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Item 1. Financial Statements

2023-02-09 compared with 2022-08-09 · 272 added, 512 removed, 694 unchanged (53% of the section changed)

3 unchanged sentences

(In thousands, except share amounts)

June 30, September 30,

December 31, September 30,

Current assets

29 unchanged sentences

Preferred stock, par value $ 0.0001 per share, 10,000,000 shares authorized;

0 shares issued and outstanding as of June 30, 2022 and September 30, 2021

0 shares issued and outstanding as of December 31, 2022 and September 30, 2022

Class A common stock, par value $ 0.0001 per share, 150,000,000 shares authorized;

22,252,640 and 22,026,098 shares issued and outstanding as of June 30, 2022 and September 30, 2021, respectively

23,011,193 and 22,986,448 shares issued and outstanding as of December 31, 2022 and September 30, 2022, respectively

Class B common stock, par value $ 0.0001 per share, 40,000,000 shares authorized;

10,118,142 and 10,229,142 shares issued and outstanding as of June 30, 2022 and September 30, 2021, respectively

10,118,142 and 10,118,142 shares issued and outstanding as of December 31, 2022 and September 30, 2022, respectively

Additional paid-in capital 228,016 241,958

8 unchanged sentences

(In thousands, except share and per share amounts)

Three months ended June 30, Nine months ended June 30,

2022 2021 (1)

Three months ended December 31,

Revenue $ 86,029 $ 73,939

5 unchanged sentences

Total operating expenses 80,191 74,694

Loss from operations ( 2,731 ) ( 835 ) ( 9,663 ) ( 639 )

Income (loss) from operations 5,838 ( 755 )

Interest expense, net 5,490 3,154

1 unchanged sentence

Total other expenses 5,287 3,154

Loss before income taxes ( 6,498 ) ( 3,539 ) ( 19,961 ) ( 5,378 )

(Benefit from) provision for income taxes ( 1,810 ) 662 ( 1,154 ) 516

Net loss ( 4,688 ) ( 4,201 ) ( 18,807 ) ( 5,894 )

Net loss attributable to non-controlling interest ( 960 ) ( 921 ) ( 5,178 ) ( 1,918 )

Income (loss) before income taxes 551 ( 3,909 )

Provision for (benefit from) income taxes 382 ( 228 )

Net income (loss) 169 ( 3,681 )

Net income (loss) attributable to non-controlling interest 409 ( 1,153 )

Net loss attributable to i3 Verticals, Inc.

6 unchanged sentences

Diluted 22,998,608 22,042,801

__________________________

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 and the impacts of adoption on the condensed consolidated statements of operations.

See Notes to the Interim Condensed Consolidated Financial Statements

5 unchanged sentences

Balance at September 30, 2022 22,986,448 $ 2 10,118,142 $ 1 $ 241,958 $ ( 23,582 ) $ 89,309 $ 307,688

Adoption of ASU 2020-06 — — — — ( 23,382 ) 11,449 — ( 11,933 )

Equity-based compensation — — — — 6,846 — — 6,846

Net loss — — — — — ( 2,528 ) ( 1,153 ) ( 3,681 )

Redemption of common units in i3 Verticals, LLC 15,000 — ( 15,000 ) — 123 — ( 123 ) —

Net (loss) income — — — — — ( 240 ) 409 169

Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis — — — — 685 — — 685

2 unchanged sentences

Balance at December 31, 2022 23,011,193 $ 2 10,118,142 $ 1 $ 228,016 $ ( 12,373 ) $ 87,812 $ 303,458

Equity-based compensation — — — — 6,257 — — 6,257

Net loss — — — — — ( 7,373 ) ( 3,065 ) ( 10,438 )

Redemption of common units in i3 Verticals, LLC 40,000 — ( 40,000 ) — 335 — ( 335 ) —

Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis — — — — ( 1,288 ) — — ( 1,288 )

Exercise of equity-based awards 29,365 — — — ( 89 ) — — ( 89 )

Allocation of equity to non-controlling interests — — — — ( 1,618 ) — 1,618 —

Balance at March 31, 2022 22,133,682 2 10,174,142 1 220,201 ( 16,381 ) 83,672 287,495

Equity-based compensation — — — — 6,799 — — 6,799

Net loss — — — — — ( 3,728 ) ( 960 ) ( 4,688 )

Redemption of common units in i3 Verticals, LLC 56,000 — ( 56,000 ) — 460 — ( 460 ) —

Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis — — — — 748 — — 748

Exercise of equity-based awards 62,958 — — — 138 — — 138

Allocation of equity to non-controlling interests — — — — ( 2,077 ) — 2,077 —

Balance at June 30, 2022 22,252,640 $ 2 10,118,142 $ 1 $ 226,269 $ ( 20,109 ) $ 84,329 $ 290,492

See Notes to the Interim Condensed Consolidated Financial Statements

12 unchanged sentences

Balance at December 31, 2021 22,064,317 $ 2 10,214,142 $ 1 $ 216,604 $ ( 9,008 ) $ 85,454 $ 293,053

Equity-based compensation — — — — 4,142 — — 4,142

Net income — — — — — 1,303 27 1,330

Redemption of common units in i3 Verticals, LLC 651,870 — ( 651,870 ) — 4,529 — ( 4,529 ) —

Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis — — — — 617 — — 617

Exercise of equity-based awards 59,745 — — — ( 199 ) — — ( 199 )

Allocation of equity to non-controlling interests — — — — ( 9,769 ) — 9,769 —

Issuance of Class A common stock under the 2020 Inducement Plan 1,202,914 — — — 35,245 — — 35,245

Balance at March 31, 2021 21,919,300 2 10,229,142 1 203,631 ( 2,718 ) 82,656 283,572

Equity-based compensation — — — — 5,111 — — 5,111

Net loss — — — — — ( 3,280 ) ( 921 ) ( 4,201 )

Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis — — — — 28 — — 28

Exercise of equity-based awards 40,759 — — — 287 — — 287

Allocation of equity to non-controlling interests — — — — ( 1,597 ) — 1,597 —

Balance at June 30, 2021 21,960,059 $ 2 10,229,142 $ 1 $ 207,460 $ ( 5,998 ) $ 83,332 $ 284,797

__________________________

See Notes to the Interim Condensed Consolidated Financial Statements

2 unchanged sentences

(In thousands)

Nine months ended June 30,

2022 2021 (1)(2)

Three months ended December 31,

Cash flows from operating activities:

Net loss $ ( 18,807 ) $ ( 5,894 )

Net income (loss) $ 169 $ ( 3,681 )

Adjustments to reconcile net loss to net cash provided by operating activities:

1 unchanged sentence

Equity-based compensation 6,846 6,624

Provision for doubtful accounts 515 129

Amortization of debt discount and issuance costs 361 1,416

Amortization of capitalized customer acquisition costs 532 386

Unrealized gain on investment — ( 2,353 )

(Benefit from) provision for income taxes ( 1,154 ) 517

Provision for (benefit from) income taxes 355 ( 228 )

Non-cash lease expense 1,063 1,205

Increase in non-cash contingent consideration expense from original estimate 1,443 4,927

Other non-cash adjustments to net income 502 283

Changes in operating assets:

16 unchanged sentences

Acquisitions of businesses, net of cash and restricted cash acquired ( 89,497 ) ( 60,000 )

Acquisition of other intangibles ( 11 ) ( 104 )

Loans to third parties ( 30 ) —

Payments for other investing activities ( 802 ) ( 11 )

Proceeds from investments 203 —

Net cash used in investing activities ( 94,530 ) ( 62,353 )

3 unchanged sentences

(In thousands)

Nine months ended June 30,

2022 2021 (1)(2)

Three months ended December 31,

Cash flows from financing activities:

1 unchanged sentence

Payments on revolving credit facility ( 79,025 ) ( 49,900 )

Payments of debt issuance costs ( 87 ) —

Cash paid for contingent consideration ( 1,000 ) ( 6,217 )

8 unchanged sentences

Cash paid for income taxes $ 172 $ 556

__________________________

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 and investing activities.

These adjustments reflect a decrease in prior year cash flows provided by operating activities of $ 2,046 and a decrease of $ 7,009 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 $ 4,963 in cash, cash equivalents, and restricted cash at the end of the period.

The following tables provide reconciliations of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to that shown in the condensed consolidated statements of cash flows:

30 unchanged sentences

As the sole managing member of i3 Verticals, LLC, i3 Verticals, Inc.

consolidates the financial results of i3 Verticals, LLC and reports a non-controlling interest representing the Common Units of i3 Verticals, LLC held by other owners other (the “Continuing Equity Owners”).

consolidates the financial results of i3 Verticals, LLC and reports a non-controlling interest representing the Common Units of i3 Verticals, LLC held by owners other than i3 Verticals, Inc.

(the “Continuing Equity Owners”).

