What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-02-09 compared with 2021-08-09 · 104 added, 204 removed, 215 unchanged (59% of the section changed)

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

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

• our ability to meet our liquidity needs in light of the impacts of the COVID-19 pandemic;

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

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

• our ability to meet our liquidity needs, particularly in light of the impacts of the COVID-19 pandemic;

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

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

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

• consolidation in the banking and financial services industry;

• risk of shortages, price increases, changes, delays or discontinuations of hardware due to supply chain disruptions with respect to our limited number of suppliers;

• our dependence on non-exclusive distribution partners to market our products and services;

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• our ability to increase our existing vertical markets, expand into new vertical markets and execute our growth strategy;

• our ability to protect our systems and data from continually evolving cybersecurity risks or other technological risks;

• our ability to protect our systems and data from continually evolving cybersecurity risks or other technological risks, including the impact of any cybersecurity incidents or security breaches;

• our ability to successfully identify acquisition targets, complete those acquisitions and effectively integrate those acquisitions into our services;

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• risks related to laws, regulations and industry standards;

• our ability to comply with complex laws and regulations applicable to the healthcare industry or to adjust our operations in response to changing laws and regulations;

• the impact of government investigations, claims, and litigation;

• the effects of health reform initiatives;

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

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

COVID-19 Recent Developments

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout the United States and other parts of the world.

The spread of COVID-19 and its variant strains has brought about many precautions at the state and local government levels to mitigate the spread of the virus, including the closure of local government facilities and parks, schools, restaurants, many businesses and other locations of public assembly.

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

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

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

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

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

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

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

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

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

The spread of COVID-19 and its variant strains brought about many precautions at the state and local government levels to mitigate the spread of the virus, including the closure of local government facilities and parks, schools, restaurants, many businesses and other locations of public assembly.

Throughout fiscal years 2020, 2021 and 2022, governments have imposed and reimposed restrictions in response to increased transmission rates of COVID-19 and eased such restrictions once the transmission rates declined across multiple cycles.

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

The economic impact of these conditions materially impacted our business.

Our payment volume fluctuated as a result of the impact of the COVID-19 pandemic.

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

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

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

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

A portion of those furloughed have since returned to work.

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

Our top priority is to protect our employees and their families, as well as our vendors and clients.

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

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

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

At December 31, 2021, we had $3.4 million of cash and cash equivalents and $115.5 million of available capacity under our Senior Secured Credit Facility subject to our financial covenants.

As of December 31, 2021, we were in compliance with these covenants with a consolidated interest coverage ratio, total leverage ratio and consolidated senior leverage ratio of 9.18x, 3.82x and 2.18x, respectively.

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

Public Equity Offering

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

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

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

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

indebtedness.

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

Exchangeable Notes Offering

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

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

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.

The Exchangeable Notes mature on February 15, 2025, unless earlier exchanged, redeemed or repurchased.

We received approximately $132.8 million in net proceeds from the sale of the Exchangeable Notes, as determined by deducting estimated offering expenses paid to third-parties from the aggregate principal amount.

i3 Verticals, LLC used a portion of the net proceeds of the Exchangeable Notes offering to pay down outstanding borrowings under the Senior Secured Credit Facility in connection with the effectiveness of the operative provisions of the Amendment and to pay the cost of the note hedge transactions.

For additional information, see Note 5.

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

Acquisitions during the nine months ended June 30, 2021

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

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

Acquisitions during the three months ended December 31, 2021

We completed the acquisition of substantially all of the assets of two businesses to expand our software offerings, in the public sector and healthcare verticals.

Total purchase consideration was $100.5 million, including $95.0 million in cash on hand and proceeds from the Company's revolving credit facility, and $5.5 million in contingent consideration.

Acquisitions during the three months ended December 31, 2020

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

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

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

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

During the nine months ended June 30, 2021, we also completed the acquisition of six other businesses to expand the Company’s software offerings in the public sector and Healthcare vertical markets, and to add proprietary technology that will augment the Company’s existing platform across several verticals.

Total purchase consideration was $65.4 million, including $57.0 million in cash consideration, funded by proceeds from our revolving line of credit, and $8.4 million of contingent consideration.

Acquisitions during the nine months ended June 30, 2020

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

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

During the three months ended December 31, 2020, we also completed the acquisition of three other businesses to expand the Company’s software offerings in the public sector and healthcare vertical markets, and to add proprietary technology that will augment the Company’s existing platform across several verticals.

