What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-09 compared with 2022-05-10 · 121 added, 130 removed, 263 unchanged (49% of the section changed)

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

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

• our ability to retain customers;

• our ability to successfully manage our intellectual property;

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Executive Overview

Recognizing the convergence of software and payments, i3 Verticals was founded in 2012 with the purpose of delivering seamlessly integrated software and payment solutions to SMBs and organizations in strategic vertical markets.

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

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

The Company delivers seamless integrated software and services to customers in strategic vertical markets.

Building on its broad suite of software and services solutions, the Company creates and acquires software products to serve the specific needs of its customers.

The Company's primary strategic verticals are Public Sector (including Education) and Healthcare.

COVID-19 Update

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.

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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 COVID-19 pandemic has caused and may continue to cause significant disruptions to businesses and macroeconomic conditions in the United States and globally.

The economic impact of these conditions materially impacted our business.

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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.

At March 31, 2022, we had $6.3 million of cash and cash equivalents and $86.7 million of available capacity under our Senior Secured Credit Facility subject to our financial covenants.

As of March 31, 2022, we were in compliance with these covenants with a consolidated interest coverage ratio, total leverage ratio and consolidated senior leverage ratio of 8.66x, 3.89x and 2.37x, respectively.

At June 30, 2022, we had $9.0 million of cash and cash equivalents and $67.6 million of available capacity under our Senior Secured Credit Facility subject to our financial covenants.

As of June 30, 2022, we were in compliance with these covenants with a consolidated interest coverage ratio, total leverage ratio and consolidated senior leverage ratio of 14.73x, 4.00x and 2.51x, respectively.

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

Recent acquisitions

Subsequent to March 31, 2022, we completed the acquisition of one business which further strengthens our focus in our healthcare vertical.

Total purchase consideration, which includes cash funded by proceeds from our revolving line of credit, and contingent consideration, is still being valued but is expected to be less than $10.0 million.

Acquisitions during the six months ended March 31, 2022

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.

Acquisitions during the nine months ended June 30, 2022

During the nine months ended June 30, 2022, we completed the acquisition of three businesses to expand our software offerings in the Public Sector and Healthcare verticals.

Total purchase consideration was $107.7 million, including $101.4 million in cash on hand and proceeds from the Company's revolving credit facility, and $6.3 million in contingent consideration.

Acquisitions during the six months ended March 31, 2021

Acquisitions during the nine months ended June 30, 2021

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

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

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

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

During the six months ended March 31, 2021, we also completed the acquisition of three other businesses to expand the Company’s software offerings in the public sector and healthcare vertical markets, and to add proprietary technology that will augment the Company’s existing platform across several verticals.

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

Total purchase consideration was $65.5 million, including $57.0 million in cash and revolving line of credit proceeds and $8.5 million of contingent consideration.

Our Revenue and Expenses

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.

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 customers 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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Other costs of services include costs directly attributable to processing and bank sponsorship costs.

These also include related costs such as residual payments to our distribution partners, which are based on a percentage of the net revenues (revenue less interchange and network fees) generated from client referrals.

Losses resulting from excessive chargebacks against a client are included in other cost of services.

Losses resulting from excessive chargebacks against a customer are included in other cost of services.

The cost of equipment sold is also included in cost of services.

Interchange and other costs of services are recognized at the time the client’s transactions are processed.

Interchange and other costs of services are recognized at the time the customer’s transactions are processed.

Selling, general and administrative .

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Merchant Services

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

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

Our Merchant Services segment provides comprehensive payment solutions.

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

Proprietary Software and Payments

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

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

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

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

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

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

Key Operating Metrics

We evaluate our performance through key operating metrics, including:

Key Performance Indicators

We evaluate our performance through key performance indicators, including:

• annualized recurring revenue ("ARR");

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

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

• the portion of our payment volume that is produced by integrated transactions;

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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 March 31, 2022 and 2021 was $254.5 million and $173.3 million, respectively, representing a period-to-period growth rate of 46.8%.

Our payment volume for the three months ended March 31, 2022 and 2021 was $5.3 billion and $4.3 billion, respectively, representing a period-to-period growth rate of 25.2%.

