i3 Verticals, Inc. 10-Q

Item 1. Financial Statements 3 i3 Verticals, Inc. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) June 30, September 30, 2021 2020 (unaudited) Assets Current assets Cash and cash equivalents $ 4,653 $ 15,568 Accounts receivable, net 28,914 17,538 Settlement assets 4,963 — Prepaid expenses and other current assets 10,755 4,869 Total current assets 49,285 37,975 Property and equipment, net 5,971 5,339 Restricted cash 10,602 5,033 Capitalized software, net 41,387 16,989 Goodwill 284,251 187,005 Intangible assets, net 178,881 109,233 Deferred tax asset 51,247 36,755 Operating lease right-of-use assets 14,483 — Other assets 8,495 5,197 Total assets $ 644,602 $ 403,526 Liabilities and equity Liabilities Current liabilities Accounts payable $ 6,415 $ 3,845 Accrued expenses and other current liabilities 45,905 24,064 Settlement obligations 4,963 — Deferred revenue 20,118 10,986 Current portion of operating lease liabilities 3,185 — Total current liabilities 80,586 38,895 Long-term debt, less current portion and debt issuance costs, net 212,644 90,758 Long-term tax receivable agreement obligations 39,626 27,565 Operating lease liabilities, less current portion 11,948 — Other long-term liabilities 17,670 6,140 Total liabilities 362,474 163,358 Commitments and contingencies (see Note 10) Stockholders' equity Preferred stock, par value $ 0.0001 per share, 10,000,000 shares authorized; 0 shares issued and outstanding as of June 30, 2021 and September 30, 2020 — — Class A common stock, par value $ 0.0001 per share, 150,000,000 shares authorized; 21,960,059 and 18,864,143 shares issued and outstanding as of June 30, 2021 and September 30, 2020, respectively 2 2 Class B common stock, par value $ 0.0001 per share, 40,000,000 shares authorized; 10,229,142 and 11,900,621 shares issued and outstanding as of June 30, 2021 and September 30, 2020, respectively 1 1 Additional paid-in capital 207,697 157,598 Accumulated (deficit) earnings ( 7,463 ) ( 2,023 ) Total stockholders' equity 200,237 155,578 Non-controlling interest 81,891 84,590 Total equity 282,128 240,168 Total liabilities and equity $ 644,602 $ 403,526 See Notes to the Interim Condensed Consolidated Financial Statements 4 i3 Verticals, Inc. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands, except share and per share amounts) Three months ended June 30, Nine months ended June 30, 2021 2020 2021 2020 Revenue $ 61,964 $ 31,573 $ 153,140 $ 111,862 Operating expenses Other costs of services 16,064 10,001 41,044 34,874 Selling, general and administrative 37,296 18,133 92,769 58,206 Depreciation and amortization 6,995 4,475 17,938 13,668 Change in fair value of contingent consideration 3,609 ( 1,473 ) 5,835 ( 1,461 ) Total operating expenses 63,964 31,136 157,586 105,287 (Loss) income from operations ( 2,000 ) 437 ( 4,446 ) 6,575 Other expenses Interest expense, net 2,704 2,423 7,092 6,621 Other expenses (income) — 829 ( 2,353 ) 829 Total other expenses 2,704 3,252 4,739 7,450 (Loss) before income taxes ( 4,704 ) ( 2,815 ) ( 9,185 ) ( 875 ) Benefit from income taxes ( 110 ) ( 5 ) ( 416 ) ( 1,918 ) Net (loss) income ( 4,594 ) ( 2,810 ) ( 8,769 ) 1,043 Net (loss) income attributable to non-controlling interest ( 1,286 ) ( 2,454 ) ( 3,328 ) 811 Net (loss) income attributable to i3 Verticals, Inc. $ ( 3,308 ) $ ( 356 ) $ ( 5,441 ) $ 232 Net income (loss) per share attributable to Class A common stockholders: Basic $ ( 0.15 ) $ ( 0.02 ) $ ( 0.26 ) $ 0.02 Diluted $ ( 0.15 ) $ ( 0.02 ) $ ( 0.26 ) $ 0.01 Weighted average shares of Class A common stock outstanding: Basic 21,926,225 14,858,858 20,658,700 14,515,506 Diluted 21,926,225 14,858,858 20,658,700 15,919,364 See Notes to the Interim Condensed Consolidated Financial Statements 5 i3 Verticals, Inc. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) (In thousands, except share amounts) Class A Common Stock Class B Common Stock Additional Paid-In Capital Retained Earnings (Deficit) Non-Controlling Interest Total Equity Shares Amount Shares Amount Balance at September 30, 2020 18,864,143 $ 2 11,900,621 $ 1 $ 157,598 $ ( 2,023 ) $ 84,590 $ 240,168 Equity-based compensation — — — — 3,441 — — 3,441 Net (loss) — — — — — ( 2,572 ) ( 1,549 ) ( 4,121 ) Redemption of common units in i3 Verticals, LLC 1,019,609 — ( 1,019,609 ) — 7,185 — ( 7,185 ) — Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis — — — — 1,257 — — 1,257 Exercise of equity-based awards 121,019 — — — 688 — — 688 Allocation of equity to non-controlling interests — — — — ( 1,072 ) — 1,072 — Balance at December 31, 2020 20,004,771 2 10,881,012 1 169,097 ( 4,595 ) 76,928 241,433 Equity-based compensation — — — — 4,142 — — 4,142 Net income (loss) — — — — — 440 ( 493 ) ( 53 ) Redemption of common units in i3 Verticals, LLC 651,870 — ( 651,870 ) — 4,529 — ( 4,529 ) — Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis — — — — 897 — — 897 Exercise of equity-based awards 59,745 — — — ( 199 ) — — ( 199 ) Allocation of equity to non-controlling interests — — — — ( 9,908 ) — 9,908 — Issuance of Class A common stock under the 2020 Inducement Plan 1,202,914 — — — 35,245 — — 35,245 Balance at March 31, 2021 21,919,300 2 10,229,142 1 203,803 ( 4,155 ) 81,814 281,465 Equity-based compensation — — — — 5,111 — — 5,111 Net (loss) — — — — — ( 3,308 ) ( 1,286 ) ( 4,594 ) Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis — — — — ( 141 ) — — ( 141 ) Exercise of equity-based awards 40,759 — — — 287 — — 287 Allocation of equity to non-controlling interests — — — — ( 1,363 ) — 1,363 — Balance at June 30, 2021 21,960,059 $ 2 10,229,142 $ 1 $ 207,697 $ ( 7,463 ) $ 81,891 $ 282,128 See Notes to the Interim Condensed Consolidated Financial Statements 6 i3 Verticals, Inc. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) (CONTINUED) (In thousands, except share amounts) Class A Common Stock Class B Common Stock Additional Paid-In Capital Retained Earnings (Deficit) Non-Controlling Interest Total Equity Shares Amount Shares Amount Balance at September 30, 2019 14,444,115 $ 1 12,921,637 $ 1 $ 82,380 $ ( 2,309 ) $ 62,368 $ 142,441 Cumulative effect of adoption of new accounting standard — — — — — 705 640 1,345 Equity-based compensation — — — — 2,124 — — 2,124 Net (loss) income — — — — — ( 149 ) 2,083 1,934 Exercise of equity-based awards 53,662 — — — 351 — — 351 Balance at December 31, 2019 14,497,777 1 12,921,637 1 84,855 ( 1,753 ) 65,091 148,195 Equity-based compensation — — — — 2,510 — — 2,510 Net income — — — — — 737 1,182 1,919 Distributions to non-controlling interest holders — — — — — — ( 3 ) ( 3 ) Redemption of common units in i3 Verticals, LLC 510,016 — ( 510,016 ) — 2,597 — ( 2,597 ) — Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis — — — — 596 — — 596 Exercise of equity-based awards 31,125 — — — 2 — — 2 Equity component of exchangeable notes, net of issuance costs and deferred taxes — — — — 27,569 — — 27,569 Purchases of exchangeable note hedges — — — — ( 28,676 ) — — ( 28,676 ) Issuance of warrants — — — — 14,669 — — 14,669 Balance at March 31, 2020 15,038,918 1 12,411,621 1 104,122 ( 1,016 ) 63,673 166,781 Equity-based compensation — — — — 2,816 — — 2,816 Forfeitures of restricted Class A common stock — — — — — — — — Net (loss) — — — — — ( 356 ) ( 2,454 ) ( 2,810 ) Distributions to non-controlling interest holders — — — — — — — — Redemption of common units in i3 Verticals, LLC 20,000 — ( 20,000 ) — 75 — ( 75 ) — Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis — — — — 61 — — 61 Exercise of equity-based awards 26,895 — — — — — — — Equity component of exchangeable notes, net of issuance costs and deferred taxes — — — — 9 — — 9 Repurchases of exchangeable note hedges — — — — 571 — — 571 Balance at June 30, 2020 15,085,813 $ 1 12,391,621 $ 1 $ 107,654 $ ( 1,372 ) $ 61,144 $ 167,428 See Notes to the Interim Condensed Consolidated Financial Statements 7 i3 Verticals, Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) Nine months ended June 30, 2021 2020 Cash flows from operating activities: Net (loss) income $ ( 8,769 ) $ 1,043 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 17,938 13,668 Equity-based compensation 12,694 7,450 Provision for doubtful accounts 129 105 Amortization of debt discount and issuance costs 4,057 2,274 Debt issuance costs write offs — 141 Loss on repurchase of exchangeable notes — 828 Amortization of capitalized customer acquisition costs 386 288 Loss on disposal of assets — 1 Unrealized gain on investment ( 2,353 ) — Benefit from deferred income taxes ( 416 ) ( 2,802 ) Non-cash lease expense 2,328 — (Decrease) Increase in non-cash contingent consideration expense from original estimate 5,835 ( 1,461 ) Changes in operating assets: Accounts receivable ( 2,862 ) ( 789 ) Prepaid expenses and other current assets 1,049 ( 1,848 ) Other assets ( 915 ) ( 1,399 ) Changes in operating liabilities: Accounts payable 1,190 989 Accrued expenses and other current liabilities 12,395 ( 2,896 ) Deferred revenue 39 ( 454 ) Operating lease liabilities ( 2,311 ) — Other long-term liabilities ( 697 ) ( 12 ) Contingent consideration paid in excess of original estimates ( 3,636 ) ( 5,039 ) Net cash provided by operating activities 36,081 10,087 Cash flows from investing activities: Expenditures for property and equipment ( 1,364 ) ( 1,883 ) Expenditures for capitalized software ( 4,483 ) ( 2,048 ) Purchases of merchant portfolios and residual buyouts ( 1,500 ) ( 1,677 ) Acquisitions of businesses, net of cash acquired ( 149,495 ) — Acquisition of other intangibles ( 104 ) ( 136 ) Net cash used in investing activities ( 156,946 ) ( 5,744 ) See Notes to the Interim Condensed Consolidated Financial Statements 8 i3 Verticals, Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED) (In thousands) Nine months ended June 30, 2021 2020 Cash flows from financing activities: Proceeds from revolving credit facility 262,264 125,024 Payments on revolving credit facility ( 144,435 ) ( 231,214 ) Proceeds from borrowings on exchangeable notes — 138,000 Payments for purchase of exchangeable senior note hedges — ( 28,676 ) Proceeds from issuance of warrants — 14,669 Payments for repurchase of exchangeable notes — ( 6,807 ) Payments of debt issuance costs — ( 5,215 ) Cash paid for contingent consideration ( 2,886 ) ( 2,988 ) Payments for required distributions to members for tax obligations — ( 3 ) Proceeds from stock option exercises 1,286 474 Payments for employee's tax withholdings from net settled stock option exercises ( 710 ) ( 121 ) Net cash provided by financing activities 115,519 3,143 Net (decrease) in cash, cash equivalents, and restricted cash ( 5,346 ) 7,486 Cash, cash equivalents, and restricted cash at beginning of period 20,601 3,200 Cash, cash equivalents, and restricted cash at end of period $ 15,255 $ 10,686 Supplemental disclosure of cash flow information: Cash paid for interest $ 2,800 $ 3,955 Cash paid for income taxes $ 280 $ 404 See Notes to the Interim Condensed Consolidated Financial Statements 9 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) 1. ORGANIZATION AND OPERATIONS i3 Verticals, Inc. (the “Company”) was formed as a Delaware corporation on January 17, 2018. The Company was formed for the purpose of completing an initial public offering (“IPO”) of its Class A common stock and other related transactions in order to carry on the business of i3 Verticals, LLC and its subsidiaries. i3 Verticals, LLC was founded in 2012 and delivers seamlessly integrated payment and software solutions to small- and medium-sized businesses (“SMBs”) and organizations in strategic vertical markets. The Company’s headquarters are located in Nashville, Tennessee, with operations throughout the United States. Unless the context otherwise requires, references to “we,” “us,” “our,” “i3 Verticals” and the “Company” refer to i3 Verticals, Inc. and its subsidiaries, including i3 Verticals, LLC. Initial Public Offering On June 25, 2018, the Company completed the IPO of 7,647,500 shares of its Class A common stock at a public offering price of $ 13.00 per share. The Company received approximately $ 92,500 of net proceeds, after deducting underwriting discounts and commissions, which the Company used to purchase newly issued common units from i3 Verticals, LLC (the “Common Units”), and Common Units from a selling Common Unit holder, 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 IPO. Reorganization Transactions In connection with the IPO, the Company completed the following transactions (the “Reorganization Transactions”): • i3 Verticals, LLC amended and restated its existing limited liability company agreement to, among other things, (1) convert all existing Class A units, common units (including common units issued upon the exercise of existing warrants) and Class P units of ownership interest in i3 Verticals, LLC into either Class A voting common units of i3 Verticals, LLC (such holders of Class A voting common units referred to herein as the “Continuing Equity Owners”) or Class B non-voting common units of i3 Verticals, LLC (such holders of Class B non-voting common units referred to herein as the “Former Equity Owners”), and (2) appoint i3 Verticals, Inc. as the sole managing member of i3 Verticals, LLC upon its acquisition of Common Units in connection with the IPO; • the Company amended and restated its certificate of incorporation to provide for, among other things, Class A common stock and Class B common stock; • i3 Verticals, LLC and the Company consummated a merger among i3 Verticals, LLC, i3 Verticals, Inc. and a newly formed wholly-owned subsidiary of i3 Verticals, Inc. (“MergerSub”) whereby: (1) MergerSub merged with and into i3 Verticals, LLC, with i3 Verticals, LLC as the surviving entity; (2) Class A voting common units converted into newly issued Common Units in i3 Verticals, LLC together with an equal number of shares of Class B common stock of i3 Verticals, Inc., and (3) Class B non-voting common units converted into Class A common stock of i3 Verticals, Inc. based on a conversion ratio that provided an equitable adjustment to reflect the full value of the Class B non-voting common units; and • the Company issued shares of its Class A common stock pursuant to a voluntary private conversion of certain subordinated notes by certain related and unrelated creditors of i3 Verticals, LLC. 10 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) Following the completion of the IPO and Reorganization Transactions, the Company became a holding company and the