Total purchase consideration was $22.5 million, including $19.6 million in cash and revolving line of credit proceeds and $2.9 million of contingent consideration.

Our Revenue and Expenses

We generate revenue primarily from volume-based payment processing fees (“discount fees”), and to a lesser extent, software licensing subscriptions, ongoing support and other POS-related solutions that we provide to our clients directly and through our distribution partners.

We generate revenue from software licensing subscriptions, ongoing software support, volume-based payment processing fees (“discount fees”) and POS-related solutions that we provide to our clients directly and through our distribution partners.

Volume-based fees represent a percentage of the dollar amount of each credit or debit transaction processed.

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

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

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

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

Key Operating Metrics

We evaluate our performance through key operating metrics, including:

• annualized recurring revenue ("ARR");

• the dollar volume of payments our clients process through us (“payment volume”);

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• period-to-period payment volume attrition.

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

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

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

ARR is the annualized revenue derived from software-as-a-service (“SaaS”) arrangements, software monetized with transaction-based fees, software maintenance, recurring software-based services, payments revenue and other recurring revenue sources within the quarter.

This excludes contracts that are not recurring or are one-time in nature.

We focus on ARR because it helps us to assess the health and trajectory of our business.

ARR does not have a standardized definition and is therefore unlikely to be comparable to similarly titled measures presented by other companies.

It should be reviewed independently of revenue and it is not a forecast.

The active contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our customers.

ARR for the three months ended December 31, 2021 and 2020 was $240.4 million and $157.5 million, respectively, representing a period-to-period growth rate of 52.7%.

Our payment volume for the three months ended December 31, 2021 and 2020 was $5.3 billion and $3.8 billion, respectively, representing a period-to-period growth rate of 39.7%.

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

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

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

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

Integrated payments grew to 61% of our payment volume for the three months ended December 31, 2021 from 56% for the three months ended December 31, 2020.

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

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

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

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

Results of Operations

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

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

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

Three months ended June 30, Change

(in thousands) 2021 2020 Amount %

Three months ended December 31, Change

(in thousands) 2021 2020 (1)

Revenue $ 73,939 $ 44,621 $ 29,318 65.7 %

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Depreciation and amortization 6,870 5,092 1,778 34.9 %

Change in fair value of contingent consideration 3,609 (1,473) 5,082 n/m

Change in fair value of contingent consideration 4,927 1,904 3,023 158.8 %

Total operating expenses 74,694 45,624 29,070 63.7 %

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

Other expenses

Loss from operations (755) (1,003) 248 (24.7) %

Interest expense, net 3,154 2,029 1,125 55.4 %

Other expenses — 829 (829) n/m

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

Loss before income taxes (3,909) (3,032) (877) 28.9 %

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

Benefit from income taxes (228) (10) (218) 21.8

Net loss (3,681) (3,022) (659) 21.8 %

Net loss attributable to non-controlling interest (1,153) (1,024) (129) 12.6 %

Net income attributable to i3 Verticals, Inc.

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

Net loss attributable to i3 Verticals, Inc.

$ (2,528) $ (1,998) $ (530) 26.5 %

n/m = not meaningful

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

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

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

Revenue related to a subset of merchant contracts purchased in 2014 and 2017 (“Purchased Portfolios”), which have a higher rate of revenue attrition and payment volume attrition than the rest of our business, decreased $0.1 million, or 5.4%, to $0.8 million for the three months ended June 30, 2021 from $0.9 million for the three months ended June 30, 2020.

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

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

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

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

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

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

__________________________

Effective October 1, 2020, the Company's financial statements are presented in accordance with ASU 2021-08, Accounting Standards Codification Topic 805, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers .

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

Revenue increased $29.3 million, or 65.7%, to $73.9 million for the three months ended December 31, 2021 from $44.6 million for the three months ended December 31, 2020.

This increase was principally driven by incremental revenue from acquisitions of $22.2 million, net of intercompany eliminations.

Revenue from existing businesses contributed an additional $7.1 million of revenue, primarily due to an increase in payment volume from new and existing customers, and growth in software and related services revenues in our public sector vertical.

Revenue within Proprietary Software and Payments increased $24.8 million, or 123.9%, to $44.8 million for the three months ended December 31, 2021 from $20.0 million for the three months ended December 31, 2020.

The increase was principally driven by growth in software and related services revenues in our public sector and healthcare verticals.

Revenue within Merchant Services increased $4.1 million, or 16.4%, to $29.2 million for the three months ended December 31, 2021 from $25.1 million for the three months ended December 31, 2020.