Our payment volume for the six months ended March 31, 2022 and 2021 was $10.6 billion and $8.1 billion, respectively, representing a period-to-period growth rate of 32.0%.

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.

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

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

ARR for the three months ended June 30, 2022 and 2021 was $266.7 million and $204.9 million, respectively, representing a period-to-period growth rate of 30.2%.

Our payment volume for the three months ended June 30, 2022 and 2021 was $5.9 billion and $5.1 billion, respectively, representing a period-to-period growth rate of 15.2%.

Our payment volume for the nine months ended June 30, 2022 and 2021 was $16.6 billion and $13.2 billion, respectively, representing a period-to-period growth rate of 25.5%.

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

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

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

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

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

Integrated payments grew to 62% and 59% of our payment volume for the three months ended March 31, 2022 and 2021, respectively.

Integrated payment grew to 62% and 57% of our payment volume for the six months ended March 31, 2022 and 2021, respectively.

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

We exclude from our calculations payment volume from new clients added during the period.

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

During the six months ended March 31, 2022, our average net volume attrition per month remained below 2%.

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

Integrated payments grew to 62% from 60% of our payment volume for the three months ended June 30, 2022 and 2021, respectively.

Integrated payments grew to 62% from 58% of our payment volume for the nine months ended June 30, 2022 and 2021, respectively.

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

We exclude from our calculations payment volume from new customers added during the period.

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

During the nine months ended June 30, 2022, our average net volume attrition per month remained below 2%.

Results of Operations

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

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

Three months ended March 31, Change

Three months ended June 30, Change

(in thousands) 2022 2021 (1)

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Total operating expenses 83,284 63,964 19,320 30.2 %

(Loss) income from operations (6,177) 1,199 (7,376) n/m

Loss from operations (2,731) (835) (1,896) 227.1 %

Interest expense, net 3,767 2,704 1,063 39.3 %

Other income — (2,353) 2,353 (100.0) %

Total other expenses 3,377 5 3,372 67,440.0 %

(Loss) income before income taxes (9,554) 1,194 (10,748) n/m

Provision for (benefit from) income taxes 884 (136) 1,020 n/m

Net (loss) income (10,438) 1,330 (11,768) n/m

Net (loss) income attributable to non-controlling interest (3,065) 27 (3,092) n/m

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

$ (7,373) $ 1,303 $ (8,676) n/m

Loss before income taxes (6,498) (3,539) (2,959) 83.6 %

(Benefit from) provision for income taxes (1,810) 662 (2,472) n/m

Net loss (4,688) (4,201) (487) 11.6 %

Net loss attributable to non-controlling interest (960) (921) (39) 4.2 %

Net loss attributable to i3 Verticals, Inc.

$ (3,728) $ (3,280) $ (448) 13.7 %

n/m = not meaningful

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

Revenue increased $28.9 million, or 58.8%, to $78.1 million for the three months ended March 31, 2022 from $49.2 million for the three months ended March 31, 2021.

Revenue increased $17.4 million, or 27.6%, to $80.6 million for the three months ended June 30, 2022 from $63.1 million for the three months ended June 30, 2021.

This increase was principally driven by incremental revenue from acquisitions of $11.4 million, net of intercompany eliminations.

Revenue from existing businesses grew, primarily due to growth in software and related services revenues and in our public sector vertical and an increase in payment volume from new and existing customers.

Revenue within Proprietary Software and Payments increased $25.2 million, or 106.0%, to $49.0 million for the three months ended March 31, 2022 from $23.8 million for the three months ended March 31, 2021.

In addition to our growth through acquisitions, revenue from existing businesses grew, resulting from an increase in payment volume from new and existing customers across the Company and growth in software and related services revenues, primarily in our Public Sector vertical.

Revenue within Proprietary Software and Payments increased $14.1 million, or 41.8%, to $47.8 million for the three months ended June 30, 2022 from $33.7 million for the three months ended June 30, 2021.

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 $3.1 million, or 11.8%, to $29.2 million for the three months ended March 31, 2022 from $26.1 million for the three months ended March 31, 2021.