principal asset that it owns are the Common Units in i3 Verticals, LLC. i3 Verticals, Inc. operates and controls all of i3 Verticals, LLC's operations and, through i3 Verticals, LLC and its subsidiaries, conducts i3 Verticals, LLC's business. i3 Verticals, Inc. has a majority economic interest in i3 Verticals, LLC. Public Offering On September 15, 2020, the Company completed a public offering (the “September 2020 Public Offering”) of 3,737,500 shares of its Class A common stock, at a public offering price of $ 23.50 per share, which included a full exercise of the underwriters' option to purchase 487,500 additional shares of Class A Common Stock from the Company. The Company received approximately $ 83,400 of net proceeds, after deducting underwriting discounts and commissions, but before offering expenses. The Company used the net proceeds to purchase (1) 3,250,000 Common Units directly from i3 Verticals, LLC, and (2) 487,500 Common Units pursuant to the exercise of the underwriters' option to purchase additional shares in full and an equivalent number of Class B common stock (which shares were then canceled) from certain Continuing Equity Owners, in each case at a price per Common Unit equal to the price per share paid by the underwriters for shares of the Company's Class A common stock in the offering. i3 Verticals, LLC received $ 72,018 in net proceeds from the sale of Common Units to the Company, which it used to repay outstanding indebtedness. • As of June 30, 2021, i3 Verticals, Inc. owned 68.2 % of the economic interest in i3 Verticals, LLC. • As of June 30, 2021, the Continuing Equity Owners owned Common Units in i3 Verticals, LLC representing approximately 31.8 % of the economic interest in i3 Verticals, LLC, shares of Class A common stock in the Company representing approximately 0.6 % of the economic interest and voting power in the Company, and shares of Class B common stock in i3 Verticals, Inc., representing approximately 31.8 % of the voting power in the Company. • The Continuing Equity Owners who own Common Units in i3 Verticals, LLC may redeem at each of their options (subject in certain circumstances to time-based vesting requirements) their Common Units for, at the election of i3 Verticals, LLC, cash or newly-issued shares of the Company's Class A common stock. • Combining the Class A common stock and Class B common stock, the Continuing Equity Owners hold approximately 32.4 % of the economic interest and voting power in i3 Verticals, Inc. i3 Verticals, Inc. is the sole managing member of i3 Verticals, LLC and as a result, consolidates the financial results of i3 Verticals, LLC and reports a non-controlling interest representing the Common Units of i3 Verticals, LLC held by the Continuing Equity Owners. As the Reorganization Transactions are considered transactions between entities under common control, the financial statements retroactively reflect the accounts of i3 Verticals, LLC for periods prior to the IPO and Reorganization Transactions. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the reporting and disclosure rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for fair presentation of the unaudited condensed consolidated financial statements of the Company and its subsidiaries as of June 30, 2021 and for the 11 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) three and nine months ended June 30, 2021 and 2020. The results of operations for the three and nine months ended June 30, 2021 and 2020 are not necessarily indicative of the operating results for the full year. It is recommended that these interim condensed consolidated financial statements be read in conjunction with the Company's consolidated financial statements and related footnotes for the years ended September 30, 2020 and 2019, included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2020. Principles of Consolidation These interim condensed consolidated financial statements include the accounts of the Company and its subsidiary companies. All significant intercompany accounts and transactions have been eliminated in consolidation. Restricted Cash Restricted cash represents funds held-on-deposit with processing banks pursuant to agreements to cover potential merchant losses. It is presented as long-term assets on the accompanying condensed consolidated balance sheets since the related agreements extend beyond the next twelve months. Settlement Assets and Obligations Settlement assets and obligations result when funds are temporarily held or owed by the Company on behalf of merchants, consumers, schools, and other institutions. Timing differences, interchange expense, merchant reserves and exceptional items cause differences between the amount received from the card networks and the amount funded to counterparties. These balances arising in the settlement process are reflected as settlement assets and obligations on the accompanying consolidated balance sheets. With the exception of merchant reserves, settlement assets or settlement obligations are generally collected and paid within one to four days. As of June 30, 2021, settlement assets and settlement obligations were both $ 4,963 . As of September 30, 2020, the Company had no settlement assets or settlement obligations. Inventories Inventories consist of point-of-sale equipment to be sold to clients and are stated at the lower of net realizable value or cost, determined on either a weighted average or specific basis. Inventories were $ 2,281 and $ 1,309 at June 30, 2021 and September 30, 2020, respectively, and are included within prepaid expenses and other current assets on the accompanying condensed consolidated balance sheets. Acquisitions Business acquisitions have been recorded using the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”), and, accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair value as of the date of acquisition. Where relevant, the fair value of contingent consideration included in an acquisition is calculated using a Monte Carlo simulation. The fair value of merchant relationships and non-compete assets acquired is identified using the Income Approach. The fair values of trade names and internally-developed software acquired are identified using the Relief from Royalty Method. The fair value of deferred revenue is identified using the Adjusted Fulfillment Cost Method. After the purchase price has been allocated, goodwill is recorded to the extent the total consideration paid for the acquisition, including the acquisition date fair value of contingent consideration, if any, exceeds the sum of the fair values of the separately identifiable acquired assets and assumed liabilities. Acquisition costs for business combinations are expensed when incurred and recorded in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. Acquisitions not meeting the accounting criteria to be accounted for as a business combination are accounted for as an asset acquisition. An asset acquisition is recorded at its purchase price, inclusive of acquisition costs, which is allocated among the acquired assets and assumed liabilities based upon their relative fair values at the date of acquisition. 12 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) The operating results of an acquisition are included in the Company’s condensed consolidated statements of operations from the date of such acquisition. Acquisitions completed during the nine months ended June 30, 2021 contributed $ 31,961 and $ 891 of revenue and net income, respectively, to the Company's condensed consolidated statements of operations for the nine months then ended. Leases The Company adopted ASU 2016-02, Leases, (“ASC 842”) on October 1, 2020, using the optional modified retrospective method under which the prior period financial statements were not restated for the new guidance. The Company elected the accounting policy practical expedients for all classes of underlying assets to (i) combine associated lease and non-lease components in a lease arrangement as a combined lease component and (ii) exclude recording short-term leases as right-of-use assets on the condensed consolidated balance sheets. At contract inception the Company determines whether an arrangement is, or contains a lease, and for each identified lease, evaluates the classification as operating or financing. Leased assets and obligations are recognized at the lease commencement date based on the present value of fixed lease payments to be made over the term of the lease. Renewal and termination options are factored into determination of the lease term only if the option is reasonably certain to be exercised. The Company’s leases do not provide a readily determinable implicit interest rate and the Company uses its incremental borrowing rate to measure the lease liability and corresponding right-of-use asset. The incremental borrowing rate is a fully collateralized rate that considers the Company’s credit rating, market conditions and the term of the lease. The Company accounts for all components in a lease arrangement as a single combined lease component. Operating lease cost is recognized on a straight-line basis over the lease term. Total lease costs include variable lease costs, which are primarily comprised of the consumer price index adjustments and other changes based on rates, such as costs of insurance and property taxes. Variable payments are expensed in the period incurred and not included in the measurement of lease assets and obligations. Revenue Recognition and Deferred Revenue Revenue is recognized as each performance obligation is satisfied, in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). The Company accrues for rights of refund, processing errors or penalties, or other related allowances based on historical experience. The Company utilized the portfolio approach practical expedient within ASC 606-10-10-4 Revenue from Contracts with Customers—Objectives and the significant financing component practical expedient within ASC 606-10-32-18 Revenue from Contracts with Customers—The Existence of a Significant Financing Component in the Contract in performing the analysis. The Company adopted ASC 606 on October 1, 2019, using the modified retrospective method and applying the standard to all contracts not completed on the date of adoption. The majority of the Company's revenue for the nine months ended June 30, 2021 and 2020 is derived from volume-based payment processing fees (“discount fees”) and other related fixed transaction or service fees. The remainder is comprised of sales of software licensing subscriptions, ongoing support, and other POS-related solutions the Company provides to its clients directly and through its processing bank relationships. 13 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) Discount fees represent a percentage of the dollar amount of each credit or debit transaction processed or a specified per transaction amount, depending on the card type. The Company frequently enters into agreements with clients under which the client engages the Company to provide both payment authorization services and transaction settlement services for all of the cardholder transactions of the client, regardless of which issuing bank and card network to which the transaction relates. The Company’s core performance obligations are to stand ready to provide continuous access to the Company’s payment authorization services and transaction settlement services in order to be able to process as many transactions as its clients require on a daily basis over the contract term. These services are stand ready obligations, as the timing and quantity of transactions to be processed is not determinable. Under a stand-ready obligation, the Company’s performance obligation is defined by each time increment rather than by the underlying activities satisfied over time based on days elapsed. Because the service of standing ready is substantially the same each day and has the same pattern of transfer to the client, the Company has determined that its stand-ready performance obligation comprises a series of distinct days of service. Discount fees are recognized each day based on the volume or transaction count at the time the merchants’ transactions are processed. The Company follows the requirements of ASC 606-10-55 Revenue from Contracts with Customers—Principal versus Agent Considerations , which states that the determination of whether a company should recognize revenue based on the gross amount billed to a client or the net amount retained is a matter of judgment that depends on the facts and circumstances of the arrangement. The determination of gross versus net recognition of revenue requires judgment that depends on whether the Company controls the good or service before it is transferred to the merchant or whether the Company is acting as an agent of a third party. The assessment is provided separately for each performance obligation identified. Under its agreements, the Company incurs interchange and network pass-through charges from the third-party card issuers and card networks, respectively, related to the provision of payment authorization services. The Company has determined that it is acting as an agent with respect to these payment authorization services, based on the following factors: (1) the Company has no discretion over which card issuing bank will be used to process a transaction and is unable to direct the activity of the merchant to another card issuing bank, and (2) interchange and card network rates are pre-established by the card issuers or card networks, and the Company has no latitude in determining these fees. Therefore, revenue allocated to the payment authorization performance obligation is presented net of interchange and card network fees paid to the card issuing banks and card networks, respectively. With regards to the Company's discount fees, generally, where the Company has control over merchant pricing, merchant portability, credit risk and ultimate responsibility for the merchant relationship, revenues are reported at the time of sale equal to the full amount of the discount charged to the merchant, less interchange and network fees. Revenues generated from merchant portfolios where the Company does not have control over merchant pricing, liability for merchant losses or credit risk or rights of portability are reported net of interchange and network fees as well as third-party processing costs