Payment volume from new and existing customers increased $1.2 billion, or 34.6%, to $4.8 billion for the three months ended December 31, 2021 from $3.6 billion for the three months ended December 31, 2020.

Other Costs of Services

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

Other costs of services increased $2.8 million, or 20.8%, to $16.5 million for the three months ended December 31, 2021 from $13.7 million for the three months ended December 31, 2020.

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

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

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

Other costs of services within Merchant Services increased $2.6 million, or 24.0%, to $13.4 million for the three months ended December 31, 2021 from $10.8 million for the three months ended December 31, 2020.

Other costs of services within Proprietary Software and Payments decreased $0.2 million, or 5.4%, to $3.1 million for the three months ended December 31, 2021 from $3.3 million for the three months ended December 31, 2020.

Selling, General and Administrative Expenses

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

Selling, general and administrative expenses increased $21.4 million, or 85.8%, to $46.4 million for the three months ended December 31, 2021 from $25.0 million for the three months ended December 31, 2020.

This increase was primarily driven by a $18.6 million increase in employment expenses, primarily resulting from an increase in headcount that resulted from acquisitions and an increase in stock compensation expense.

Depreciation and Amortization

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

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

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

Change in Fair Value of Contingent Consideration

Change in fair value of contingent consideration to be paid in connection with acquisitions was a charge of $3.6 million for the three months ended June 30, 2021 primarily due to the performance of some of our acquisitions exceeding our expectations.

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

Interest Expense, net

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

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

Other Expense

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

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

Benefit from Income Taxes

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

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

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

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

i3 Verticals, Inc.

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

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

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

Nine months ended June 30, Change

(in thousands) 2021 2020 Amount %

Revenue $ 153,140 $ 111,862 $ 41,278 36.9 %

Operating expenses

Other costs of services 41,044 34,874 6,170 17.7 %

Selling, general and administrative 92,769 58,206 34,563 59.4 %

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

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

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

(Loss) income from operations (4,446) 6,575 (11,021) n/m

Other expenses

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

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

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

(Loss) income before income taxes (9,185) (875) (8,310) n/m

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

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

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

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

$ (5,441) $ 232 $ (5,673) n/m

n/m = not meaningful

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

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

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

In addition, revenue from existing businesses increased $3.9 million, primarily due to an overall increase in consumer spending as a result of recovery from the COVID-19 pandemic.

Revenue related to a subset of merchant contracts purchased in 2014 and 2017 (“Purchased Portfolios”), which have a higher rate of revenue attrition and payment volume attrition than the rest of our business, decreased $0.7 million, or 22.1%, to $2.5 million for the nine months ended June 30, 2021 from $3.2 million for the nine months ended June 30, 2020.

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

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

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

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

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

Other Costs of Services

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

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

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

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

Selling, General and Administrative Expenses

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

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

Increases in insurance and professional services and software and technological services comprised the majority of the remainder of the increase.

The remaining increase was primarily driven by increases in technology expense, rental expense, and travel expenses.

Depreciation and Amortization

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

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

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

Depreciation and amortization increased $1.8 million, or 34.9%, to $6.9 million for the three months ended December 31, 2021 from $5.1 million for the three months ended December 31, 2020.

Amortization expense increased $1.6 million to $6.2 million for the three months ended December 31, 2021 from $4.6 million for the three months ended December 31, 2020 primarily due to acquisitions completed during the 2021 and 2022 fiscal years.

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

Change in Fair Value of Contingent Consideration

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

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

Change in fair value of contingent consideration to be paid in connection with acquisitions was a charge of $4.9 million for the three months ended December 31, 2021 primarily due to the performance of some of our acquisitions exceeding our expectations.

The change in fair value of contingent consideration for the three months ended December 31, 2020 was a charge of $1.9 million.

Interest Expense, net

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

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

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

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

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

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

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

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

Interest expense, net, increased $1.2 million, or 57.9%, to $3.2 million for the three months ended December 31, 2021 from $2.0 million for the three months ended December 31, 2020.

The increase reflects a higher average outstanding debt balance for the three months ended December 31, 2021, as compared to the three months ended December 31, 2020.

Benefit from Income Taxes

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

During the nine months ended June 30, 2020, we had a reduction in the valuation allowance recorded on a deferred tax asset, which resulted in a $2.7 million reduction in the valuation allowance on the deferred tax asset related to our investment in partnership and a corresponding reduction in our income tax expense in the nine months ended June 30, 2021.