Payment volume from new and existing customers increased $1.0 billion, or 25.8%, to $4.8 billion for the three months ended March 31, 2022 from $3.8 billion for the three months ended March 31, 2021.

Revenue within Merchant Services increased $2.8 million, or 9.2%, to $32.7 million for the three months ended June 30, 2022 from $30.0 million for the three months ended June 30, 2021.

Payment volume from new and existing customers increased $0.6 billion, or 13.3%, to $5.4 billion for the three months ended June 30, 2022 from $4.8 billion for the three months ended June 30, 2021.

Other Costs of Services

Other costs of services increased $5.3 million, or 47.0%, to $16.6 million for the three months ended March 31, 2022 from $11.3 million for the three months ended March 31, 2021.

This increase was primarily driven by an increase in other cost of services within the Proprietary Software and Payments segment driven by the increase in payment volume.

Other costs of services within Merchant Services increased $1.7 million, or 14.8%, to $13.5 million for the three months ended March 31, 2022 from $11.8 million for the three months ended March 31, 2021.

Other costs of services within Proprietary Software and Payments increased $2.9 million, or 1,387.6%, to $3.1 million for the three months ended March 31, 2022 from $0.2 million for the three months ended March 31, 2021.

Other costs of services increased $3.7 million, or 22.9%, to $19.7 million for the three months ended June 30, 2022 from $16.1 million for the three months ended June 30, 2021.

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 $2.1 million, or 14.8%, to $16.3 million for the three months ended June 30, 2022 from $14.2 million for the three months ended June 30, 2021, driven primarily by the growth in payment volume.

Other costs of services within Proprietary Software and Payments increased $1.1 million, or 44.2%, to $3.5 million for the three months ended June 30, 2022 from $2.4 million for the three months ended June 30, 2021, driven primarily by acquisitions.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $18.2 million, or 59.7%, to $48.7 million for the three months ended March 31, 2022 from $30.5 million for the three months ended March 31, 2021.

Selling, general and administrative expenses increased $10.5 million, or 28.1%, to $47.8 million for the three months ended June 30, 2022 from $37.3 million for the three months ended June 30, 2021.

This increase was primarily driven by a $8.5 million increase in employment expenses, primarily resulting from an increase in headcount that resulted from acquisitions and an increase in stock compensation expense.

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

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

Depreciation and Amortization

Depreciation and amortization increased $1.5 million, or 26.4%, to $7.4 million for the three months ended March 31, 2022 from $5.9 million for the three months ended March 31, 2021.

Amortization expense increased $1.5 million to $6.8 million for the three months ended March 31, 2022 from $5.3 million for the three months ended March 31, 2021 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 March 31, 2022 from $0.6 million for the three months ended March 31, 2021.

Depreciation and amortization increased $0.5 million, or 7.3%, to $7.5 million for the three months ended June 30, 2022 from $7.0 million for the three months ended June 30, 2021.

Amortization expense increased $0.4 million to $6.9 million for the three months ended June 30, 2022 from $6.4 million for the three months ended June 30, 2021 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 June 30, 2022 from $0.6 million for the three months ended June 30, 2021.

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 $11.5 million for the three months ended March 31, 2022 primarily due to the performance of some of our acquisitions exceeding our expectations.

The change in fair value of contingent consideration for the three months ended March 31, 2021 was a charge of $0.3 million.

Change in fair value of contingent consideration to be paid in connection with acquisitions was a charge of $8.3 million for the three months ended June 30, 2022 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, 2021 was a charge of $3.6 million.

Interest Expense, net

Interest expense, net, increased $1.0 million, or 43.2%, to $3.4 million for the three months ended March 31, 2022 from $2.4 million for the three months ended March 31, 2021.

The increase reflects a higher average outstanding debt balance for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021.

There was no other income for the three months ended March 31, 2022.

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

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

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

Interest expense, net, increased $1.1 million, or 39.3%, to $3.8 million for the three months ended June 30, 2022 from $2.7 million for the three months ended June 30, 2021.

The increase reflects a higher average interest rate and a higher average outstanding debt balance for the three months ended June 30, 2022, as compared to the three months ended June 30, 2021.

Provision for (Benefit from) Income Taxes

The provision for income taxes increased to a provision for $0.9 million for the three months ended March 31, 2022 from a benefit of $0.1 million for three months ended March 31, 2021.

Our effective tax rate was (9.3)% for the three months ended March 31, 2022.

The provision for income taxes decreased to a benefit of $1.8 million for the three months ended June 30, 2022 from a provision for $0.7 million for three months ended June 30, 2021.

Our effective tax rate was 27.9% for the three months ended June 30, 2022.

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

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

Six months ended March 31, 2022 Compared to Six months ended March 31, 2021

Nine months ended June 30, 2022 Compared to Nine months ended June 30, 2021

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

Six Months Ended March 31, Change

Nine Months Ended June 30, Change

(in thousands) 2022 2021 (1)

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Total operating expenses 242,275 157,586 84,689 53.7 %

(Loss) income from operations (6,932) 196 (7,128) n/m

Loss from operations (9,663) (639) (9,024) 1,412.2 %

Interest expense, net 10,298 7,092 3,206 45.2 %

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Loss before income taxes (19,961) (5,378) (14,583) 271.2 %

Provision for (benefit from) income taxes 656 (146) 802 n/m

(Benefit from) provision for income taxes (1,154) 516 (1,670) n/m

Net loss (18,807) (5,894) (12,913) 219.1 %

Net loss attributable to non-controlling interest (5,178) (1,918) (3,260) 170.0 %

(4,218) (997) (3,221) 323.1 %

Net loss attributable to i3 Verticals, Inc.

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

Revenue increased $58.2 million, or 62.1%, to $152.1 million for the six months ended March 31, 2022 from $93.8 million for the six months ended March 31, 2021.

Revenue increased $75.7 million, or 48.2%, to $232.6 million for the nine months ended June 30, 2022 from $156.9 million for the nine months ended June 30, 2021.

This increase was principally driven by incremental revenue from acquisitions of $52.1 million, net of intercompany eliminations.

Revenue from existing businesses grew, primarily due to growth in software and related services revenues in our public sector vertical and an increase in payment volume from new and existing customers.

Revenue within Proprietary Software and Payments increased $50.0 million, or 114.2%, to $93.7 million for the six months ended March 31, 2022 from $43.8 million for the six months ended March 31, 2021.

Revenue within Proprietary Software and Payments increased $64.1 million, or 82.7%, to $141.6 million for the nine months ended June 30, 2022 from $77.5 million for the nine months ended June 30, 2021.

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 $7.2 million, or 14.1%, to $58.4 million for the six months ended March 31, 2022 from $51.2 million for the six months ended March 31, 2021.

Payment volume from new and existing customers increased $2.2 billion, or 30.0%, to $9.6 billion for the six months ended March 31, 2022 from $7,398.8 million for the six months ended March 31, 2021.

Revenue within Merchant Services increased $9.9 million, or 12.3%, to $91.1 million for the nine months ended June 30, 2022 from $81.1 million for the nine months ended June 30, 2021.

Payment volume from new and existing customers increased $2.9 billion, or 23.5%, to $15.0 billion for the nine months ended June 30, 2022 from $12.2 billion for the nine months ended June 30, 2021.

Other Costs of Services

Other costs of services increased $8.2 million, or 32.7%, to $33.1 million for the six months ended March 31, 2022 from $25.0 million for the six months ended March 31,2021.

Other costs of services increased $11.8 million, or 28.9%, to $52.9 million for the nine months ended June 30, 2022 from $41.0 million for the nine months ended June 30, 2021.

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 $4.4 million, or 19.4%, to $27.0 million for the six months ended March 31, 2022 from $22.6 million for the six months ended March 31, 2021.

Other costs of services within Proprietary Software and Payments increased $2.7 million, or 78.9%, to $6.2 million for the six months ended March 31, 2022 from $3.5 million for the six months ended March 31, 2021.

Other costs of services within Merchant Services increased $6.4 million, or 17.5%, to $43.3 million for the nine months ended June 30, 2022 from $36.8 million for the nine months ended June 30, 2021, driven primarily by the growth in payment volume.

Other costs of services within Proprietary Software and Payments increased $3.8 million, or 64.7%, to $9.7 million for the nine months ended June 30, 2022 from $5.9 million for the nine months ended June 30, 2021, driven primarily by acquisitions.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $39.6 million, or 71.4%, to $95.1 million for the six months ended March 31, 2022 from $55.5 million for the six months ended March 31, 2021.

Selling, general and administrative expenses increased $50.1 million, or 54.0%, to $142.9 million for the nine months ended June 30, 2022 from $92.8 million for the nine months ended June 30, 2021.

This increase was primarily driven by a $42.7 million increase in employment expenses, primarily resulting from an increase in headcount that resulted from acquisitions and an increase in stock compensation expense.

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

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

Depreciation and Amortization

Depreciation and amortization increased $3.4 million, or 30.8%, to $14.3 million for the six months ended March 31, 2022 from $10.9 million for the six months ended March 31, 2021.

Amortization expense increased $3.2 million to $13.0 million for the six months ended March 31, 2022 from $9.8 million for the six months ended March 31, 2021 primarily due to acquisitions completed during the 2021 and 2022 fiscal years.

Depreciation expense increased $0.2 million to $1.3 million for the six months ended March 31, 2022 from $1.1 million for the six months ended March 31, 2021.

Depreciation and amortization increased $3.9 million, or 21.7%, to $21.8 million for the nine months ended June 30, 2022 from $17.9 million for the nine months ended June 30, 2021.

Amortization expense increased $3.6 million to $19.9 million for the nine months ended June 30, 2022 from $16.3 million for the nine months ended June 30, 2021 primarily due to acquisitions completed during the 2021 and 2022 fiscal years.

Depreciation expense increased $0.3 million to $1.9 million for the nine months ended June 30, 2022 from $1.7 million for the nine months ended June 30, 2021.

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 $16.4 million for the six months ended March 31, 2022 primarily due to the performance of some of our acquisitions exceeding our expectations.

The change in fair value of contingent consideration for the six months ended March 31, 2021 was a charge of $2.2 million.

Change in fair value of contingent consideration to be paid in connection with acquisitions was a charge of $24.7 million for the nine months ended June 30, 2022 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, 2021 was a charge of $5.8 million.

Interest Expense, net

Interest expense, net, increased $2.1 million, or 48.9%, to $6.5 million for the six months ended March 31, 2022 from $4.4 million for the six months ended March 31, 2021.

The increase reflects a higher average outstanding debt balance for the six months ended March 31, 2022, as compared to the six months ended March 31, 2021.

There was no other income for the six months ended March 31, 2022.

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

Interest expense, net, increased $3.2 million, or 45.2%, to $10.3 million for the nine months ended June 30, 2022 from $7.1 million for the nine months ended June 30, 2021.

The increase reflects a higher average interest rate and a higher average outstanding debt balance for the nine months ended June 30, 2022, as compared to the nine months ended June 30, 2021.

There was no other income for the nine months ended June 30, 2022.

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

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.

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Provision for (benefit from) Income Taxes

The provision for income taxes increased to a provision for $0.7 million for the six months ended March 31, 2022 from a benefit of $0.1 million for six months ended March 31, 2021.

Our effective tax rate was (5)% for the six months ended March 31, 2022.

The provision for income taxes decreased to a benefit of $1.2 million for the nine months ended June 30, 2022 from a provision for $0.5 million for nine months ended June 30, 2021.

Our effective tax rate was 5.8% for the nine months ended June 30, 2022.

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

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

As of March 31, 2022, we had $6.3 million of cash and cash equivalents and available borrowing capacity of $86.7 million under our Senior Secured Credit Facility, subject to the financial covenants.

As of June 30, 2022, we had $9.0 million of cash and cash equivalents and available borrowing capacity of $67.6 million under our Senior Secured Credit Facility, subject to the financial covenants.

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

As of March 31, 2022, we had borrowings outstanding of $188.3 million under the Senior Secured Credit Facility.

As of June 30, 2022, we had borrowings outstanding of $207.4 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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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.

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.

As of June 30, 2022, the aggregate principal amount outstanding of the Exchangeable Notes was $117.0 million.

We may elect from time to time to purchase our outstanding debt in open market purchases, privately negotiated transactions or otherwise.

Any such debt repurchases will depend

upon prevailing market conditions, our liquidity requirements, contractual restrictions, applicable securities law and other factors.

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

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

Six Months Ended March 31, 2022 and 2021

Six months ended March 31,

Nine Months Ended June 30, 2022 and 2021

Nine months ended June 30,

2022 2021 (1)

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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 $6,056 thousand and a corresponding increase in cash, cash equivalents, and restricted cash at the end of the period.

These adjustments reflect a decrease in prior year cash flows provided by operating activities of $2.0 million and a decrease of $7.0 million in cash outflows for acquisitions of businesses, net of cash and restricted cash acquired within cash flows used in investing activities, resulting in a combined increase of $5.0 million 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 $1.3 million to $31.2 million for the six months ended March 31, 2022 from $29.9 million for the six months ended March 31, 2021.

Our net loss increased from a net loss of $1.7 million for the six months ended March 31, 2021 to a net loss of $14.1 million for the six months ended March 31, 2022, most of this increase in net loss 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 non-cash contingent consideration of $14.2 million and an increase in equity-based compensation of $5.3 million.

Other changes include decreases in operating assets and liabilities of $13.5 million, which are impacted by the timing of collections and payments and an increase in depreciation and amortization of $3.4 million for the six months ended March 31, 2022 compared to the six months ended March 31, 2021.

Net cash provided by operating activities increased $1.8 million to $35.8 million for the nine months ended June 30, 2022 from $34.0 million for the nine months ended June 30, 2021.

Our net loss increased from a net loss of $5.9 million for the nine months ended June 30, 2021 to a net loss of $18.8 million for the nine months ended June 30, 2022.

Most of this increase in net loss was driven by non-cash expenses that do not impact cash flows from operating activities.

The primary drivers of the increase in cash provided by operating activities, despite the increase in net loss, was an increase in non-cash contingent consideration of $18.8 million and an increase in equity-based compensation of $7.0 million, both of which increase the net loss but are not cash expenditures.

Other changes include decreases in operating assets and liabilities of $17.8 million, which are impacted by the timing of collections and payments and an increase in depreciation and amortization of $3.9 million for the nine months ended June 30, 2022 compared to the nine months ended June 30, 2021.

Cash Flow from Investing Activities

Net cash used in investing activities decreased $16.3 million to $99.6 million for the six months ended March 31, 2022 from $115.9 million for the six months ended March 31, 2021.

The largest driver of cash used in investing activities for the six months ended March 31, 2022 was cash used in acquisitions, net of cash acquired.

For the six months ended March 31, 2022, we used $94.3 million of cash for acquisitions, net of cash acquired compared to $112.1 million for the six months ended March 31, 2021.

Additionally, expenditures for capitalized software increased $1.4 million for the six months ended March 31, 2022.

Net cash used in investing activities decreased $40.6 million to $109.4 million for the nine months ended June 30, 2022 from $149.9 million for the nine months ended June 30, 2021.

The largest driver of cash used in investing activities for the nine months ended June 30, 2022 and the nine months ended June 30, 2021 was cash used in acquisitions, net of cash acquired.

For the nine months ended June 30, 2022, we used $100.7 million of cash for acquisitions, net of cash acquired compared to $142.5 million for the nine months ended June 30, 2021.

Additionally, expenditures for purchases of merchant portfolios and residual buyouts decreased $1.5 million for the nine months ended June 30, 2022 compared to the nine months ended June 30, 2021.

These changes in cash used in investing activities were partially offset by an increase in expenditures for capitalized software of $2.7 million for the nine months ended June 30, 2022 compared to the nine months ended June 30, 2021.

Cash Flow from Financing Activities

Net cash provided by financing activities decreased $6.1 million to $77.8 million for the six months ended March 31, 2022 from $83.9 million for the six months ended March 31, 2021.

The decrease in net cash provided by financing activities was primarily the result of an increase in payments on the revolving credit facility of $5.5 million and an increase in cash paid for contingent consideration up to our original estimates of $4.5 million for the six months ended March 31, 2022 from the six months ended March 31, 2021.

These changes in cash provided by financing activities were partially offset by an increase in proceeds from the revolving credit facility of $4.4 million for six months ended March 31, 2022 from the six months ended March 31, 2021.

Net cash provided by financing activities decreased $29.8 million to $85.7 million for the nine months ended June 30, 2022 from $115.5 million for the nine months ended June 30, 2021.

The decrease in net cash provided by financing activities was primarily the result of an increase in payments on the revolving credit facility of $11.2 million, an increase in cash paid for contingent consideration up to our original estimates of $14.5 million and a decrease in proceeds from the revolving credit facility of $3.6 million for the nine months ended June 30, 2022 from the nine months ended June 30, 2021.

Senior Secured Credit Facility

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

The Senior Secured Credit Facility accrues interest at LIBOR (based upon an interest period of one, two, three or six months or, under some circumstances, up to twelve months) plus an applicable margin of 2.25% to 3.25% (3.25% as of March 31, 2022), or the base rate (defined as the highest of (x) the Bank of America prime rate, (y) the federal funds rate plus 0.50% and (z) LIBOR plus 1.00%), plus an applicable margin of 0.25% to 1.25% (1.25% as of March 31, 2022), 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 June 30, 2022), 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, 2022), in each case depending upon the consolidated total leverage ratio, as defined in the agreement.

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

Additionally, the Senior Secured Credit Facility requires us to pay unused commitment fees of 0.15% to 0.30% (0.30% as of March 31, 2022) on any undrawn amounts under the revolving credit facility and letter of credit fees of up to 3.25% on the maximum amount available to be drawn under each letter of credit issued under the agreement.

Additionally, the Senior Secured Credit Facility requires us to pay unused commitment fees of 0.15% to 0.30% (0.30% as of June 30, 2022) on any undrawn amounts under the revolving credit facility and letter of credit fees of up to 3.25% on the maximum amount available to be drawn under each letter of credit issued under the agreement.

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

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

As of March 31, 2022, we were in compliance with these covenants, and there was $86.7 million available for borrowing under the revolving credit facility, subject to the financial covenants.

As of June 30, 2022, we were in compliance with these covenants, and there was $67.6 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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Material Cash Requirements

The following table summarizes our material cash requirements as of March 31, 2022 related to leases and borrowings:

The following table summarizes our material cash requirements as of June 30, 2022 related to leases and borrowings:

Payments Due by Period

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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 estimated interest payments through the maturity of our Senior Secured Credit Facility by applying the interest rate of 3.74% in effect on the outstanding balance as of March 31, 2022, plus the unused fee rate of 0.30% in effect as of March 31, 2022.

We calculated interest payments through the maturity of our Exchangeable Notes by applying the coupon interest rate of 1.0% on the principal balance as of March 31, 2022 of $117.0 million.

We estimated interest payments through the maturity of our Senior Secured Credit Facility by applying the interest rate of 4.72% in effect on the outstanding balance as of June 30, 2022, plus the unused fee rate of 0.30% in effect as of June 30, 2022.

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, 2022 of $117.0 million.

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

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

As of March 31, 2022, the total amount due under the Tax Receivable Agreement was $39.5 million, and payments to the Continuing Equity Owners related to exchanges through March 31, 2022 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 March 31, 2022, approximate the current estimate of expected tax savings and are subject to change after the filing of the Company’s U.S.

As of June 30, 2022, the total amount due under the Tax Receivable Agreement was $39.9 million, and payments to the Continuing Equity Owners related to exchanges through June 30, 2022 will range from $0 to $3.2 million per year and are expected to be paid over the next 28 years.

The amounts recorded as of June 30, 2022, approximate the current estimate of expected tax savings and are subject to change after the filing of the Company’s U.S.

federal and state income tax returns.

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

As of March 31, 2022, 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.

As of June 30, 2022, 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.

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