directly attributable to processing and bank sponsorship costs. Revenues are also derived from a variety of fixed transaction or service fees, including authorization fees, convenience fees, statement fees, annual fees, gateway fees, which are charged for accessing our payment and software solutions, and fees for other miscellaneous services, such as handling chargebacks. Revenues derived from service fees are recognized at the time the services are performed and there are no further performance obligations. Revenue from fixed transactions, which principally relate to the sale of equipment, is recognized upon transfer of ownership and delivery to the client, after which there are no further performance obligations. Revenues from sales of the Company’s software are recognized when the related performance obligations are satisfied. Sales of software licenses are categorized into one of two categories of intellectual property in accordance with ASC 606, functional or symbolic. The key distinction is whether the license represents a right to use (functional) or a right to access (symbolic) intellectual property. The Company generates sales of one-time software licenses, which is functional intellectual property. Revenue from functional intellectual property is recognized at a point in time, when delivered to the client. The Company also offers access to its software under 14 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) software-as-a-service (“SaaS”) arrangements, which represent services arrangements. Revenue from SaaS arrangements is recognized over time, over the term of the agreement. Arrangements may contain multiple performance obligations, such as payment authorization services, transaction settlement services, hardware, software products, maintenance, and professional installation and training services. Revenues are allocated to each performance obligation based on the standalone selling price of each good or service. The selling price for a deliverable is based on standalone selling price, if available, the adjusted market assessment approach, estimated cost plus margin approach, or residual approach. The Company establishes estimated selling price, based on the judgment of the Company's management, considering internal factors such as margin objectives, pricing practices and controls, client segment pricing strategies and the product life cycle. In arrangements with multiple performance obligations, the Company determines allocation of the transaction price at inception of the arrangement and uses the standalone selling prices for the majority of the Company's revenue recognition. Revenues from sales of the Company ’ s combined hardware and software element are recognized when each performance obligation has been satisfied which has been determined to be upon the delivery of the product. Revenues derived from service fees are recognized at the time the services are performed and there are no further performance obligations. The Company’s professional services, including training, installation, and repair services are recognized as revenue as these services are performed. The tables below present a disaggregation of the Company's revenue from contracts with clients by product by segment. Refer to Note 12 for discussion of the Company's segments. The Company's products are defined as follows: • Payments — Includes discount fees, gateway fees and other related fixed transaction or service fees. • Other — Includes sales of software, sales of equipment, professional services and other revenues. For the Three Months Ended June 30, 2021 Merchant Services Proprietary Software and Payments Other Total Payments revenue $ 24,995 $ 7,770 $ ( 542 ) $ 32,223 Other revenue 4,917 24,845 ( 21 ) 29,741 Total revenue $ 29,912 $ 32,615 $ ( 563 ) $ 61,964 For the Three Months Ended June 30, 2020 (1) Merchant Services Proprietary Software and Payments Other Total Payments revenue $ 18,334 $ 2,724 $ ( 412 ) $ 20,646 Other revenue 3,888 7,043 ( 4 ) 10,927 Total revenue $ 22,222 $ 9,767 $ ( 416 ) $ 31,573 ________ 1. Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. Refer to Note 12 for further discussion. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation. 15 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) For the Nine Months Ended June 30, 2021 Merchant Services Proprietary Software and Payments Other Total Payments revenue $ 67,051 $ 20,756 $ ( 1,636 ) $ 86,171 Other revenue 13,823 53,184 ( 38 ) 66,969 Total revenue $ 80,874 $ 73,940 $ ( 1,674 ) $ 153,140 For the Nine Months Ended June 30, 2020 (1) Merchant Services Proprietary Software and Payments Other Total Payments revenue $ 62,247 $ 14,504 $ ( 1,347 ) $ 75,404 Other revenue 13,943 22,525 ( 10 ) 36,458 Total revenue $ 76,190 $ 37,029 $ ( 1,357 ) $ 111,862 ________ 1. Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. Refer to Note 12 for further discussion. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation. The tables below present a disaggregation of the Company's revenue from contracts with clients by timing of transfer of goods or services by segment. The Company's revenue included in each category are defined as follows: • Revenue transferred over time — Includes discount fees, gateway fees, sales of SaaS and ongoing support contract revenue. • Revenue transferred at a point in time — Includes fixed service fees, software licenses sold as functional intellectual property, professional services and other equipment. For the Three Months Ended June 30, 2021 Merchant Services Proprietary Software and Payments Other Total Revenue transferred over time $ 22,566 $ 20,524 $ ( 520 ) $ 42,570 Revenue transferred at a point in time 7,346 12,091 ( 43 ) 19,394 Total revenue $ 29,912 $ 32,615 $ ( 563 ) $ 61,964 16 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) For the Three Months Ended June 30, 2020 (1) Merchant Services Proprietary Software and Payments Other Total Revenue transferred over time $ 15,902 $ 6,712 $ ( 402 ) $ 22,212 Revenue transferred at a point in time 6,320 3,055 ( 14 ) 9,361 Total revenue $ 22,222 $ 9,767 $ ( 416 ) $ 31,573 ______ 1. Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. Refer to Note 12 for further discussion. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation. For the Nine Months Ended June 30, 2021 Merchant Services Proprietary Software and Payments Other Total Revenue transferred over time $ 59,844 $ 49,941 $ ( 1,540 ) $ 108,245 Revenue transferred at a point in time 21,030 23,999 ( 134 ) 44,895 Total revenue $ 80,874 $ 73,940 $ ( 1,674 ) $ 153,140 For the Nine Months Ended June 30, 2020 (1) Merchant Services Proprietary Software and Payments Other Total Revenue transferred over time $ 54,503 $ 25,838 $ ( 1,336 ) $ 79,005 Revenue transferred at a point in time 21,687 11,191 ( 21 ) 32,857 Total revenue $ 76,190 $ 37,029 $ ( 1,357 ) $ 111,862 ______ 1. Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. Refer to Note 12 for further discussion. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation. Contract Assets The Company bills for fixed fee professional services once the Company achieves pre-determined milestones in the contract. Therefore, the Company may have contract assets other than trade accounts receivable for performance obligations that are partially completed, which would typically represent consulting services provided before a milestone is completed in a contract. For the Company’s time and materials professional services contracts and transaction processing services, the Company periodically bills the customer after services have been provided but has the right to invoice the customer for services performed to date at any time. Unbilled amounts associated with these services are presented as accounts receivable as the Company has an unconditional right to payment for services performed. As of June 30, 2021 and September 30, 2020, the Company’s contract assets from contracts with customers was $ 1,575 and $ 0 , respectively Contract Liabilities Deferred revenue represents amounts billed to clients by the Company for services contracts. Payment is typically collected at the start of the contract term. The initial prepaid contract agreement balance is deferred. The balance is then recognized as the services are provided over the contract term. Deferred revenue that is expected to be recognized as revenue within one year is recorded as short-term deferred revenue and the remaining portion is recorded as other long-term liabilities in the condensed consolidated balance sheets. The terms for 17 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) most of the Company's contracts with a deferred revenue component are one year. Substantially all of the Company's deferred revenue is anticipated to be recognized within the next year. The following tables present the changes in deferred revenue as of and for the nine months ended June 30, 2021 and 2020, respectively: Balance at September 30, 2020 $ 11,054 Deferral of revenue 19,149 Recognition of unearned revenue ( 6,234 ) Balance at December 31, 2020 23,969 Deferral of revenue 5,699 Recognition of unearned revenue ( 7,174 ) Balance at March 31, 2021 22,494 Deferral of revenue 10,547 Recognition of unearned revenue ( 12,923 ) Balance at June 30, 2021 $ 20,118 Balance at September 30, 2019 $ 10,237 Deferral of revenue 5,389 Recognition of unearned revenue ( 5,211 ) Balance at December 31, 2019 10,415 Deferral of revenue 5,004 Recognition of unearned revenue ( 5,753 ) Balance at March 31, 2020 9,666 Deferral of revenue 5,630 Recognition of unearned revenue ( 5,512 ) Balance at June 30, 2020 $ 9,784 Costs to Obtain and Fulfill a Contract The Company capitalizes incremental costs to obtain new contracts and contract renewals and amortizes these costs on a straight-line basis as an expense over the benefit period, which is generally the contract term, unless a commensurate payment is not expected at renewal. As of June 30, 2021 and 2020 the Company had $ 3,720 and $ 2,958 , respectively, of capitalized contract costs, which relates to commissions paid to obtain new sales, included within "Prepaid expenses and other current assets” and “Other assets" on the condensed consolidated balance sheets. The Company recorded commissions expense related to these costs of $ 138 and $ 386 for the three and nine months ended June 30, 2021, respectively, and $ 104 and $ 288 for the three and nine months ended June 30, 2020, respectively. The Company expenses sales commissions as incurred for the Company's sales commission plans that are paid on recurring monthly revenues, portfolios of existing clients, or have a substantive stay requirement prior to payment. 18 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) Other Cost of Services Other costs of services include third-party processing costs directly attributable to processing and bank sponsorship costs, which may not be based on a percentage of volume. These costs also include related costs such as residual payments to sales groups, which are based on a percentage of the net revenues generated from merchant referrals. In certain merchant processing bank relationships the Company is liable for chargebacks against a merchant equal to the volume of the transaction. Losses resulting from chargebacks against a merchant are included in other cost of services on the accompanying condensed consolidated statement of operations. The Company evaluates its risk for such transactions and estimates its potential loss from chargebacks based primarily on historical experience and other relevant factors. The reserve for merchant losses is included within accrued expenses and other current liabilities on the accompanying condensed consolidated balance sheets. The cost of equipment sold is also included in other cost of services. Other costs of services are recognized at the time the associated revenue is earned. The Company accounts for all governmental taxes associated with revenue transactions on a net basis. Use of Estimates The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include, but are not limited to, the value of purchase consideration paid and identifiable assets acquired and assumed in acquisitions, goodwill and intangible asset impairment review, determination of performance obligations for revenue recognition, loss reserves, assumptions used in the calculation of equity-based compensation and in the calculation of income taxes, and certain tax assets and liabilities as well as the related valuation allowances. Actual results could differ from those estimates. Recent Accounting Pronouncements Recently Adopted Accounting Pronouncements In February 2016, the FASB issued ASC 842 with amendments in 2018 and 2019. ASC 842 aims to increase transparency and comparability among organizations by requiring recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. The amendments to ASC 842 are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. In November 2019, the FASB issued ASU No. 2019-10, which extends the effective date for adoption of ASC 842 for certain entities. In June 2020, the FASB issued ASU No. 2020-05, which further extends the effective date for adoption of ASC 842 for certain entities. As a result of the provisions in ASU No. 2020-05, and as the Company is an emerging growth company and has elected to use the extended transition period of such companies, the Company was not required to adopt ASC 842 until October 1, 2022. The Company elected to early adopt ASC 842 on October 1, 2020, using the optional modified retrospective transition method, under which the prior period financial statements were not restated for the new guidance. The Company elected to apply the package of practical expedients whereby the Company did not reassess whether expired or existing leases contain a lease, did not reassess the lease classification for any expired or existing leases, and did not reassess initial direct costs for any existing leases. The Company further elected to account for lease and nonlease components in a lease arrangement as a combined lease component for all classes of leased assets. The Company also elected to apply the short-term lease exception practical expedient. The adoption of ASC 842 resulted in the recognition of the right-of-use assets of $ 9,093 and the lease liabilities of $ 9,760 as of October 1, 2020. The adoption of ASC 842 also resulted in a reduction in existing prepaid expenses and other current assets of $ 202 and in accrued expenses and other current liabilities and other long-term liabilities of $ 869 as of October 1, 2020. Lease liabilities are measured as the present value of remaining 19 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) lease payments, utilizing the Company’s incremental borrowing rate based on the remaining lease term as of the adoption date. The right-of-use assets are measured at an amount equal to the lease liabilities adjusted by the amounts of certain assets and liabilities, such as deferred lease obligations and prepaid rent, that were previously recognized on the balance sheet prior to the initial application of ASC 842. Refer to Note 7 for further information. Recently Issued Accounting Pronouncements Not Yet Adopted In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement: Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820). The amendments in ASU No. 2018-13 provide clarification and modify the disclosure requirements on fair value measurement in Topic 820, Fair Value Measurement. The amendments in this ASU No. 2018-13 are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. As a public business entity, the Company is an emerging growth company and has elected to use the extended transition period provided for such companies. As a result, the Company will not be required to adopt this ASU No. 2018-13 until October 1, 2021. The Company is currently evaluating the impact of the adoption of this principle on the Company’s condensed consolidated financial statements. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326). The amendments in ASU No. 2016-13 require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The amendments in this ASU No. 2016-13 are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. As a public business entity, the Company is an emerging growth company and has elected to use the extended transition period provided for such companies. As a result, the Company will not be required to adopt ASU 2016-13 until October 1, 2023. The Company is currently evaluating the impact of the adoption of this principle on the Company’s condensed consolidated financial statements. In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. The amendments in ASU No. 2021-04 provides guidance to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The amendments in this ASU No. 2021-04 are effective for all entities for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted, including interim periods within those fiscal years. As a result, the Company will not be required to adopt ASU 2021-04 until October 1, 2022. The Company is currently evaluating the impact of the adoption of this principle on the Company’s condensed consolidated financial statements. 3. ACQUISITIONS During the nine months ended June 30, 2021 and 2020 the Company acquired the following intangible assets and businesses: Residual Buyouts From time to time, the Company acquires future commission streams from sales agents in exchange for an upfront cash payment. This results in an increase in overall gross processing volume to the Company. The residual buyouts are treated as asset acquisitions, resulting in recording a residual buyout intangible asset at cost on the date of acquisition. These assets are amortized using a method of amortization that reflects the pattern in which the economic benefits of the intangible asset are expected to be utilized over their estimated useful lives. 20 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) During the nine months ended June 30, 2021 the Company purchased $ 1,500 in residual buyouts using a combination of cash on hand and borrowings on the Company's revolving credit facility. The acquired residual buyout intangible assets have weighted average estimated amortization periods of eight years . Business Combinations during the nine months ended June 30, 2021 During the nine months ended June 30, 2021, the Company completed the acquisitions of unrelated businesses. Certain of the purchase price allocations assigned for these acquisitions are considered preliminary as of June 30, 2021. Purchase of BIS On February 1, 2021, the Company 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 its software offerings, primarily in the Public Sector vertical. BIS is within the Proprietary Software & Payments segment. Total purchase consideration was $ 95,495 , including $ 52,500 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 (valued at $ 35,245 ), and $ 7,750 in contingent consideration. The goodwill associated with the acquisition is deductible for tax purposes. The acquired merchant relationships intangible asset has an estimated amortization period of nineteen years . The non-compete agreement and trade name have estimated amortization periods of three and five years , respectively. The weighted-average estimated amortization period of all intangibles acquired is nineteen years . The acquired capitalized software has an estimated amortization period of ten years . Acquisition-related costs for BIS amounted to approximately $ 342 and were expensed as incurred. Certain provisions in the merger agreement provide for additional consideration of up to $ 16,000 in the aggregate, to be paid based upon achievement of specified financial performance targets, as defined in the purchase agreement, in the 24 months from February 1, 2021 through January 31, 2023. The Company determined the acquisition date fair value of the liability for the contingent consideration based on a probability forecast and discounted cash flow analysis. In each subsequent reporting period, the Company will reassess the current estimates of performance relative to the targets and adjust the contingent liability to its fair value through earnings. See additional disclosures in Note 8. Purchase of ImageSoft On November 17, 2020, the Company completed the acquisition of substantially all of the assets of ImageSoft, Inc. (“Imagesoft”) to expand its software offerings, primarily in the Public Sector vertical. ImageSoft, is within the Proprietary Software & Payments segment. Total purchase consideration was $ 46,300 , including $ 40,000 in cash consideration, funded by proceeds from the Company's revolving credit facility, and $ 6,300 in contingent consideration. The goodwill associated with the acquisition is deductible for tax purposes. The acquired merchant relationships intangible asset has an estimated amortization period of twenty years . The non-compete agreement and trade name have estimated amortization periods of three and five years , respectively. The weighted-average estimated amortization period of all intangibles acquired is nineteen years . The acquired capitalized software has an estimated amortization period of seven years . Acquisition-related costs for ImageSoft amounted to approximately $ 403 and were expensed as incurred. Certain provisions in the merger agreement provide for additional consideration of up to $ 20,000 in the aggregate, to be paid based upon achievement of specified financial performance targets, as defined in the purchase agreement, in the 24 months from May 1, 2021 through April 30, 2023. The Company determined the acquisition date fair value of the liability for the contingent consideration based on a probability forecast and 21 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) discounted cash flow analysis. In each subsequent reporting period, the Company will reassess the current estimates of performance relative to the targets and adjust the contingent liability to its fair value through earnings. See additional disclosures in Note 8. Other Business Combinations From October 1, 2020 to May 1, 2021, the Company completed the acquisitions 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. Five of these businesses are within the Proprietary Software & Payments segment and one is within the Merchant Services segment. Total purchase consideration was $ 65,353 , including $ 57,000 in cash consideration, funded by proceeds from the Company's revolving credit facility, and $ 8,353 of contingent consideration. For each of these businesses acquired, the goodwill associated with the acquisition is deductible for tax purposes. The acquired merchant relationships intangible assets have estimated amortization periods of between eleven and twenty-five years . The non-compete agreement and trade names have estimated amortization periods of three years . The weighted-average amortization period for all intangibles acquired is eighteen years . The acquired capitalized software has a weighted-average amortization period of seven years . Acquisition-related costs for these businesses amounted to approximately $ 1,280 and were expensed as incurred. Certain provisions in the purchase agreements provide for additional consideration of up to $ 50,200 , in the aggregate, to be paid based upon the achievement of specified financial performance targets, as defined in the purchase agreements, through no later than June 2023. The Company determined the acquisition date fair values of the liabilities for the contingent consideration based on probability forecasts and discounted cash flow analyses. In each subsequent reporting period, the Company will reassess its current estimates of performance relative to the targets and adjust the contingent liabilities to their fair values through earnings. See additional disclosures in Note 8. 22 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) Summary of Business Combinations during the nine months ended June 30, 2021 The fair values assigned to certain assets and liabilities assumed, as of the acquisition dates, were as follows: BIS ImageSoft Other Total Accounts receivable $ 1,567 $ 4,997 $ 923 $ 7,487 Settlement assets 6,889 120 — 7,009 Inventories 458 — 161 619 Prepaid expenses and other current assets 10 2,897 2,061 4,968 Property and equipment 206 433 312 951 Capitalized software 15,100 5,200 4,100 24,400 Acquired merchant relationships 35,200 16,300 24,590 76,090 Non-compete agreements 100 610 390 1,100 Trade name 700 1,100 840 2,640 Goodwill 43,152 20,160 33,669 96,981 Operating lease right-of-use assets — 332 — 332 Other assets — 6 7 13 Total assets acquired 103,382 52,155 67,053 222,590 Accrued expenses and other current liabilities 138 910 1 1,049 Settlement obligations 6,889 120 — 7,009 Deferred revenue, current 860 4,500 3,665 9,025 Current portion of operating lease liabilities — 75 — 75 Operating lease liabilities, less current portion — 250 — 250 Net assets acquired $ 95,495 $ 46,300 $ 63,387 $ 205,182 Pro Forma Results of Operations for Business Combinations during the nine months ended June 30, 2021 The following unaudited supplemental pro forma results of operations have been prepared as though each of the acquired businesses in the nine months ended June 30, 2021 had occurred on October 1, 2019. Pro forma adjustments were made to reflect the impact of depreciation and amortization, changes to executive compensation and the increased debt, all in accordance with ASC 805. This supplemental pro forma information does not purport to be indicative of the results of operations that would have been attained had the acquisitions been made on these dates, or of results of operations that may occur in the future. Nine months ended June 30, 2021 2020 Revenue $ 178,349 $ 168,720 Net (loss) $ ( 8,525 ) $ ( 272 ) Business Combinations during the year ended September 30, 2020 During the year ended September 30, 2020, the Company completed the acquisitions of three unrelated businesses. Two expand the Company's geographic reach and software capabilities in the Public Sector vertical. The other adds text-to-pay capabilities and other software solutions in the Company's non-profit vertical. These businesses are within the Proprietary Software & Payments segment. Total purchase consideration was $ 32,628 , including $ 27,880 in proceeds from the Company's revolving credit facility and $ 4,748 of contingent consideration. Certain of the purchase price allocations assigned for these acquisitions are preliminary. 23 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) For some of these business acquired, the goodwill associated with the acquisitions is deductible for tax purposes, and goodwill associated with the acquisitions of others of the businesses is not deductible for tax purposes. The acquired merchant relationships intangible assets have estimated amortization periods of between fifteen and eighteen years . The non-compete agreement and trade names both have weighted-average amortization periods three years . The weighted-average amortization period for all intangibles acquired is sixteen years . The acquired capitalized software has an estimated amortization period of seven years . Acquisition-related costs for these businesses amounted to approximately $ 547 and were expensed as incurred. Certain provisions in the purchase agreements provide for additional consideration of up to $ 18,600 , in the aggregate, to be paid based upon the achievement of specified financial performance targets, as defined in the purchase agreements, through no later than September 2022. The Company determined the acquisition date fair values of the liabilities for the contingent consideration based on probability forecasts and discounted cash flow analyses. In each subsequent reporting period, the Company will reassess its current estimates of performance relative to the targets and adjust the contingent liabilities to their fair values through earnings. See additional disclosures in Note 8. Summary of Business Combinations during the year ended September 30, 2020 The fair values assigned to certain assets and liabilities assumed, as of the acquisition dates, during the year ended September 30, 2020 were as follows: Cash and cash equivalents $ 313 Accounts receivable 846 Prepaid expenses and other current assets 54 Property and equipment 122 Capitalized software 1,970 Acquired merchant relationships 11,900 Non-compete agreements 90 Trade name 300 Goodwill 20,213 Other assets 17 Total assets acquired $ 35,825 Accounts payable 168 Accrued expenses and other current liabilities 635 Deferred revenue, current 200 Other long-term liabilities 2,194 Net assets acquired $ 32,628 24 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) 4. GOODWILL AND INTANGIBLE ASSETS Changes in the carrying amount of goodwill are as follows: Merchant Services Proprietary Software and Payments Other