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

The benefit from income taxes decreased to a benefit of $0.2 million for the three months ended December 31, 2021 from a benefit of $10 thousand for three months ended December 31, 2020.

Our effective tax rate was 5.8% for the three months ended December 31, 2021.

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

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Revenue in our education vertical fluctuates with the school calendar.

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

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

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

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

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

As of December 31, 2021, we had $3.4 million of cash and cash equivalents and available borrowing capacity of $115.5 million under our Senior Secured Credit Facility, subject to the financial covenants.

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

As of June 30, 2021, we had borrowings outstanding of $117.8 million under the Senior Secured Credit Facility.

As of December 31, 2021, we had borrowings outstanding of $159.5 million under the Senior Secured Credit Facility.

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

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

Our liquidity profile reflects our completed offering in February 2020 of an aggregate principal amount of $138.0 million in 1.0% Exchangeable Senior Notes due 2025, with substantially all the proceeds being used to pay down outstanding borrowings under our Senior Secured Credit Facility, as well as our September 2020 Public Offering as described under the heading "Follow-On Offering".

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

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

Nine Months Ended June 30, 2021 and 2020

Nine months ended June 30,

Three Months Ended December 31, 2021 and 2020

Three months ended December 31,

2021 2020 (1)

(in thousands)

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Net cash provided by financing activities $ 49,223 $ 48,222

__________________________

The prior period amounts included in the statement of cash flows have been updated to correct settlement assets as restricted cash, which were previously reported as cash flows used in operating activities.

These adjustments reflect an increase in prior year cash flows provided by operating activities of $84 thousand and a corresponding increase in cash, cash equivalents, and restricted cash at the end of the period.

Cash Flow from Operating Activities

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

While our net income declined from net income of $1.0 million for the nine months ended June 30, 2020 to a net loss of $8.8 million for the nine months ended June 30, 2021, most of this reduction was driven by non-cash expenses that do not impact cash flows from operating activities.

The primary driver of the increase in cash provided by operating activities was increases in operating assets and liabilities of $15.7 million, which are impacted by the timing of collections and payments.

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

Net cash provided by operating activities increased $9.9 million to $21.9 million for the three months ended December 31, 2021 from $12.0 million for the three months ended December 31, 2020.

Our net loss declined from a net loss of $3.0 million for the three months ended December 31, 2020 to a net loss of $3.7 million for the three months ended December 31, 2021, most of this reduction was driven by non-cash expenses that do not impact cash flows from operating activities.

The primary driver of the increase in cash provided by operating activities was an increase in equity-based compensation of $3.2 million and an increase in non-cash contingent consideration of $3.0 million.

Other changes include increases in operating assets and liabilities of $2.1 million, which are impacted by the timing of collections and payments and an increase in depreciation and amortization of $1.8 million for the three months ended December 31, 2021 compared to the three months ended December 31, 2020.

Cash Flow from Investing Activities

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

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

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

Net cash used in investing activities increased $1.1 million to $62.4 million for the three months ended December 31, 2021 from $61.3 million for the three months ended December 31, 2020.

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

For the three months ended December 31, 2021, we used $60.0 million of cash for acquisitions, net of cash acquired compared to $59.6 million for the three months ended December 31, 2020.

Additionally, expenditures for capitalized software increased $0.8 million for the three months ended December 31, 2021.

Cash Flow from Financing Activities

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

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

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

Net cash provided by financing activities increased $1.0 million to $49.2 million for the three months ended December 31, 2021 from $48.2 million for the three months ended December 31, 2020.

The increase in net cash provided by financing activities was primarily the result of an increase in proceeds from the revolving credit facility of $16.8 million for three months ended December 31, 2021 from the three months ended December 31, 2020.

These increases in cash provided by financing activities were partially offset by an increase in payments on the revolving credit facility of $11.0 million and an increase in cash paid for contingent consideration up to our original estimates of $4.5 million for the three months ended December 31, 2021 from the three months ended December 31, 2020.

Senior Secured Credit Facility

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The Senior Secured Credit Facility consists of a $275.0 million revolving credit facility, together with an option to increase the revolving credit facility and/or obtain incremental term loans in an additional principal amount of up to $50.0 million in the aggregate (subject to the receipt of additional commitments for any such incremental loan amounts).

The Senior Secured Credit Facility accrues interest at 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.