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

2 unchanged sentences

Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for fair presentation of the unaudited condensed consolidated financial statements of the Company and its subsidiaries as of June 30, 2022 and for the three and nine months ended June 30, 2022 and 2021.

The results of operations for the three and nine months ended June 30, 2022 and 2021 are not necessarily indicative of the operating results for the full year.

It is recommended that these interim condensed consolidated financial statements be read in conjunction with the Company's consolidated financial statements and related footnotes for the years ended September 30, 2021 and 2020, included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2021.

In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for fair presentation of the unaudited condensed consolidated financial statements of the Company and its subsidiaries as of December 31, 2022 and for the three months ended December 31, 2022 and 2021.

The results of operations for the three months ended December 31, 2022 and 2021 are not necessarily indicative of the operating results for the full year.

As permitted by the rules and regulations of the SEC, certain information and disclosures otherwise included in the notes to the consolidated financial statements have been condensed or omitted from the summary of significant accounting policies.

The Company believes the disclosures are adequate to make the information presented not misleading.

It is recommended that these interim condensed consolidated financial statements be read in conjunction with the Company's consolidated financial statements and related footnotes for the years ended September 30, 2022 and 2021, included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2022 filed with the SEC on November 18, 2022.

Principles of Consolidation

14 unchanged sentences

With the exception of merchant reserves, settlement assets or settlement obligations are generally collected and paid within one to four days .

Settlement assets and settlement obligations were both $ 6,365 as of June 30, 2022 and $ 4,768 as of September 30, 2021, respectively.

Settlement assets and settlement obligations were both $ 11,786 as of December 31, 2022 and $ 7,540 as of September 30, 2022, respectively.

Inventories consist of point-of-sale equipment to be sold to customers and are stated at the lower of cost, determined on a weighted average or specific basis, or net realizable value.

Inventories were $ 4,087 and $ 2,220 at June 30, 2022 and September 30, 2021, respectively, and are included within prepaid expenses and other current assets on the accompanying condensed consolidated balance sheets.

Inventories were $ 4,960 and $ 4,121 at December 31, 2022 and September 30, 2022, respectively, and are included within prepaid expenses and other current assets on the accompanying condensed consolidated balance sheets.

Business acquisitions have been recorded using the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”), and, accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair value as of the date of acquisition.

2 unchanged sentences

The fair values of trade names and internally-developed software acquired are identified using the Relief from Royalty Method.

The fair value of deferred revenue is identified using the Adjusted Fulfillment Cost Method.

After the purchase price has been allocated, goodwill is recorded to the extent the total consideration paid for the acquisition, including the acquisition date fair value of contingent consideration, if any, exceeds the sum of the fair values of the separately identifiable acquired assets and assumed liabilities.

3 unchanged sentences

The operating results of an acquisition are included in the Company’s condensed consolidated statements of operations from the date of such acquisition.

Acquisitions completed during the nine months ended June 30, 2022 contributed $ 26,049 and $ 3,567 of revenue and net income, respectively, to the Company's condensed consolidated statements of operations for the nine months then ended.

Acquisitions completed during the three months ended December 31, 2022 contributed $ 3,625 and $ 971 of revenue and net income, respectively, to the Company's condensed consolidated statements of operations for the three months then ended.

The Company adopted ASU 2016-02, Leases, on October 1, 2020, using the optional modified retrospective method under which the prior period financial statements were not restated for the new guidance.

i3 VERTICALS, Inc.

1 unchanged sentence

(in thousands, except unit, share and per share amounts)

The Company adopted ASU 2016-02, Leases, (“ASC 842”) on October 1, 2020, using the optional modified retrospective method under which the prior period financial statements were not restated for the new guidance.

The Company elected the accounting policy practical expedients for all classes of underlying assets to (i) combine associated lease and non-lease components in a lease arrangement as a combined lease component and (ii) exclude recording short-term leases as right-of-use assets on the condensed consolidated balance sheets.

elected the accounting policy practical expedients for all classes of underlying assets to (i) combine associated lease and non-lease components in a lease arrangement as a combined lease component and (ii) exclude recording short-term leases as right-of-use assets on the condensed consolidated balance sheets.

At contract inception the Company determines whether an arrangement is, or contains a lease, and for each identified lease, evaluates the classification as operating or financing.

12 unchanged sentences

The Company adopted ASC 606 on October 1, 2019, using the modified retrospective method and applying the standard to all contracts not completed on the date of adoption.