Total Balance at September 30, 2020 (net of accumulated impairment losses of $ 11,458 , $ 0 and $ 0 , respectively) $ 115,982 $ 71,023 $ — $ 187,005 Goodwill attributable to preliminary purchase price adjustments and acquisitions during the nine months ended June 30, 2021 2,822 94,424 — 97,246 Balance at June 30, 2021 $ 118,804 $ 165,447 $ — $ 284,251 Intangible assets consisted of the following as of June 30, 2021: Cost Accumulated Amortization Carrying Value Amortization Life and Method Finite-lived intangible assets: Merchant relationships $ 230,661 $ ( 62,543 ) $ 168,118 12 to 20 years – accelerated or straight-line Non-compete agreements 2,878 ( 1,737 ) 1,141 2 to 5 years – straight-line Website and brand development costs 240 ( 115 ) 125 3 to 4 years – straight-line Trade names 6,320 ( 2,324 ) 3,996 2 to 7 years – straight-line Residual buyouts 6,399 ( 1,207 ) 5,192 2 to 8 years – straight-line Referral and exclusivity agreements 800 ( 533 ) 267 5 to 10 years – straight-line Total finite-lived intangible assets 247,298 ( 68,459 ) 178,839 Indefinite-lived intangible assets: Trademarks 42 — 42 Total identifiable intangible assets $ 247,340 $ ( 68,459 ) $ 178,881 Amortization expense for intangible assets amounted to $ 4,674 and $ 11,786 during the three and nine months ended June 30, 2021, respectively, and $ 3,066 and $ 9,348 during the three and nine months ended June 30, 2020, respectively. Based on net carrying amounts at June 30, 2021, the Company's estimate of future amortization expense for intangible assets are presented in the table below for fiscal years ending September 30: 2021 (three months remaining) $ 4,181 2022 15,510 2023 14,652 2024 13,669 2025 13,388 Thereafter 117,439 $ 178,839 25 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) 5. LONG-TERM DEBT, NET A summary of long-term debt, net as of June 30, 2021 and September 30, 2020 is as follows: June 30, September 30, Maturity 2021 2020 Revolving lines of credit to banks under the Senior Secured Credit Facility May 9, 2024 $ 117,829 $ — 1 % Exchangeable Senior Notes due 2025 February 15, 2025 98,663 95,325 Debt issuance costs, net ( 3,848 ) ( 4,567 ) Total long-term debt, net of issuance costs $ 212,644 $ 90,758 2020 Exchangeable Notes Offering On February 18, 2020, i3 Verticals, LLC issued $ 138,000 aggregate principal amount of 1.0 % Exchangeable Senior Notes due 2025 (the “Exchangeable Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The Company received approximately $ 132,762 in net proceeds from the sale of the Exchangeable Notes, as determined by deducting estimated offering expenses paid to third-parties from the aggregate principal amount. The Exchangeable Notes bear interest at a fixed rate of 1.00 % per year, payable semiannually in arrears on February 15 and August 15 of each year, beginning on August 15, 2020. The Exchangeable Notes will mature on February 15, 2025, unless converted or repurchased at an earlier date. i3 Verticals, LLC issued the Exchangeable Notes pursuant to an Indenture, dated as of February 18, 2020 (the “Indenture”), among i3 Verticals, LLC, the Company and U.S. Bank National Association, as trustee. Prior to August 15, 2024, the Exchangeable Notes are exchangeable only upon satisfaction of certain conditions and during certain periods described in the Indenture, and thereafter, the Exchangeable Notes are exchangeable at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. The Exchangeable Notes are exchangeable on the terms set forth in the Indenture into cash, shares of Class A common stock, or a combination thereof, at i3 Verticals, LLC’s election. The exchange rate is initially 24.4666 shares of Class A common stock per $1,000 principal amount of Exchangeable Notes (equivalent to an initial exchange price of approximately $ 40.87 per share of Class A common stock). The exchange rate is subject to adjustment in certain circumstances. In addition, following certain corporate events that occur prior to the maturity date or i3 Verticals, LLC’s delivery of a notice of redemption, i3 Verticals, LLC will increase, in certain circumstances, the exchange rate for a holder who elects to exchange its Exchangeable Notes in connection with such a corporate event or notice of redemption, as the case may be. If the Company or i3 Verticals, LLC undergoes a fundamental change, holders may require i3 Verticals, LLC to repurchase all or part of their Exchangeable Notes at a repurchase price equal to 100 % of the principal amount of the Exchangeable Notes to be repurchased, plus accrued and unpaid interest to, but not including, the fundamental change repurchase date. As of June 30, 2021, none of the conditions permitting the holders of the Exchangeable Notes to early convert have been met. i3 Verticals, LLC may not redeem the Exchangeable Notes prior to February 20, 2023. On or after February 20, 2023, and prior to the 47th scheduled trading day immediately preceding the maturity date, if the last reported sale price per share of Class A common stock has been at least 130 % of the exchange price for the Exchangeable Notes for at least 20 trading days (whether or not consecutive), i3 Verticals, LLC may redeem all or any portion of the Exchangeable Notes at a cash redemption price equal to 100 % of the principal amount of the Exchangeable Notes to be redeemed plus accrued and unpaid interest on such note to, but not including, the redemption date. 26 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) The Exchangeable Notes are general senior unsecured obligations of i3 Verticals, LLC. The guarantee is the Company’s senior unsecured obligation and rank senior in right of payment to all of i3 Verticals, LLC’s and the Company’s future indebtedness that is expressly subordinated in right of payment to the Exchangeable Notes or the guarantee, as applicable. The Exchangeable Notes and the guarantee rank equally in right of payment with all of i3 Verticals, LLC’s and the Company’s existing and future unsecured indebtedness that is not so expressly subordinated in the right of payment to the Exchangeable Notes or the guarantee, as applicable. The Exchangeable Notes and the guarantee are effectively subordinated to any of the Companies’ existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness (including obligations under the credit agreement governing the Senior Secured Credit Facility, defined below). The Exchangeable Notes and the guarantee will be structurally subordinated to all indebtedness and other liabilities and obligations (including the debt and trade payables) of the Company’s subsidiaries, other than i3 Verticals, LLC. In accounting for the issuance of the Exchangeable Notes, the Company separated the Exchangeable Notes into liability and equity components. The carrying amount of the liability component before the allocation of any transaction costs was calculated by measuring the fair value of a similar liability that does not have an associated exchangeable feature. The carrying amount of the equity component (before the allocation of any transaction costs), representing the conversion option, which does not require separate accounting as a derivative as it meets a scope exception for certain contracts involving an entity's own equity, was determined by deducting the fair value of the liability component from the par value of the Exchangeable Notes. The difference between the principal amount of the Exchangeable Notes and the liability component represents the debt discount, which is recorded as a direct deduction from the related debt liability in the consolidated balance sheet and accreted over the period from the date of issuance to the contractual maturity date, resulting in the recognition of non-cash interest expense. The equity component of the Exchangeable Notes of approximately $ 28,662 is included in additional paid-in capital in the consolidated balance sheet and is not remeasured as longs as it continues to meet the conditions for equity classification. Transaction costs were allocated to the liability and equity components in the same proportion as the allocation of the proceeds. Transaction costs attributable to the liability component were recorded as debt issuance costs in the consolidated balance sheet and are amortized to interest expense using the effective interest method over the term of the Exchangeable Notes, and transaction costs attributable to the equity component were netted with the equity component in stockholders' equity. The Company incurred third-party issuance costs totaling $ 5,238 , in connection with the issuance of the Exchangeable Notes. The Company capitalized $ 4,150 of debt issuance costs in connection with the Exchangeable Notes and allocated $ 1,088 of the third-party issuance costs to equity. Non-cash interest expense, including amortization of debt issuance costs, related to the Exchangeable Notes for the three and nine months ended June 30, 2021 was $ 149 and $ 434 , respectively, and $ 146 and $ 216 for the three and nine months ended June 30, 2020, respectively. The Company also wrote off a portion of the debt issuance costs in connection with the repurchase transactions in April and September 2020, as described below. Total unamortized debt issuance costs related to the Exchangeable Notes were $ 2,759 as of June 30, 2021. The estimated fair value of the Exchangeable Notes was $ 119,633 as of June 30, 2021. The estimated fair value of the Exchangeable Notes was determined through consideration of quoted market prices for similar instruments. The fair value is classified as Level 2, as defined in Note 8. The Company can choose to purchase its Exchangeable Notes on the open market. In April and September 2020, the Company paid $ 17,414 in aggregate to repurchase $ 21,000 in aggregate principal amount of the Exchangeable Notes and to repay approximately $ 24 in accrued interest on the repurchased portion of the Exchangeable Notes. The Company recorded a loss on retirement of debt of $ 2,297 due to the carrying value exceeding the fair value of the repurchased portion of the Exchangeable Notes at the dates of repurchases. The Company wrote off $ 592 of debt issuance costs in connection with the repurchase transactions. Exchangeable Note Hedge Transactions On February 12, 2020, concurrently with the pricing of the Exchangeable Notes, and on February 13, 2020, concurrently with the exercise by the initial purchasers of their right to purchase additional Exchangeable Notes, i3 27 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) Verticals, LLC entered into exchangeable note hedge transactions with respect to Class A common stock (the “Note Hedge Transactions”) with certain financial institutions (collectively, the “Counterparties”). The Note Hedge Transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Exchangeable Notes, the same number of shares of Class A common stock that initially underlie the Exchangeable Notes in the aggregate and are exercisable upon exchange of the Exchangeable Notes. The Note Hedge Transactions are intended to reduce potential dilution to the Class A common stock upon any exchange of the Exchangeable Notes. The Note Hedge Transactions will expire upon the maturity of the Exchangeable Notes, if not earlier exercised. The Note Hedge Transactions are separate transactions, entered into by i3 Verticals, LLC with the Counterparties, and are not part of the terms of the Exchangeable Notes. Holders of the Exchangeable Notes will not have any rights with respect to the Note Hedge Transactions. i3 Verticals, LLC used approximately $ 28,676 of the net proceeds from the offering of the Exchangeable Notes (net of the premiums received for the warrant transactions described below) to pay the cost of the Note Hedge Transactions. The Note Hedge Transactions do not require separate accounting as a derivative as they meet a scope exception for certain contracts involving an entity's own equity. The premiums paid for the Note Hedge Transactions have been included as a net reduction to additional paid-in capital within stockholders' equity. Warrant Transactions On February 12, 2020, concurrently with the pricing of the Exchangeable Notes, and on February 13, 2020, concurrently with the exercise by the initial purchasers of their right to purchase additional Exchangeable Notes, the Company entered into warrant transactions to sell to the Counterparties warrants (the “Warrants”) to acquire, subject to customary adjustments, up to initially 3,376,391 shares of Class A common stock in the aggregate at an initial exercise price of $ 62.88 per share. The Company offered and sold the Warrants in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act. The Warrants will expire over a period beginning on May 15, 2025. The Warrants are separate transactions, entered into by the Company with the Counterparties, and are not part of the terms of the Exchangeable Notes. Holders of the Exchangeable Notes will not have any rights with respect to the Warrants. The Company received approximately $ 14,669 from the offering and sale of the Warrants. The Warrants do not require separate accounting as a derivative as they meet a scope exception for certain contracts involving an entity's own equity. The premiums paid for the Warrants have been included as a net increase to additional paid-in capital within stockholders' equity. Senior Secured Credit Facility On May 9, 2019, the Company replaced its existing senior secured credit facility with a new credit agreement (the "Senior Secured Credit Facility"). On February 18, 2020, the Company entered into the second amendment to the Senior Secured Credit Facility in connection with the offering of the Company's Exchangeable Notes. The second amendment reduced the Company's borrowing capacity under the Senior Secured Credit Facility. During the year ended September 30, 2020, the Company wrote off $ 141 of unamortized debt issuance costs, which was recorded in interest expense in the condensed consolidated statements of operations, due to the decrease in borrowing capacity. The Senior Secured Credit Facility consists of a $ 275,000 revolving credit facility, together with an option to increase the revolving credit facility and/or obtain incremental term loans in an additional principal amount of up to $ 50,000 in the aggregate (subject to the receipt of additional commitments for any such incremental loan amounts). 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 the Company to pay 28 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) 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. 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, 2021, the Company was 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 assets of the Company. The lenders under the Senior Secured Credit Facility hold senior rights to collateral and principal repayment over all other creditors. The provisions of the Senior Secured Credit Facility place certain restrictions and limitations upon the Company. These include, among others, restrictions on liens, investments, indebtedness, fundamental changes and dispositions; maintenance of certain financial ratios; and certain non-financial covenants pertaining to the activities of the Company during the period covered. The Company was in compliance with such covenants as of June 30, 2021. In addition, the Senior Secured Credit Facility restricts the Company's ability to make dividends or other distributions to the holders of the Company's equity. The Company is permitted to (i) make cash distributions to the holders of the Company's equity in order to pay taxes incurred by owners of equity in i3 Verticals, LLC, by reason of such ownership, (ii) move intercompany cash between subsidiaries that are joined to the Senior Secured Credit Facility, (iii) repurchase equity from employees, directors, officers or consultants in an aggregate amount not to exceed $ 3,000 per year, (iv) make certain payments in connection with the Tax Receivable Agreement, and (v) make other dividends or distributions in an aggregate amount not to exceed 5 % of the net cash proceeds received from any additional common equity issuance. The Company is also permitted to make non-cash dividends in the form of additional equity issuances. Each subsidiary may make ratable distributions to persons that own equity interests in such subsidiary. All other forms of dividends or distributions are prohibited under the Senior Secured Credit Facility. Debt Issuance Costs The Company incurred no debt issuance costs during the three and nine months ended June 30, 2021. During the three and nine months ended June 30, 2020, the Company capitalized debt issuance costs totaling $ 4,212 , in connection with the issuance of the Exchangeable Notes, the Note Hedge Transactions and the Warrants and in connection with entering into the second amendment to the Senior Secured Credit Facility. The Company's debt issuance costs are being amortized over the related term of the debt using the straight-line method, which is not materially different than the effective interest rate method, and are presented net against long-term debt in the condensed consolidated balance sheets. The amortization of deferred debt issuance costs is included in interest expense and amounted to approximately $ 244 and $ 719 during the three and nine months ended June 30, 2021, respectively, and $ 242 and $ 514 during the three and nine months ended June 30, 2020, respectively. 6. INCOME TAXES i3 Verticals, Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from i3 Verticals, LLC based on i3 Verticals, Inc.’s economic interest in i3 Verticals, LLC. i3 Verticals, LLC's members, including the Company, are liable for federal, state and local income taxes based on their share of i3 Verticals, LLC's pass-through taxable income. i3 Verticals, LLC is not a taxable entity for federal income tax purposes but is subject to and reports entity level tax in both Tennessee and Texas. In addition, certain subsidiaries of i3 Verticals, LLC are corporations that are subject to state and federal income taxes. 29 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) The Company’s tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. When the estimate of the annual effective tax rate is unreliable, the Company records its income tax expense or benefit based up on a period to date effective tax rate. Each quarter, the Company updates its estimate of the annual effective tax rate, and if the Company’s estimated tax rate changes, it makes a cumulative adjustment in that period. The Company’s provision for income taxes was a benefit of $ 110 and $ 416 for the three and nine months ended June 30, 2021, respectively, and a benefit of $ 5 and $ 1,918 for the three and nine months ended June 30, 2020, respectively. Tax Receivable Agreement On June 25, 2018, the Company entered into a Tax Receivable Agreement with i3 Verticals, LLC and each of the Continuing Equity Owners (the “Tax Receivable Agreement”) that provides for the payment by the Company to the Continuing Equity Owners of 85 % of the amount of certain tax benefits, if any, that it actually realizes, or in some circumstances, is deemed to realize in its tax reporting, as a result of (i) future redemptions funded by the Company or exchanges, or deemed exchanges in certain circumstances, of Common Units of i3 Verticals, LLC for Class A common stock of i3 Verticals, Inc. or cash, and (ii) certain additional tax benefits attributable to payments made under the Tax Receivable Agreement. These tax benefit payments are not conditioned upon one or more of the Continuing Equity Owners maintaining a continued ownership interest in i3 Verticals, LLC. If a Continuing Equity Owner transfers Common Units but does not assign to the transferee of such units its rights under the Tax Receivable Agreement, such Continuing Equity Owner generally will continue to be entitled to receive payments under the Tax Receivable Agreement arising in respect of a subsequent exchange of such Common Units. In general, the Continuing Equity Owners’ rights under the Tax Receivable Agreement may not be assigned, sold, pledged or otherwise alienated to any person, other than certain permitted transferees, without (a) the Company's prior written consent, which should not be unreasonably withheld, conditioned or delayed, and (b) such persons becoming a party to the Tax Receivable Agreement and agreeing to succeed to the applicable Continuing Equity Owner’s interest therein. The Company expects to benefit from the remaining 15 % of the tax benefits, if any, that the Company may realize. During the nine months ended June 30, 2021, the Company acquired an aggregate of 1,671,479 Common Units in Verticals, LLC in connection with the redemption of Common Units from the Continuing Equity Owners, which resulted in an increase in the tax basis of our investment in i3 Verticals, LLC subject to the provisions of the Tax Receivable Agreement. As a result of these exchanges, during the nine months ended June 30, 2021, the Company recognized an increase to its net deferred tax assets in the amount of $ 14,177 , and corresponding Tax Receivable Agreement liabilities of $ 12,051 , representing 85 % of the tax benefits due to the Continuing Equity Owners. The deferred tax asset and corresponding Tax Receivable Agreement liability balances were $ 42,897 and $ 39,626 , respectively, as of June 30, 2021. Payments to the Continuing Equity Owners related to exchanges through June 30, 2021 will range from $ 0 to $ 3,229 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. Future payments under the Tax Receivable Agreement with respect to subsequent exchanges would be in addition to these amounts. 30 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) 7. LEASES As discussed in Note 2, the Company adopted ASC 842 effective October 1, 2020, using the modified retrospective transition method, under which the prior period financial statements were not restated for the new guidance. The Company’s leases consist primarily of real estate leases throughout the markets in which the Company operates. At contract inception, the Company determines whether an arrangement is or contains a lease, and for each identified lease, evaluates the classification as operating or financing. The Company had no finance leases as of June 30, 2021. Leased assets and obligations are recognized at the lease commencement date based on the present value of fixed lease payments to be made over the term of the lease. Renewal and termination options are factored into determination of the lease term only if the option is reasonably certain to be exercised. The weighted-average remaining lease term at June 30, 2021 was 6 years. The Company had no significant short-term leases during the three and nine months ended June 30, 2021. The Company’s leases do not provide a readily determinable implicit interest rate and the Company uses its incremental borrowing rate to measure the lease liability and corresponding right-of-use asset. The incremental borrowing rates were determined based on a portfolio approach considering the Company’s current secured borrowing rate adjusted for market conditions and the length of the lease term. The weighted-average discount rate used in the measurement of our lease liabilities was 7.3 % as of June 30, 2021. Operating lease cost is recognized on a straight-line basis over the lease term. Operating lease costs for the three and nine months ended June 30, 2021 were $ 1,164 and $ 3,064 , respectively, which are included in selling, general and administrative expenses in the condensed consolidated statements of operations. Total operating lease costs for the three and nine months ended June 30, 2021 include variable lease costs of approximately $ 1 and $ 5 , respectively, which are primarily comprised of costs of maintenance and utilities and changes in rates, and are determined based on the actual costs incurred during the period. Variable payments are expensed in the period incurred and not included in the measurement of lease assets and liabilities. Short-term rent expense for the three and nine months ended June 30, 2021 was $ 410 and $ 540 , respectively, and are included in selling, general and administrative expenses in the condensed consolidated statements of operations. As of June 30, 2021, maturities of lease liabilities are as follows: Years ending September 30: 2021 (three months remaining) $ 1,035 2022 3,856 2023 3,309 2024 2,709 2025 2,271 Thereafter 4,704 Total future minimum lease payments (undiscounted) 17,884 Less: present value discount ( 2,751 ) Present value of lease liability $ 15,133 __________________________ 1. Total future minimum lease payments excludes payments of $ 46 for leases designated as short-term leases, which are excluded from the Company's right-of-use assets. These payments will be made within the next twelve months. 31 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) A summary of approximate future minimum payments for leases under ASC 840 as of September 30, 2020, was as follows: Years ending September 30: 2021 $ 2,726 2022 2,397 2023 2,096 2024 1,469 2025 968 Thereafter 1,221 Total $ 10,877 8. FAIR VALUE MEASUREMENTS The Company applies the provisions of ASC 820, Fair Value Measurement , which defines fair value, establishes a framework for its measurement and expands disclosures about fair value measurements. Fair value is the price that would be received to sell an asset or the price paid to transfer a liability as of the measurement date. A three-tier, fair-value reporting hierarchy exists for disclosure of fair value measurements based on the observability of the inputs to the valuation of financial assets and liabilities. The three levels are: Level 1 — Quoted prices for identical instruments in active markets. Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable in active exchange markets. The carrying value of the Company’s financial instruments, including cash and cash equivalents, restricted cash, settlement assets and obligations, accounts receivable, other assets, accounts payable, and accrued expenses, approximated their fair values as of June 30, 2021 and 2020, because of the relatively short maturity dates on these instruments. The carrying amount of debt approximates fair value as of June 30, 2021 and 2020, because interest rates on these instruments approximate market interest rates. 32 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) The Company has no Level 1 or Level 2 financial instruments measured at fair value on a recurring basis. The following tables present the changes in the Company's Level 3 financial instruments that are measured at fair value on a recurring basis. Accrued Contingent Consideration Balance at September 30, 2020 $ 13,034 Contingent consideration accrued at time of business combination 22,403 Change in fair value of contingent consideration included in Operating expenses 5,835 Contingent consideration paid ( 6,522 ) Balance at June 30, 2021 $ 34,750 Accrued Contingent Consideration Balance at September 30, 2019 $ 18,226 Contingent consideration accrued at time of business combination — Change in fair value of contingent consideration included in Operating expenses ( 1,461 ) Contingent consideration paid ( 8,027 ) Balance at June 30, 2020 $ 8,738 The fair value of contingent consideration obligations includes inputs not observable in the market and thus represents a Level 3 measurement. The amount to be paid under these obligations is contingent upon the achievement of certain growth metrics related to the financial performance of the entities subsequent to acquisition. The fair value of material contingent consideration included in an acquisition is calculated using a Monte Carlo simulation. The contingent consideration is revalued each period until it is settled. Management reviews the historical and projected performance of each acquisition with contingent consideration and uses an income probability method to revalue the contingent consideration. The revaluation requires management to make certain assumptions and represent management's best estimate at the valuation date. The probabilities are determined based on a management review of the expected likelihood of triggering events that would cause a change in the contingent consideration paid. The Company develops the projected future financial results based on an analysis of historical results, market conditions, and the expected impact of anticipated changes in the Company's overall business and/or product strategies. Approximately $ 19,878 and $ 10,062 of contingent consideration was recorded in accrued expenses and other current liabilities as of June 30, 2021 and September 30, 2020, respectively. Approximately $ 14,872 and $ 2,972 of contingent consideration was recorded in other long-term liabilities as of June 30, 2021 and September 30, 2020, respectively. Disclosure of Fair Values The Company's financial instruments that are not remeasured at fair value include the Exchangeable Notes (see Note 5). The Company estimates the fair value of the Exchangeable Notes through consideration of quoted market prices of similar instruments, classified as Level 2 as described above. The estimated fair value of the Exchangeable Notes was $ 119,633 as of June 30, 2021. AxiaMed Sale On April 1, 2021, AxiaMed (defined below) was sold to a third party and the Company received $ 2,453 for its investment in AxiaMed. Greg Daily, the Company’s chief executive officer; Clay Whitson, the Company’s chief financial officer; and the Company no longer have ownership interest in AxiaMed following the sale. For additional information, see Note 11. 