The Senior Secured Credit Facility accrues interest at LIBOR (based upon an interest period of one, two, three or six months or, under some circumstances, up to twelve months) plus an applicable margin of 2.25% to 3.25% (3.25% as of December 31, 2021), or the base rate (defined as the highest of (x) the Bank of America prime rate, (y) the federal funds rate plus 0.50% and (z) LIBOR plus 1.00%), plus an applicable margin of 0.25% to 1.25% (1.25% as of December 31, 2021), in each case depending upon the consolidated total leverage ratio, as defined in the agreement.

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

Additionally, the Senior Secured Credit Facility requires us to pay unused commitment fees of 0.15% to 0.30% (0.30% as of 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.

Additionally, the Senior Secured Credit Facility requires us to pay unused commitment fees of 0.15% to 0.30% (0.30% as of December 31, 2021) on any undrawn amounts under the revolving credit facility and letter of credit fees of up to 3.25% on the maximum amount available to be drawn under each letter of credit issued under the agreement.

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

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(i) a minimum consolidated interest coverage ratio of 3.00 to 1.00, (ii) a maximum total leverage ratio of 5.00 to 1.00, provided, that for each of the four fiscal quarters immediately following a qualified acquisition (each a “Leverage Increase Period”), the required ratio set forth above may be increased by up to 0.25, subject to certain limitations and (iii) a maximum consolidated senior secured leverage ratio of 3.25 to 1.00, provided, that for each Leverage Increase Period, the consolidated senior leverage ratio may be increased by up to 0.25, subject to certain limitations.

As of June 30, 2021, we were in compliance with these covenants, and there was $157.2 million available for borrowing under the revolving credit facility, subject to the financial covenants.

As of December 31, 2021, we were in compliance with these covenants, and there was $115.5 million available for borrowing under the revolving credit facility, subject to the financial covenants.

The Senior Secured Credit Facility is secured by substantially all of our assets.

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

Follow-on Offering

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

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

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

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

Exchangeable Notes

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Contractual Obligations

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

At-the-Market Program

On August 20, 2021, we entered into an at-the-market offering sales agreement with Raymond James & Associates, Inc., Morgan Stanley & Co.

LLC and BTIG, LLC (each a “Sales Agent”), as further amended on November 22, 2021, under which we may issue and sell, from time to time and through the Sales Agents, shares of our Class A common stock having an aggregate offering price of up to $125.0 million (the “ATM Program”).

As of the date of this report, we have not sold any shares of Class A common stock under the ATM Program.

Material Cash Requirements

The following table summarizes our material cash requirements as of December 31, 2021 related to leases and borrowings:

Payments Due by Period

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Facility leases 24,711 5,828 9,466 6,414 3,003

Loan to third party sales organization (2)

750 750 — — —

Senior Secured Credit Facility and related interest (2)

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

We have committed to a loan to a third party sales organization in multiple increments, contingent upon the third party sales organization's achievement of certain financial metrics.

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

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

We calculated interest payments through the maturity of our Exchangeable Notes by applying the coupon interest rate of 1.0% on the principal balance as of June 30, 2021 of $117.0 million.

We estimated interest payments through the maturity of our Senior Secured Credit Facility by applying the interest rate of 3.47% in effect on the outstanding balance as of December 31, 2021, plus the unused fee rate of 0.30% in effect as of December 31, 2021.

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

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

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

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

The amounts recorded as of June 30, 2021, approximate the current estimate of expected tax savings and are subject to change after the filing of the Company’s U.S.

As of December 31, 2021, the total amount due under the Tax Receivable Agreement was $39.2 million, and payments to the Continuing Equity Owners related to exchanges through December 31, 2021 will range from $0 to $3.2 million per year and are expected to be paid over the next 26 years.

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

federal and state income tax returns.

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

As of June 30, 2021, there have been no significant changes to our critical accounting estimates disclosed in the Form 10-K filed with the SEC on November 23, 2020, except regarding the adoption of ASC 842 on October 1, 2020, as described in Note 2 to our condensed consolidated financial statements.

As of December 31, 2021, there have been no significant changes to our critical accounting estimates disclosed in the Form 10-K filed with the SEC on November 22, 2021.

Recently Issued Accounting Pronouncements

As of June 30, 2021, there have been no significant changes to our recently issued accounting pronouncements disclosed in the Form 10-K filed with the SEC on November 23, 2020, except as described in Note 2 to our condensed consolidated financial statements.

As of December 31, 2021, there have been no significant changes to our recently issued accounting pronouncements disclosed in the Form 10-K filed with the SEC on November 22, 2021, except as described in Note 2 to our condensed consolidated financial statements.

Off-Balance Sheet Arrangements

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

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis