.4 million for the three months ended March 31, 2021.

We had no other income for the three months ended March 31, 2020.

In March 2021, the Company became aware of an observable price change in the AxiaMed equity investment, due to a planned third party acquisition of AxiaMed.

This resulted in an increase of $2.4 million to the fair value of the AxiaMed investment at March 31, 2021, which the Company recognized in other income.

Interest expense, net, increased $0.3 million, or 11.6%, to $2.7 million for the three months ended June 30, 2021 from $2.4 million for the three months ended June 30, 2020.

The increase reflects a higher average outstanding debt balance for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020.

Other Expense

There was no other expense for the three months ended June 30, 2021.

We had $0.8 million other expense 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.

Benefit from Income Taxes

The benefit from income taxes decreased to a benefit of $0.1 million for the three months ended March 31, 2021 from a benefit of $2.1 million for the three months ended March 31, 2020.

During the three months ended March 31, 2020, 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 reduction in our income tax expense in the three months ended March 31, 2020.

Our effective tax rate was 62.1% for the three months ended March 31, 2021.

The benefit from income taxes decreased to a benefit of $0.1 million for the three months ended June 30, 2021 from a nominal benefit for the three months ended June 30, 2020.

Our effective tax rate was 2.3% for the three months ended June 30, 2021.

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

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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.

Six Months Ended March 31, 2021 Compared to Six Months Ended March 31, 2020

Nine Months Ended June 30, 2021 Compared to Nine Months Ended June 30, 2020

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

Six months ended March 31, Change

Nine months ended June 30, Change

(in thousands) 2021 2020 Amount %

4 unchanged sentences

Depreciation and amortization 17,938 13,668 4,270 31.2 %

Change in fair value of contingent consideration 2,226 12 2,214 18,450.0 %

Change in fair value of contingent consideration 5,835 (1,461) 7,296 n/m

Total operating expenses 157,586 105,287 52,299 49.7 %

2 unchanged sentences

Interest expense, net 7,092 6,621 471 7.1 %

Other income (2,353) — (2,353) n/m

Other (income) expense (2,353) 829 (3,182) n/m

Total other expenses 4,739 7,450 (2,711) (36.4) %

1 unchanged sentence

Benefit from income taxes (416) (1,918) 1,502 (78.3) %

Net (loss) income (4,174) 3,853 (8,027) (208.3) %

Net (loss) income (8,769) 1,043 (9,812) n/m

Net (loss) income attributable to non-controlling interest (3,328) 811 (4,139) n/m

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n/m = not meaningful

Revenue increased $10.9 million, or 13.6%, to $91.2 million for the six months ended March 31, 2021 from $80.3 million for the six months ended March 31, 2020.

Revenue increased $41.3 million, or 36.9%, to $153.1 million for the nine months ended June 30, 2021 from $111.9 million for the nine months ended June 30, 2020.

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

These acquisitions contributed an incremental $17.1 million, net of intercompany eliminations, to our revenue for the six months ended March 31, 2021, partially offset by a decrease in revenue from existing business lines of $6.2 million, primarily due to 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 $0.7 million, or 28.1%, to $1.7 million for the six months ended March 31, 2021 from $2.4 million for the six months ended March 31, 2020.

Excluding revenues from the Purchased Portfolios, revenue grew $11.6 million, or 14.8%, to $89.5 million for the six months ended March 31, 2021 from $77.9 million for the six months ended March 31, 2020.

Revenue within Merchant Services decreased $3.0 million, or 5.6%, to $51.0 million for the six months ended March 31, 2021 from $54.0 million for the six months ended March 31, 2020.

This decrease was comprised of a decrease in payments revenue of $1.9 million and a decrease in other revenue of $1.1 million for the six months ended March 31, 2021 from the six months ended March 31, 2020.

Revenue within Proprietary Software and Payments increased $14.1 million, or 51.6%, to $41.3 million for the six months ended March 31, 2021 from $27.3 million for the six months ended March 31, 2020.

Payment volume increased $0.6 billion, or 8.7%, to $8.1 billion for the six months ended March 31, 2021 from $7.4 billion for the six months ended March 31, 2020.

Acquisitions completed during the 2020 and 2021 fiscal years contributed an incremental $0.2 billion to payment volume for the six months ended March 31, 2021.

These acquisitions contributed an incremental $37.4 million, net of intercompany eliminations, to our revenue for the nine months ended June 30, 2021.

In addition, revenue from existing businesses increased $3.9 million, primarily due to an overall increase in consumer spending as a result of recovery from 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 $0.7 million, or 22.1%, to $2.5 million for the nine months ended June 30, 2021 from $3.2 million for the nine months ended June 30, 2020.

Excluding revenues from the Purchased Portfolios, revenue grew $42.0 million, or 38.6%, to $150.6 million for the nine months ended June 30, 2021 from $108.6 million for the nine months ended June 30, 2020.

Revenue within Merchant Services increased $4.7 million, or 6.1%, to $80.9 million for the nine months ended June 30, 2021 from $76.2 million for the nine months ended June 30, 2020.

Revenue within Proprietary Software and Payments increased $36.9 million, or 99.7%, to $73.9 million for the nine months ended June 30, 2021 from $37.0 million for the nine months ended June 30, 2020.

Payment volume increased $2.8 billion, or 27.0%, to $13.2 billion for the nine months ended June 30, 2021 from $10.4 billion for the nine months ended June 30, 2020.

Acquisitions completed during the 2020 and 2021 fiscal years contributed an incremental $0.5 billion to payment volume for the nine months ended June 30, 2021.

Other Costs of Services

Other costs of services increased $0.1 million, or 0.4%, to $25.0 million for the six months ended March 31, 2021 from $24.9 million for the six months ended March 31, 2020.

These acquisitions contributed an incremental $1.6 million to our other costs of services for the six months ended March 31, 2021.

Other costs of services within Merchant Services decreased $0.9 million, or 3.9%, to $22.6 million for the six months ended March 31, 2021 from $23.5 million for the six months ended March 31, 2020.

Other costs of services within Proprietary Software and Payments increased $1.2 million, or 51.9%, to $3.5 million for the six months ended March 31, 2021 from $2.3 million for the six months ended March 31, 2020, due to the incremental impact of acquisitions completed during the 2020 and 2021 fiscal years.

Other costs of services increased $6.2 million, or 17.7%, to $41.0 million for the nine months ended June 30, 2021 from $34.9 million for the nine months ended June 30, 2020.

This increase was partially driven by acquisitions completed during the 2020 and 2021 fiscal years, as well as an increase in other cost of services within the Merchant Services segment driven by the increase in payment volume.

Other costs of services within Merchant Services increased $3.9 million, or 11.7%, to $36.8 million for the nine months ended June 30, 2021 from $33.0 million for the nine months ended June 30, 2020.

Other costs of services within Proprietary Software and Payments increased $2.6 million, or 80.3%, to $5.9 million for the nine months ended June 30, 2021 from $3.3 million for the nine months ended June 30, 2020, due to the incremental impact of acquisitions completed during the 2020 and 2021 fiscal years.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $15.4 million, or 38.4%, to $55.5 million for the six months ended March 31, 2021 from $40.1 million for the six months ended March 31, 2020.

Selling, general and administrative expenses increased $34.6 million, or 59.4%, to $92.8 million for the nine months ended June 30, 2021 from $58.2 million for the nine months ended June 30, 2020.

This increase was primarily driven by a $30.5 million increase in employment expense, primarily resulting from an increase in headcount that resulted from acquisitions and an increase in stock compensation expense.

1 unchanged sentence

Depreciation and Amortization

Depreciation and amortization increased $1.8 million, or 19.0%, to $10.9 million for the six months ended March 31, 2021 from $9.2 million for the six months ended March 31, 2020.

Amortization expense increased $1.6 million to $9.8 million for the six months ended March 31, 2021 from $8.3 million for the six months ended March 31, 2020, primarily due to acquisitions completed during the 2020 and 2021 fiscal years.

Depreciation expense increased $0.2 million to $1.1 million for the six months ended March 31, 2021 from $0.9 million for the six months ended March 31, 2020.

Depreciation and amortization increased $4.3 million, or 31.2%, to $17.9 million for the nine months ended June 30, 2021 from $13.7 million for the nine months ended June 30, 2020.

Amortization expense increased $4.0 million to $16.3 million for the nine months ended June 30, 2021 from $12.3 million for the nine months ended June 30, 2020, primarily due to acquisitions completed during the 2020 and 2021 fiscal years.

Depreciation expense increased $0.3 million to $1.7 million for the nine months ended June 30, 2021 from $1.4 million for the nine months ended June 30, 2020.

Change in Fair Value of Contingent Consideration

Change in fair value of contingent consideration to be paid in connection with acquisitions was a charge of less than $2.2 million for the six months ended March 31, 2021, primarily due to on average slightly stronger performance of some of our acquisitions than expectations.

The change in fair value of contingent consideration for the six months ended March 31, 2020 was a charge of less than $0.1 million.

Change in fair value of contingent consideration to be paid in connection with acquisitions was a charge of $5.8 million for the nine months ended June 30, 2021, primarily due to the performance of some of our acquisitions exceeding our expectations.

The change in fair value of contingent consideration for the nine months ended June 30, 2020 was a benefit of $1.5 million.

Interest Expense, net

Interest expense, net, increased $0.2 million, or 4.5%, to $4.4 million for the six months ended March 31, 2021 from $4.2 million for the six months ended March 31, 2020.

Interest expense, net, increased $0.5 million, or 7.1%, to $7.1 million for the nine months ended June 30, 2021 from $6.6 million for the nine months ended June 30, 2020.

We recorded $2.2 million and $0.6 million in interest expense related to the amortization of the debt discount during the six months ended

March 31, 2021 and 2020, respectively.

The increase in amortization of debt discount was partially offset by a debt extinguishment charge of $0.1 million for the write-off of deferred financing costs during the six months ended March 31, 2020.

Other income was $2.4 million for the six months ended March 31, 2021.

We had no other income for the six months ended March 31, 2020.

In March 2021, the Company became aware of an observable price change in the AxiaMed equity investment, due to a planned third party acquisition of AxiaMed.

This resulted in an increase of $2.4 million to the fair value of the AxiaMed investment at March 31, 2021, which the Company recognized in other income.

We recorded $3.3 million and $1.8 million in interest expense related to the amortization of the debt discount during the nine months ended June 30, 2021 and 2020, respectively.

The increase in amortization of debt discount was partially offset by a debt extinguishment charge of $0.1 million for the write-off of deferred financing costs during the nine months ended June 30, 2020 and also reflects a lower average interest rate for the nine months ended June 30, 2021 as compared to the nine months ended June 30, 2020 due to the presence of the 1% Exchangeable Senior Notes.

Other income was $2.4 million for the nine months ended June 30, 2021.

During the nine months ended June 30, 2021, the Company became aware of an observable price change in the AxiaMed equity investment, due to a planned third party acquisition of AxiaMed.

This resulted in an increase of $2.4 million to the fair value of the AxiaMed investment, which the Company recognized in other income.

We had $0.8 million other expense 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.

Benefit from Income Taxes

The benefit from income taxes decreased to a benefit of $0.3 million for the six months ended March 31, 2021 from a benefit of $1.9 million for the six months ended March 31, 2020.

Our effective tax rate was 6.8% for the six months ended March 31, 2021.

The benefit from income taxes decreased to a benefit of $0.4 million for the nine months ended June 30, 2021 from a benefit of $1.9 million for the nine months ended June 30, 2020.

During the nine months ended June 30, 2020, 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 reduction in our income tax expense in the nine months ended June 30, 2021.

Our effective tax rate was 4.5% for the nine months ended June 30, 2021.

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

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

As of March 31, 2021, we had $2.4 million of cash and cash equivalents and available borrowing capacity of $190.0 million under our Senior Secured Credit Facility, subject to the financial covenants.

As of June 30, 2021, we had $4.7 million of cash and cash equivalents and available borrowing capacity of $157.2 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 March 31, 2021, we had borrowings outstanding of $85.0 million under the Senior Secured Credit Facility.

As of June 30, 2021, we had borrowings outstanding of $117.8 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.

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

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

A portion of those furloughed have since returned to work.

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

Six Months Ended March 31, 2021 and 2020

Six months ended March 31,

Nine Months Ended June 30, 2021 and 2020

Nine months ended June 30,

(in thousands)

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Net cash used in investing activities $ (156,946) $ (5,744)

Net cash provided by (used in) financing activities $ 83,900 $ (4,994)

Net cash provided by financing activities $ 115,519 $ 3,143

Cash Flow from Operating Activities

Net cash provided by operating activities increased $15.0 million to $23.9 million for the six months ended March 31, 2021 from $8.8 million for the six months ended March 31, 2020.

While our net income declined from net income of $3.9 million for the six months ended March 31, 2020 to a net loss of $4.2 million for the six months ended March 31, 2021, most of this reduction was driven by non-cash expenses that do not impact cash flows from operating activities.

Net cash provided by operating activities increased $26.0 million to $36.1 million for the nine months ended June 30, 2021 from $10.1 million for the nine months ended June 30, 2020.

While our net income declined from net income of $1.0 million for the nine months ended June 30, 2020 to a net loss of $8.8 million for the nine months ended June 30, 2021, 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 $15.7 million, which are impacted by the timing of collections and payments.

Other changes include an increase in equity-based compensation of $2.9 million, an increase in deferred income tax expense of $2.4 million, an unrealized gain on an investment of $2.4 million, an increase in non-cash contingent consideration of $2.2 million, an increase in amortization of debt discount and issuance costs of $1.8 million, an increase in depreciation and amortization of $1.8 million and an increase in non-cash lease expense of $1.5 million for the six months ended March 31, 2021 compared to the six months ended March 31, 2020.

Other changes include an increase in non-cash contingent consideration of $7.3 million, an increase in equity-based compensation of $5.2 million, an increase in depreciation and amortization of $4.3 million, an unrealized gain on an investment of $2.4 million, an increase in amortization of debt discount and issuance costs of $1.8 million, and an increase in non-cash lease expense of $2.3 million for the nine months ended June 30, 2021 compared to the nine months ended June 30, 2020.

Cash Flow from Investing Activities

Net cash used in investing activities increased $112.1 million to $115.9 million for the six months ended March 31, 2021 from $3.9 million for the six months ended March 31, 2020.

The largest driver of cash used in investing activities for the six months ended March 31, 2021 was cash used in acquisitions, net of cash acquired.

For the six months ended March 31, 2021, we used $112.1 million of cash for acquisitions, net of cash acquired.

Net cash used in investing activities increased $151.2 million to $156.9 million for the nine months ended June 30, 2021 from $5.7 million for the nine months ended June 30, 2020.

The largest driver of cash used in investing activities for the nine months ended June 30, 2021 was cash used in acquisitions, net of cash acquired.

For the nine months ended June 30, 2021, we used $149.5 million of cash for acquisitions, net of cash acquired.

Cash Flow from Financing Activities

Net cash provided by financing activities increased $88.9 million to $83.9 million cash provided by financing activities for the six months ended March 31, 2021 from $5.0 million cash used in financing activities for the six months ended March 31, 2020.

The increase in net cash provided by financing activities was primarily the result of a decrease in payments on the revolving credit facility of $112.7 million, an increase in proceeds from the revolving credit facility of $94.5 million, a decrease in payments for purchase of exchangeable notes of $28.7 million and a decrease in payments of debt issuance costs of $5.1 million for the six months ended March 31, 2021 from the six months ended March 31, 2020.

These increases in cash provided by financing activities were partially offset by decreases in the proceeds from borrowings on exchangeable notes of $138.0 million and proceeds from issuance of warrants of $14.7 million for the six months ended March 31, 2021 from the six months ended March 31, 2020.

Net cash provided by financing activities increased $112.4 million to $115.5 million cash provided by financing activities for the nine months ended June 30, 2021 from $3.1 million cash provided by financing activities for the nine months ended June 30, 2020.

The increase in net cash provided by financing activities was primarily the result of an increase in proceeds from the revolving credit facility of $137.2 million, a decrease in payments on the revolving credit facility of $86.8 million, a decrease in payments for purchase of exchangeable notes of $28.7 million and a decrease in payments of debt issuance costs of $5.2 million for the nine months ended June 30, 2021 from the nine months ended June 30, 2020.

These increases in cash provided by financing activities were partially offset by decreases in the proceeds from borrowings on exchangeable notes of $138.0 million and proceeds from issuance of warrants of $14.7 million for the nine months ended June 30, 2021 from the nine months ended June 30, 2020.

Senior Secured Credit Facility

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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 (subject to the receipt of additional commitments for any such incremental loan amounts).

The Senior Secured Credit Facility accrues interest at LIBOR (based upon an interest period of one, two, three or six months or, under some circumstances, up to twelve months) plus an applicable margin of 2.25% to 3.25% (3.25% as of March 31, 2021), 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 March 31, 2021), in each case depending upon the consolidated total leverage ratio, as defined in the agreement.

The Senior Secured Credit Facility accrues interest at the London Inter Bank Offered Rate ("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, 2021), 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, 2021), 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 March 31, 2021) 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.

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, 2021) 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.

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(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 March 31, 2021, we were in compliance with these covenants, and there was $190.0 million available for borrowing under the revolving credit facility, subject to the financial covenants.

As of June 30, 2021, we were in compliance with these covenants, and there was $157.2 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, ;

maintenance of certain financial ratios;

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

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 our activities during the period covered.

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

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Follow-on 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.

On September 15, 2020, we completed 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.

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Contractual Obligations

The following table summarizes our contractual obligations and commitments as of March 31, 2021 related to leases and borrowings:

The following table summarizes our contractual obligations and commitments as of June 30, 2021 related to leases and borrowings:

Payments Due by Period

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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 3.36% in effect on the outstanding balance as of March 31, 2021, plus the unused fee rate of 0.30% in effect as of March 31, 2021.

We calculated interest payments through the maturity of our Exchangeable Notes by applying the coupon interest rate of 1.0% on the principal balance as of March 31, 2021 of $117.0 million.

We estimated interest payments through the maturity of our Senior Secured Credit Facility by applying the interest rate of 3.52% in effect on the outstanding balance as of June 30, 2021, plus the unused fee rate of 0.30% in effect as of June 30, 2021.

We calculated interest payments through the maturity of our Exchangeable Notes by applying the coupon interest rate of 1.0% on the principal balance as of June 30, 2021 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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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 March 31, 2021, the total amount due under the Tax Receivable Agreement was $39.6 million, and payments to the Continuing Equity Owners related to exchanges through March 31, 2021 will range from $0 to $3.2 million per year and are expected to be paid over the next 25 years.

The amounts recorded as of March 31, 2021, approximate the current estimate of expected tax savings and are subject to change after the filing of the Company’s U.S.

As of June 30, 2021, the total amount due under the Tax Receivable Agreement was $39.6 million, and payments to the Continuing Equity Owners related to exchanges through June 30, 2021 will range from $0 to $3.2 million per year and are expected to be paid over the next 25 years.

The amounts recorded as of June 30, 2021, 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 March 31, 2021, 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.

As of June 30, 2021, 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 March 31, 2021, 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.

As of June 30, 2021, 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 March 31, 2021, we did not have any off-balance sheet financing arrangements.

As of June 30, 2021, 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