33 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) 9. EQUITY-BASED COMPENSATION A summary of equity-based compensation expense recognized during the three and nine months ended June 30, 2021 and 2020 is as follows: Three months ended June 30, Nine months ended June 30, 2021 2020 2021 2020 Stock options $ 5,111 $ 2,816 $ 12,694 $ 7,450 Amounts are included in general and administrative expense on the condensed consolidated statements of operations. Income tax benefits of $ 102 and $ 584 were recognized during the three and nine months ended June 30, 2021, respectively. Income tax expense of $ 164 and benefits of $ 177 were recognized during the three and nine months ended June 30, 2020, respectively. Stock Options In May 2018, the Company adopted the 2018 Equity Incentive Plan (the “2018 Plan”) under which the Company may grant up to 3,500,000 stock options and other equity-based awards to employees, directors and officers. The number of shares of Class A common stock available for issuance under the 2018 Plan includes an annual increase on the first day of each year, beginning with the 2019 calendar year, equal to 4.0 % of the outstanding shares of all classes of the Company's common stock as of the last day of the immediately preceding calendar year, unless the Company’s board of directors determines prior to the last trading day of December of the immediately preceding calendar year that the increase shall be less than 4.0 %. As of June 30, 2021, there were 468,762 equity awards available for grant under the 2018 Plan. In September 2020, the Company adopted the 2020 Acquisition Equity Incentive Plan (the “2020 Inducement Plan”) under which the Company may grant up to 1,500,000 stock options and other equity-based awards to individuals that were not previously employees of the Company or its subsidiaries in connection with acquisitions, as a material inducement to the individual's entry into employment with the Company or its subsidiaries within the meaning of Rule 5635(c)(4) of the Nasdaq Listing Rules. In May 2021, the Company amended the 2020 Inducement Plan to increase the number of shares of the Company's Class A common stock available for issuance from 1,500,000 to 3,000,000 shares. As of June 30, 2021, there were 1,424,971 equity awards available for grant under the 2020 Inducement Plan. The fair value of the stock option awards during the nine months ended June 30, 2021 and during the year ended September 30, 2020 was determined on the grant date using the Black-Scholes valuation model based on the following weighted-average assumptions: June 30, 2021 September 30, 2020 Expected volatility (1) 38.0 % 28.5 % Expected dividend yield (2) — % — % Expected term (3) 6 years 6 years Risk-free interest rate (4) 0.7 % 1.2 % _________________ 1. Expected volatility is based on the historical volatility of a selected peer group over a period equivalent to the expected term. 2. The Company has assumed a dividend yield of zero as management has no plans to declare dividends in the foreseeable future. 3. Expected term represents the estimated period of time until an award is exercised and was determined using the simplified method. 4. The risk-free rate is an interpolation of yields on U.S. Treasury securities with maturities equivalent to the expected term. 34 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) A summary of stock option activity for the nine months ended June 30, 2021 is as follows: Stock Options Weighted Average Exercise Price Outstanding at beginning of period 5,210,566 $ 21.73 Granted 2,907,472 30.22 Exercised ( 426,836 ) 17.87 Forfeited ( 206,695 ) 27.07 Outstanding at end of period 7,484,507 $ 25.10 The weighted-average grant date fair value of stock options granted during the nine months ended June 30, 2021 was $ 11.22 . As of June 30, 2021, there were 7,484,507 stock options outstanding, of which 2,904,266 were exercisable. As of June 30, 2021, total unrecognized compensation expense related to unvested stock options, including an estimate for pre-vesting forfeitures, was $ 34,517 , which is expected to be recognized over a weighted-average period of two years . The Company's policy is to account for forfeitures of stock-based compensation awards as they occur. The total fair value of stock options that vested during the three and nine months ended June 30, 2021 was $ 4,374 and $ 10,590 , respectively. 10. COMMITMENTS AND CONTINGENCIES Leases The Company utilizes office space and equipment under operating leases. Rent expense under these leases amounted to $ 1,201 and $ 3,231 during the three and nine months ended June 30, 2021, respectively, and $ 657 and $ 2,073 during the three and nine months ended June 30, 2020, respectively. Refer to Note 7 for further discussion and a table of the future minimum payments under these leases. Minimum Processing Commitments The Company has non-exclusive agreements with several processors to provide the Company services related to transaction processing and transmittal, transaction authorization and data capture, and access to various reporting tools. Certain of these agreements require the Company to submit a minimum monthly number of transactions for processing. If the Company submits a number of transactions that is lower than the minimum, it is required to pay to the processor the fees the processor would have received if the Company had submitted the required minimum number of transactions. As of June 30, 2021, such minimum fee commitments were as follows: Years ending September 30: 2021 (three months remaining) $ 608 2022 2,817 2023 2,645 2024 450 2025 — Thereafter — Total $ 6,520 35 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) Loan to Third Party Sales Organization The Company has entered into an agreement as of March 2020, as amended in October 2020, to provide a secured loan to a third party sales organization of up to $ 750 in the future, dependent on their achievement of certain financial metrics. Additionally, the Company has conditionally committed to a future buyout of the third party's business at the earlier of (a) the 60th day following the date upon which the founder of the third party sales organization dies or becomes disabled or (b) the 60th day following July 1, 2023. The buyout amount is dependent on certain financial metrics but is capped at $ 29,000 , which would be net of repayment of the secured loans. The buyout also contains certain provisions to provide additional consideration of up to $ 9,000 , in the aggregate, to be paid based on the achievement of specified financial performance targets, following the buyout. As the eventual financial metrics are not known, the amount of the buyout transaction as well as the additional consideration are not able to be estimated at this time. As of June 30, 2021, such knowable loan commitments, dependent on the third party sales organization's achievement of certain financial metrics, were $ 750 for fiscal year 2021. Litigation With respect to all legal, regulatory and governmental proceedings, and in accordance with ASC 450-20, Contingencies—Loss Contingencies , the Company considers the likelihood of a negative outcome. If the Company determines the likelihood of a negative outcome with respect to any such matter is probable and the amount of the loss can be reasonably estimated, the Company records an accrual for the estimated amount of loss for the expected outcome of the matter. If the likelihood of a negative outcome with respect to material matters is reasonably possible and the Company is able to determine an estimate of the amount of possible loss or a range of loss, whether in excess of a related accrued liability or where there is no accrued liability, the Company discloses the estimate of the amount of possible loss or range of loss. However, the Company in some instances may be unable to estimate an amount of possible loss or range of loss based on the significant uncertainties involved in, or the preliminary nature of, the matter, and in these instances the Company will disclose the nature of the contingency and describe why the Company is unable to determine an estimate of possible loss or range of loss. The Company is involved in ordinary course legal proceedings, which include all claims, lawsuits, investigations and proceedings, including unasserted claims, which are probable of being asserted, arising in the ordinary course of business. The Company has considered all such ordinary course legal proceedings in formulating its disclosures and assessments. After taking into consideration the evaluation of such legal matters by the Company's legal counsel, the Company's management believes at this time such matters will not have a material impact on the Company's consolidated balance sheet, results of operations or cash flows. 36 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) S&S Litigation A Petition was filed on June 2, 2021 in the 19th Judicial District Court, Parish of East Baton Rouge by the State of Louisiana, through the Division of Administration, and the East Baton Rouge Parish Law Enforcement District and other Law Enforcement Districts, on behalf of themselves and as class representatives of a purported class of law enforcement districts in the State of Louisiana against i3-Software & Services, LLC (“S&S”), a subsidiary of i3 Verticals, Inc. (the “Company”) located in Shreveport, Louisiana, the Company, the leader of the S&S business and its former owner. See State of Louisiana, by and through its Division of Administration, East Baton Rouge Parish Law Enforcement District, by and through the duly elected East Baton Rouge Parish Sheriff, Sid J. Gautreaux, III, et. al., individually and as class representatives vs. i3-Software & Services, LLC; 1120 South Pointe Properties, LLC, formerly known as Software and Services of Louisiana, L.L.C.; i3 Verticals, Inc.; i3 Verticals, LLC; Gregory R. Teeters; and Scott Carrington . The Petition seeks monetary damages for the cost of network remediation of $ 15 million, return of their purchase prices, potential additional expenses related to remediation and any obligation to notify parties of an alleged data breach as and if required by applicable law, and reasonable attorneys’ fees. The claimed damages relate to a third-party remote access software product (“Third-Party Software”) used in connection with services provided by S&S to certain Louisiana Parish law enforcement districts and alleged inadequacies in the Company’s cybersecurity practices. S&S was acquired by the Company in 2018 for an aggregate purchase price of $ 17 million, including upfront cash consideration and contingent consideration, and provides software and payments services within the Company’s Public Sector vertical to local government agencies almost exclusively in Louisiana. The Company is also aware of a related investigation led by the U.S. Department of Justice (“DOJ”). The Company has produced documents in response to subpoenas and made employees available for interviews by the government. The Company has cooperated fully and is continuing to cooperate. Based on information available to the Company, the Company believes that the investigation is focused on unauthorized access to certain S&S customers’ internal networks by unknown third parties. Such unauthorized access may have been enabled in part by the Third-Party Software. The Company is unable to predict the outcome of the DOJ’s investigation or the related litigation. We do not believe that these matters will, individually or in the aggregate, have a material adverse effect on our business or financial condition. We cannot give assurance, however, that these will not have a material effect on our results of operations for the period in which they are resolved. Other The Company's subsidiary CP-PS, LLC has certain indemnification obligations in favor of FDS Holdings, Inc. related to the acquisition of certain assets of Merchant Processing Solutions, LLC in February 2014. The Company has incurred expenses related to these indemnification obligations in prior periods and may have additional expenses in the future. However, after taking into consideration the evaluation of such matters by the Company’s legal counsel, the Company’s management believes at this time that the anticipated outcome of any existing or potential indemnification liabilities related to this matter will not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. 11. RELATED PARTY TRANSACTIONS In April 2016, the Company entered into a purchase agreement to purchase certain assets of Axia, LLC. On April 29, 2016, the Company entered into a Processing Services Agreement (the “AxiaMed Agreement”) with Axia Technologies, LLC (which has since been incorporated as Axia Technologies, Inc., doing business as AxiaMed (“AxiaMed”)), an entity controlled by the previous owner of Axia, LLC. Under the AxiaMed Agreement, the Company agreed to provide processing services for certain merchants as designated by AxiaMed from time to time. In accordance with ASC 606-10-55, revenue from the processing services is recognized net of interchange, residual expense and other fees. 37 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) 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 $ 2,353 to the fair value of the AxiaMed investment at March 31, 2021, which the Company recognized in other income. On April 1, 2021, AxiaMed was sold to a third party and the Company received $ 2,453 for its investment in AxiaMed. Greg Daily, the Company’s chief executive officer; Clay Whitson, the Company’s chief financial officer; and the Company no longer have ownership interest in AxiaMed following the sale. In connection with the Company’s IPO, the Company and i3 Verticals, LLC entered into a Tax Receivable Agreement with the Continuing Equity Owners that provides for the payment by the Company to the Continuing Equity Owners of 85 % of the amount of certain tax benefits, if any, that it actually realizes, or in some circumstances, is deemed to realize in its tax reporting, as a result of (i) future redemptions funded by the Company or exchanges, or deemed exchanges in certain circumstances, of Common Units of i3 Verticals, LLC for Class A common stock of i3 Verticals, Inc. or cash, and (ii) certain additional tax benefits attributable to payments made under the Tax Receivable Agreement. See Note 6 for further information. As of June 30, 2021, the total amount due under the Tax Receivable Agreement was $ 39,626 . 12. SEGMENTS The Company determines its operating segments based on ASC 280, Segment Reporting , how the chief operating decision making group monitors and manages the performance of the business and the level at which financial information is reviewed. The Company’s operating segments are strategic business units that offer different products and services. The Company's core business is delivering seamlessly integrated payment and software solutions to SMBs and organizations in strategic vertical markets. This is accomplished through the Merchant Services and Proprietary Software and Payments segments. The Merchant Services segment provides comprehensive payment solutions to businesses and organizations. The Merchant Services segment includes third-party integrated payment solutions as well as merchant of record payment services across the Company's strategic vertical markets. The Proprietary Software and Payments segment delivers solutions, including embedded payments, to the Company's clients through proprietary software. Payments are delivered through both the payment facilitator model and the traditional merchant processing model. The Other category includes corporate overhead expenses when presenting reportable segment information. Effective July 1, 2020 the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's segments with its business operations. The prior period comparatives reflected in the tables below have been retroactively adjusted to reflect the Company's current segment presentation. The Company primarily uses processing margin to measure operating performance. Processing margin is equal to revenue less other cost of services plus residuals expense, which are a component of other cost of 38 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) services. The following is a summary of reportable segment operating performance for the three and nine months ended June 30, 2021 and 2020. As of and for the Three Months Ended June 30, 2021 Merchant Services Proprietary Software and Payments Other Total Revenue $ 29,912 $ 32,615 $ ( 563 ) $ 61,964 Other costs of services ( 14,206 ) ( 2,397 ) 539 ( 16,064 ) Residuals 8,374 273 ( 519 ) 8,128 Processing margin $ 24,080 $ 30,491 $ ( 543 ) $ 54,028 Residuals ( 8,128 ) Selling general and administrative ( 37,296 ) Depreciation and amortization ( 6,995 ) Change in fair value of contingent consideration ( 3,609 ) Income (loss) from operations $ ( 2,000 ) Total assets $ 209,707 $ 372,903 $ 61,992 $ 644,602 Goodwill $ 118,804 $ 165,447 $ — $ 284,251 As of and for the Nine Months Ended June 30, 2021 Merchant Services Proprietary Software and Payments Other Total Revenue $ 80,874 $ 73,940 $ ( 1,674 ) $ 153,140 Other costs of services ( 36,829 ) ( 5,864 ) 1,649 ( 41,044 ) Residuals 21,219 817 ( 1,612 ) 20,424 Processing margin $ 65,264 $ 68,893 $ ( 1,637 ) $ 132,520 Residuals ( 20,424 ) Selling general and administrative ( 92,769 ) Depreciation and amortization ( 17,938 ) Change in fair value of contingent consideration ( 5,835 ) Loss from operations $ ( 4,446 ) Total assets $ 209,707 $ 372,903 $ 61,992 $ 644,602 Goodwill $ 118,804 $ 165,447 $ — $ 284,251 39 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) As of and for the Three Months Ended June 30, 2020 Merchant Services Proprietary Software and Payments Other Total Revenue $ 22,222 $ 9,767 $ ( 416 ) $ 31,573 Other costs of services ( 9,448 ) ( 969 ) 416 ( 10,001 ) Residuals 4,690 103 ( 413 ) 4,380 Processing margin $ 17,464 $ 8,901 $ ( 413 ) $ 25,952 Residuals ( 4,380 ) Selling general and administrative ( 18,133 ) Depreciation and amortization ( 4,475 ) Change in fair value of contingent consideration 1,473 Income from operations $ 437 Total assets $ 210,565 $ 99,870 $ 50,038 $ 360,473 Goodwill $ 116,401 $ 50,653 $ — $ 167,054 As of and for the Nine Months Ended June 30, 2020 Merchant Services Proprietary Software and Payments Other Total Revenue $ 76,190 $ 37,029 $ ( 1,357 ) $ 111,862 Other costs of services ( 32,978 ) ( 3,252 ) 1,356 ( 34,874 ) Residuals 15,788 413 ( 1,347 ) 14,854 Processing margin $ 59,000 $ 34,190 $ ( 1,348 ) $ 91,842 Residuals ( 14,854 ) Selling general and administrative ( 58,206 ) Depreciation and amortization ( 13,668 ) Change in fair value of contingent consideration 1,461 Income from operations $ 6,575 Total assets $ 210,565 $ 99,870 $ 50,038 $ 360,473 Goodwill $ 116,401 $ 50,653 $ — $ 167,054 The Company has not disclosed expenditures on long-lived assets as such expenditures are not reviewed by or provided to the chief operating decision maker. 40 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) 13. NON-CONTROLLING INTEREST i3 Verticals, Inc. is the sole managing member of i3 Verticals, LLC, and as a result, consolidates the financial results of i3 Verticals, LLC and reports a non-controlling interest representing the Common Units of i3 Verticals, LLC held by the Continuing Equity Owners. Changes in i3 Verticals, Inc.’s ownership interest in i3 Verticals, LLC while i3 Verticals, Inc. retains its controlling interest in i3 Verticals, LLC will be accounted for as equity transactions. As such, future redemptions or direct exchanges of Common Units of i3 Verticals, LLC by the Continuing Equity Owners will result in a change in ownership and reduce or increase the amount recorded as non-controlling interest and increase or decrease additional paid-in capital when i3 Verticals, LLC has positive or negative net assets, respectively. As of June 30, 2021, i3 Verticals, Inc. owned 21,960,059 of i3 Verticals, LLC's Common Units, representing a 68.2 % economic ownership interest in i3 Verticals, LLC. The following table summarizes the impact on equity due to changes in the Company's ownership interest in i3 Verticals, LLC: Nine months ended June 30, 2021 2020 Net (loss) income attributable to non-controlling interest $ ( 3,328 ) $ 811 Transfers to (from) non-controlling interests: Distributions to non-controlling interest holders — ( 3 ) Redemption of common units in i3 Verticals, LLC ( 11,714 ) ( 2,672 ) Cumulative effect of adoption of new accounting standard — 640 Allocation of equity to non-controlling interests 12,343 — Net transfers to (from) non-controlling interests 629 ( 2,035 ) Change from net (loss) income attributable to non-controlling interests and transfers to (from) non-controlling interests $ ( 2,699 ) $ ( 1,224 ) 14. EARNINGS PER SHARE Basic earnings per share of Class A common stock is computed by dividing net income available to i3 Verticals, Inc. by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted earnings per share of Class A common stock is computed by dividing net income available to i3 Verticals, Inc. by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities. 41 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per share of Class A common stock for the three and nine months ended June 30, 2021 and 2020: Three months ended June 30, Nine months ended June 30, 2021 2020 2021 2020 Basic net (loss) income per share: Numerator Net (loss) income $ ( 4,594 ) $ ( 2,810 ) $ ( 8,769 ) $ 1,043 Less: Net (loss) income attributable to non-controlling interests ( 1,286 ) ( 2,454 ) ( 3,328 ) 811 Net (loss) income attributable to Class A common stockholders $ ( 3,308 ) $ ( 356 ) $ ( 5,441 ) $ 232 Denominator Weighted average shares of Class A common stock outstanding (1) 21,926,225 14,858,858 20,658,700 14,515,506 Basic net (loss) income per share $ ( 0.15 ) $ ( 0.02 ) $ ( 0.26 ) $ 0.02 Dilutive net income per share: Numerator Net income (loss) attributable to Class A common stockholders $ 232 Reallocation of net (loss) income assuming conversion of common units (3)(4) — Net income (loss) attributable to Class A common stockholders - diluted $ 232 Denominator Weighted average shares of Class A common stock outstanding (1) 14,515,506 Weighted average effect of dilutive securities (2)(3) 1,403,858 Weighted average shares of Class A common stock outstanding - diluted 15,919,364 Diluted net income (loss) per share $ 0.01 ____________________ 1. Excludes 2,949 and 8,965 restricted Class A common stock units for the three and nine months ended June 30, 2021, respectively, and 193,709 and 225,985 restricted Class A common stock units for both the three and nine months ended June 30, 2020, respectively. 2. For the three and nine months ended June 30, 2021, all potentially dilutive securities were anti-dilutive, so diluted net loss per share was equivalent to basic net loss per share. The following securities were excluded from the weighted average effect of dilutive securities in the computation of diluted net loss per share of Class A common stock: a. 10,229,142 and 10,884,874 shares of weighted average Class B common stock for the three and nine months ended June 30, 2021, respectively, along with the reallocation of net income assuming conversion of these shares, were excluded because the effect would have been anti-dilutive, b. 2,100,833 and 2,419,305 stock options for the three and nine months ended June 30, 2021, respectively, were excluded because the exercise price of these stock options exceeded the average market price of our Class A common stock during the period (“out-of-the-money”) and the effect of including them would have been anti-dilutive, and c. 1,678,774 and 1,531,722 shares for the three and nine months ended June 30, 2021, respectively, resulting from estimated stock option exercises as calculated by the treasury stock method, and 2,949 and 8,965 restricted Class A common units for the three and nine months ended June 30, 2021, respectively, were excluded because the effect of including them would have been anti-dilutive. 3. For the three months ended June 30, 2020,all potentially dilutive securities were anti-dilutive, so diluted net loss per share was equivalent to basic net loss per share. The following securities were excluded from the weighted average effect of dilutive securities in the computation of diluted net loss per share of Class A common stock: a. 12,404,368 and 12,699,339 shares of weighted average Class B common stock for the three and nine months ended June 30, 2020, respectively, along with the reallocation of net income assuming conversion of these shares, were excluded because the effect would have been anti-dilutive, and 42 i3 VERTICALS, Inc. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except unit, share and per share amounts) b. 1,498,000 and 1,105,000 stock options for the three and nine months ended June 30, 2020, respectively, were excluded because the exercise price of these stock options exceeded the average market price of our Class A common stock during the period (“out-of-the-money”) and the effect of including them would have been anti-dilutive. c. 1,127,509 shares for the three months ended June 30, 2020, resulting from estimated stock option exercises as calculated by the treasury stock method, and 193,709 restricted Class A common units for the three months ended June 30, 2020, were excluded because the effect of including them would have been anti-dilutive. 4. The reallocation of net income assuming conversion of common units represents the tax effected net income attributable to non-controlling interest using the effective income tax rates described in Note 6 above and assuming all common units of i3 Verticals, LLC were exchanged for Class A common stock at the beginning of the period. The common units of i3 Verticals, LLC held by the Continuing Equity Owners are potentially dilutive securities, and the computations of pro forma diluted net income per share assume that all common units of i3 Verticals, LLC were exchanged for shares of Class A common stock at the beginning of the period. Since the Company expects to settle the principal amount of its outstanding Exchangeable Notes in cash and any excess in cash or shares of the Company's Class A common stock, the Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will have a dilutive impact on diluted net income per share of common stock when the average market price of the Company's Class A common stock for a given period exceeds the exchange price of $ 40.87 per share for the Exchangeable Notes. The Warrants sold in connection with the issuance of the Exchangeable Notes are considered to be dilutive when the average price of the Company's Class A common stock during the period exceeds the Warrants' stock price of $ 62.88 per share. The effect of the additional shares that may be issued upon exercise of the Warrants will be included in the weighted average shares of Class A common stock outstanding—diluted using the treasury stock method. The Note Hedge Transactions purchased in connection with the issuance of the Exchangeable Notes are considered to be anti-dilutive and therefore do not impact our calculation of diluted net income per share. Refer to Note 5 for further discussion regarding the Exchangeable Notes. Shares of the Company's Class B common stock do not participate in the earnings or losses of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented. 15. SIGNIFICANT NON-CASH TRANSACTIONS The Company engaged in the following significant non-cash investing and financing activities during the nine months ended June 30, 2021 and 2020: Nine months ended June 30, 2021 2020 Class A common stock issued as part of acquisition's purchase consideration (Note 3) $ 35,245 $ — Acquisition date fair value of contingent consideration in connection with business combinations $ 22,403 $ — Issuance of Exchangeable Notes and related Note Hedge Transactions and Warrants $ — $ 85 Right-of-use assets obtained in exchange for operating lease obligations $ 16,745 $ — 43