The Company's revenue for the nine months ended June 30, 2022 and 2021 is derived from the following sources:

The Company's revenue for the three months ended December 31, 2022 and 2021 is derived from the following sources:

• Software and related services — Includes sales of software as a service, transaction-based fees, ongoing software maintenance and support, software licenses and other professional services related to our software offerings

48 unchanged sentences

• Other — Includes sales of equipment, non-software related professional services and other revenues.

For the Three Months Ended June 30, 2022

Merchant Services Proprietary Software and Payments Other Total

Software and related services revenue $ 3,349 $ 35,667 $ ( 10 ) $ 39,006

Payments revenue 27,135 9,559 ( 11 ) 36,683

Other revenue 2,230 2,613 21 4,864

Total revenue $ 32,714 $ 47,839 $ — $ 80,553

For the Three Months Ended June 30, 2021 (1)

Merchant Services Proprietary Software and Payments Other Total

Software and related services revenue $ 2,975 $ 23,852 $ ( 8 ) $ 26,819

Payments revenue 24,995 7,770 ( 542 ) 32,223

Other revenue 1,993 2,107 ( 13 ) 4,087

Total revenue $ 29,963 $ 33,729 $ ( 563 ) $ 63,129

__________________________

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except unit, share and per share amounts)

For the Nine Months Ended June 30, 2022

Merchant Services Proprietary Software and Payments Other Total

For the Three Months Ended December 31, 2022

Merchant Services Software and Services Other Total

Software and related services revenue $ 2,979 $ 38,145 $ ( 10 ) $ 41,114

2 unchanged sentences

Total revenue $ 32,834 $ 53,213 $ ( 18 ) $ 86,029

For the Nine Months Ended June 30, 2021 (1)

Merchant Services Proprietary Software and Payments Other Total

For the Three Months Ended December 31, 2021

Merchant Services Software and Services Other Total

Software and related services revenue $ 2,962 $ 33,384 $ ( 8 ) $ 36,338

2 unchanged sentences

Total revenue $ 29,177 $ 44,774 $ ( 12 ) $ 73,939

__________________________

The tables below present a disaggregation of the Company's revenue from contracts with customers by timing of transfer of goods or services by segment.

The Company's revenue included in each category are defined as follows:

• Revenue earned over time — Includes discount fees, gateway fees, sales of SaaS and ongoing support contract revenue.

• Revenue earned at a point in time — Includes fixed service fees, software licenses sold as functional intellectual property, professional services and other equipment.

For the Three Months Ended June 30, 2022

Merchant Services Proprietary Software and Payments Other Total

Revenue earned over time $ 25,643 $ 33,951 $ ( 10 ) $ 59,584

Revenue earned at a point in time 7,071 13,888 10 20,969

Total revenue $ 32,714 $ 47,839 $ — $ 80,553

For the three months ended December 31, 2021, $10,213 was included in revenue earned at a point in time related to professional services or other stand ready contract revenue for fixed service fee arrangements.

These types of revenue are included in revenue earned over time for the three months ended December 31, 2022.The Company's revenue included in each category are defined as follows:

• Revenue earned over time — Includes discount fees, gateway fees, sales of SaaS, ongoing support or other stand-ready obligations and professional services.

• Revenue earned at a point in time — Includes point in time service fees that are not stand-ready obligations, software licenses sold as functional intellectual property and other equipment.

i3 VERTICALS, Inc.

1 unchanged sentence

(in thousands, except unit, share and per share amounts)

For the Three Months Ended June 30, 2021 (1)

Merchant Services Proprietary Software and Payments Other Total

Revenue earned over time $ 22,617 $ 21,638 $ ( 520 ) $ 43,735

Revenue earned at a point in time 7,346 12,091 ( 43 ) 19,394

Total revenue $ 29,963 $ 33,729 $ ( 563 ) $ 63,129

__________________________

For the Nine Months Ended June 30, 2022

Merchant Services Proprietary Software and Payments Other Total

For the Three Months Ended December 31, 2022

Merchant Services Software and Services Other Total

Revenue earned over time $ 27,597 $ 50,441 $ ( 10 ) $ 78,028

1 unchanged sentence

Total revenue $ 32,834 $ 53,213 $ ( 18 ) $ 86,029

For the Nine Months Ended June 30, 2021 (1)

Merchant Services Proprietary Software and Payments Other Total

For the Three Months Ended December 31, 2021

Merchant Services Software and Services Other Total

Revenue earned over time $ 22,734 $ 31,288 $ ( 8 ) $ 54,014

1 unchanged sentence

Total revenue $ 29,177 $ 44,774 $ ( 12 ) $ 73,939

__________________________

Contract Assets

2 unchanged sentences

Unbilled amounts associated with these services are presented as accounts receivable as the Company has an unconditional right to payment for services performed.

As of June 30, 2022 and September 30, 2021, the Company’s contract assets from contracts with customers was $ 6,137 and $ 1,505 , respectively.

As of December 31, 2022 and September 30, 2022, the Company’s contract assets from contracts with customers was $ 11,676 and $ 9,716 , respectively.

Contract Liabilities

4 unchanged sentences

Deferred revenue that is expected to be recognized as revenue within one year is recorded as short-term deferred revenue and the remaining portion is recorded as other long-term liabilities in the condensed consolidated balance sheets.

The terms for

The terms for most of the Company's contracts with a deferred revenue component are one year.

Substantially all of the Company's deferred revenue is anticipated to be recognized within the next year.

i3 VERTICALS, Inc.

1 unchanged sentence

(in thousands, except unit, share and per share amounts)

most of the Company's contracts with a deferred revenue component are one year.

Substantially all of the Company's deferred revenue is anticipated to be recognized within the next year.

The following tables present the changes in deferred revenue as of and for the nine months ended June 30, 2022 and 2021, respectively:

The following tables present the changes in deferred revenue as of and for the three months ended December 31, 2022 and 2021, respectively:

Balance at September 30, 2022

2 unchanged sentences

Balance at December 31, 2022

Deferral of revenue 11,047

Recognition of unearned revenue ( 16,034 )

Balance at March 31, 2022 30,334

Deferral of revenue 8,131

Recognition of unearned revenue ( 15,742 )

Balance at June 30, 2022 $ 22,723

Balance at September 30, 2021

2 unchanged sentences

Balance at December 31, 2021

Deferral of revenue 6,483

Recognition of unearned revenue ( 8,509 )

Balance at March 31, 2021 23,629

Deferral of revenue 11,565

Recognition of unearned revenue ( 14,087 )

Balance at June 30, 2021 $ 21,107

Costs to Obtain and Fulfill a Contract

The Company capitalizes incremental costs to obtain new contracts and contract renewals and amortizes these costs on a straight-line basis as an expense over the benefit period, which is generally the contract term, unless a commensurate payment is not expected at renewal.

As of June 30, 2022 and September 30, 2021 the Company had $ 4,227 and $ 3,851 , respectively, of capitalized contract costs, which relates to commissions paid to employees and agents as well as other incentives given to customers to obtain new sales, included within “Other assets" on the condensed consolidated balance sheets.

The Company recorded expense related to these costs of $ 187 and $ 532 for the three and nine months ended June 30, 2022, respectively and $ 138 and $ 386 for the three and nine months ended June 30, 2021.

As of December 31, 2022 and September 30, 2022 the Company had $ 4,339 and $ 4,185 , respectively, of capitalized contract costs, which relates to commissions paid to employees and agents as well as other incentives given to customers to obtain new sales, included within “Other assets" on the condensed consolidated balance sheets.

The Company recorded expense related to these costs of $ 183 for the three months ended December 31, 2022 and $ 167 for the three months ended December 31, 2021.

The Company expenses sales commissions as incurred for the Company's sales commission plans that are paid on recurring monthly revenues, portfolios of existing customers, or have a substantive stay requirement prior to payment.

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except unit, share and per share amounts)

Other Cost of Services

10 unchanged sentences

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.

Such estimates include, but are not limited to, the value of purchase consideration paid and identifiable assets acquired and assumed in acquisitions, goodwill and intangible asset impairment review, determination of performance obligations for revenue recognition, loss reserves, assumptions used in the calculation of equity-based compensation and in the calculation of income taxes, and certain tax assets and liabilities as well as the related valuation allowances.

Actual results could differ from those estimates.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments—Credit Losses (Topic 326).

The amendments in ASU No.

2016-13 require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.

The Company’s financial assets impacted by this ASU include primarily accounts receivable, settlement processing assets, and certain other receivables.

The Company adopted this ASU on October 1, 2021.

The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In October 2021, the FASB issued ASU No.

2021-08, Business Combinations (Topic 805)—Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.

The amendments in ASU No.

2021-08 address diversity and inconsistency related to the recognition and measurement of contract assets and contract liabilities acquired in a business combination.

The amendments in ASU No.

2021-08 require that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers.

Upon adoption, an acquirer should account for the related revenue contracts of the acquiree as if it has originated the contracts.

For public business entities, the amendments in ASU No.

2021-08 are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

The amendments in ASU No.

2021-08 should be applied prospectively to business combinations occurring on or after the effective date of the amendments.

Early adoption of the amendments is permitted.

An entity that early adopts should apply the amendments (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and (2) prospectively to all business combinations that occur on or after the date of initial application.

The Company has early adopted ASU No.

2021-08 effective October 1, 2020.

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except unit, share and per share amounts)

The adoption of ASU 2021-08 resulted in adjustments to the fair values assigned to goodwill and deferred revenue assumed as of the acquisition dates of acquisitions occurring during the year ended September 30, 2021, and an increase in revenue for the year ended September 30, 2021 due to recognition of revenue earned during the period for deferred revenue contracts acquired in business combinations.

The following tables present the material impacts of adopting ASU 2021-08 on the Company's condensed consolidated balance sheets as of June 30, 2021:

As of June 30, 2021

Excluding impacts of adoption of ASU 2021-08 Adjustment Presentation with adoption of ASU 2021-08

Goodwill $ 284,251 $ 4,795 $ 289,046

Deferred tax asset $ 51,247 $ ( 1,146 ) $ 50,101

Liabilities and equity

Current liabilities

Deferred revenue $ 20,118 $ 989 $ 21,107

Long-term tax receivable agreement obligations $ 39,626 $ ( 9 ) $ 39,617

Stockholders' equity

Additional paid-in-capital $ 207,697 $ ( 237 ) $ 207,460

Accumulated deficit $ ( 7,463 ) $ 1,465 $ ( 5,998 )

Non-controlling interest $ 81,891 $ 1,441 $ 83,332

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except unit, share and per share amounts)

The following tables present the material impacts of adoption of ASU 2021-08 on the Company's condensed consolidated statements of operations for the three and nine months ended June 30, 2021:

Three months ended June 30, 2021

Excluding impacts of adoption of ASU 2021-08 Adjustment Presentation with adoption of ASU 2021-08

Revenue $ 61,964 $ 1,165 $ 63,129

Benefit from income taxes $ ( 110 ) $ 772 $ 662

Net loss $ ( 4,594 ) $ 393 $ ( 4,201 )

Net loss attributable to non-controlling interest $ ( 1,286 ) $ 365 $ ( 921 )

Net loss attributable to i3 Verticals, Inc.

$ ( 3,308 ) $ 28 $ ( 3,280 )

Net loss per share attributable to Class A common stockholders:

Basic $ ( 0.15 ) $ 0.00 $ ( 0.15 )

Diluted $ ( 0.15 ) $ 0.00 $ ( 0.15 )

Nine months ended June 30, 2021

Excluding impacts of adoption of ASU 2021-08 Adjustment Presentation with adoption of ASU 2021-08

Revenue $ 153,140 $ 3,807 $ 156,947

Benefit from income taxes $ ( 416 ) $ 932 $ 516

Net loss $ ( 8,769 ) $ 2,875 $ ( 5,894 )

Net loss attributable to non-controlling interest $ ( 3,328 ) $ 1,410 $ ( 1,918 )

Net loss attributable to i3 Verticals, Inc.

$ ( 5,441 ) $ 1,465 $ ( 3,976 )

Net loss per share attributable to Class A common stockholders:

Basic $ ( 0.26 ) $ 0.07 $ ( 0.19 )

Diluted $ ( 0.26 ) $ 0.07 $ ( 0.19 )

The following tables present the material impacts of adoption of ASU 2021-08 on the Company's condensed consolidated statement of changes in equity for the three months ended June 30, 2021:

Three months ended June 30, 2021

Excluding impacts of adoption of ASU 2021-08 Adjustment Presentation with adoption of ASU 2021-08

Net loss $ ( 4,594 ) 393 ( 4,201 )

Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis $ ( 141 ) 169 28

Balance at June 30, 2021 $ 282,128 $ 2,669 $ 284,797

i3 VERTICALS, Inc.

1 unchanged sentence

(in thousands, except unit, share and per share amounts)

The following tables present the material impacts of adoption of ASU 2021-08 on the Company's condensed consolidated statements of cash flows for the nine months ended June 30, 2021:

Nine months ended June 30, 2021

Excluding impacts of adoption of ASU 2021-08 Adjustment Presentation with adoption of ASU 2021-08

Cash flows from operating activities:

Net loss $ ( 8,769 ) $ 2,875 $ ( 5,894 )

Adjustments to reconcile net loss to net cash provided by operating activities:

(Benefit from) provision for deferred income taxes $ ( 416 ) $ 933 $ 517

Changes in operating liabilities:

Deferred revenue $ 39 $ ( 3,807 ) $ ( 3,768 )

Other long-term liabilities $ ( 697 ) $ ( 1 ) $ ( 698 )

Recently Issued Accounting Pronouncements Not Yet Adopted

recognition, loss reserves, assumptions used in the calculation of equity-based compensation and in the calculation of income taxes, and certain tax assets and liabilities as well as the related valuation allowances.

Actual results could differ from those estimates.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In August 2020, the FASB issued ASU No.

5 unchanged sentences

The amendments in ASU 2020-06 are effective for public business entities for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.

As the Company is an emerging growth company and has elected to use the extended transition period afforded to such companies, the Company will not be required to adopt ASU 2020-06 until October 1, 2022.

The Company is currently evaluating the impact of the adoption of this principle on the Company’s condensed consolidated financial statements.

In May 2021, the FASB issued ASU No.

2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40):

Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options.

The amendments in ASU No.

2021-04 provide guidance to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange.

The amendments in this ASU No.

2021-04 are effective for all entities for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted, including interim periods within those fiscal years.

As a result, the Company will not be required to adopt ASU 2021-04 until October 1, 2022.

The Company is currently evaluating the impact of the adoption of this principle on the Company’s condensed consolidated financial statements.

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except unit, share and per share amounts)

During the nine months ended June 30, 2022 and 2021, the Company acquired the following intangible assets and businesses:

Business Combinations during the nine months ended June 30, 2022

During the nine months ended June 30, 2022, the Company completed the acquisition of three businesses to expand the Company’s software offerings in the Public Sector and Healthcare vertical markets.

Certain of the purchase price allocations assigned for these acquisitions are considered preliminary as of June 30, 2022.

Total purchase consideration was $ 107,681 , including $ 101,400 in cash consideration, funded by proceeds from the Company's revolving credit facility, and $ 6,281 of contingent consideration.

The goodwill associated with one of the two acquisitions is deductible for tax purposes.

The acquired merchant relationships intangible assets have estimated amortization periods of between ten and nineteen years .

The trade names have estimated weighted-average amortization periods of four years .

The weighted-average amortization period for all intangibles acquired is fifteen years .

The acquired capitalized software have amortization periods of seven years .

Acquisition-related costs for these businesses amounted to approximately $ 601 and were expensed as incurred.

Certain provisions in the purchase agreements provide for additional consideration of up to $ 23,000 , in the aggregate, to be paid based upon the achievement of specified financial performance targets, as defined in the purchase agreements, through no later than September 2024.

The Company determined the acquisition date fair values of the liabilities for the contingent consideration based on probability forecasts and discounted cash flow analyses.

In each subsequent reporting period, the Company will reassess its current estimates of performance relative to the targets and adjust the contingent liabilities to their fair values through earnings.

See additional disclosures in Note 10.

The Company adopted this ASU on October 1, 2022.

The adoption of ASU 2020-06 resulted in an increase in long-term debt, less current portion and debt issuance costs, net of $ 11,933 , a decrease in additional paid-in-capital of $ 23,382 and a decrease in accumulated deficit of $ 11,449 .

The adoption of ASU 2020-06 had no impact on net income.

During the three months ended December 31, 2022 and 2021, the Company acquired the following intangible assets and businesses:

Residual Buyouts

From time to time, the Company acquires future commission streams (or "residuals") from sales agents in exchange for an upfront cash payment.

This results in an increase in overall gross processing volume to the Company.

The residual buyouts are treated as asset acquisitions, resulting in recording a residual buyout intangible asset at cost on the date of acquisition.

These assets are amortized using a method of amortization that reflects the pattern in which the economic benefits of the intangible asset are expected to be utilized over their estimated useful lives.

During the three months ended December 31, 2022, the Company purchased $ 275 in residuals using a combination of cash on hand and borrowings on the Company's revolving credit facility.

The acquired residual buyout intangible asset has an estimated amortization period of eight years .

The Company did not acquire any residuals during the three months ended December 31, 2021.

Purchase of Celtic Cross Holdings, Inc.

and Celtic Systems Pvt.

During the three months ended December 31, 2022, the Company completed the acquisition of substantially all of the assets of Celtic Cross Holdings, Inc., in Scottsdale, Arizona and Celtic Systems Pvt.

in Vadodara, India (collectively "Celtic") to expand the Company’s software offerings in the Public Sector vertical.

Celtic is within the Software and Services segment.

Total purchase consideration consisted of $ 85,000 in cash consideration, funded by proceeds from the Company's revolving credit facility.

Certain of the purchase price allocations assigned for this acquisition is considered preliminary as of December 31, 2022.

The goodwill associated with the Celtic acquisition is deductible for tax purposes.

The acquired customer relationships intangible assets has an estimated amortization period of eighteen years .

The trade name and non-compete agreements associated with the acquisition have amortization periods of five years and three years ,

i3 VERTICALS, Inc.

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(in thousands, except unit, share and per share amounts)

Summary of Business Combinations during the nine months ended June 30, 2022

The fair values assigned to certain assets and liabilities assumed, as of the acquisition dates, were as follows:

respectively.

The weighted-average amortization period for all intangibles acquired is eighteen years .

The acquired capitalized software has a weighted-average amortization period of ten years .

Acquisition-related costs for this acquisition amounted to approximately $ 1,567 and were expensed as incurred.

Summary of Celtic Cross Holdings, Inc.

and Celtic Systems Pvt.

The fair values assigned to certain assets and liabilities assumed, as of the acquisition date, were as follows:

Accounts receivable $ 8,217

Settlement assets 685

Inventories —

Prepaid expenses and other current assets 110

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Capitalized software 12,600

Acquired merchant relationships 41,090

Customer relationships 33,800

Non-compete agreements 200

Trade name 600

Goodwill 42,315

Operating lease right-of-use assets 263

Other assets 22

Total assets acquired 103,279

Accounts payable 9

Accrued expenses and other current liabilities 3,134

Settlement obligations 685

Deferred revenue, current 3,160

Current portion of operating lease liabilities 82

Operating lease liabilities, less current portion 181

Other long-term liabilities 11,976

Net assets acquired $ 85,000

Pro Forma Results of Operations for Business Combinations during the nine months ended June 30, 2022

The following unaudited supplemental pro forma results of operations have been prepared as though each of the acquired businesses in the nine months ended June 30, 2022 had occurred on October 1, 2020.

Other Business Combinations during the three months ended December 31, 2022

Effective October 1, 2022, the Company completed the acquisition of another business to expand the Company's software offerings.

The total purchase consideration consisted of $ 4,497 in cash consideration, funded by proceeds from the Company's revolving credit facility.

In connection with this acquisition, the Company allocated approximately $ 104 of the consideration to net working capital, approximately $ 39 of the consideration to purchase price to property and equipment, approximately $ 30 of the consideration to capitalized software, approximately $ 1,480 of the consideration to customer relationships, and the remainder, approximately $ 2,844 , to goodwill, which is deductible for tax purposes.

Certain of the purchase price allocations assigned for this acquisition is considered preliminary as of December 31, 2022.

The acquired capital software and customer relationships intangible asset have estimated amortization periods of eight years and ten years , respectively.

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except unit, share and per share amounts)

Pro Forma Results of Operations for Business Combinations during the three months ended December 31, 2022

The following unaudited supplemental pro forma results of operations have been prepared as though each of the acquired businesses in the three months ended December 31, 2022 had occurred on October 1, 2021.

Pro forma adjustments were made to reflect the impact of depreciation and amortization, changes to executive compensation and the increased debt, all in accordance with ASC 805.

This supplemental pro forma information does not purport to be indicative of the results of operations that would have been attained had the acquisitions been made on these dates, or of results of operations that may occur in the future.

Nine months ended June 30,

Three months ended December 31,

Revenue $ 86,029 $ 79,109

Net loss $ ( 22,923 ) $ ( 8,033 )

Net income (loss) $ 169 $ ( 5,267 )

Business Combinations during the year ended September 30, 2022

During the year ended September 30, 2021, the Company completed the acquisitions of eight unrelated businesses, including Business Information Systems, Inc., ImageSoft Inc., and six other collectively material businesses.

Purchase of Business Information Systems

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

BIS is within the Proprietary Software & Payments segment.

Total purchase consideration was $ 95,495 , including $ 52,500 in

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except unit, share and per share amounts)

cash on hand and proceeds from the Company's revolving credit facility, 1,202,914 shares of the Company's Class A Common Stock (valued at $ 35,245 ), and $ 7,750 in contingent consideration.

The goodwill associated with the acquisition is deductible for tax purposes.

The acquired merchant relationships intangible asset has an estimated amortization period of nineteen years .

The non-compete agreement and trade name have estimated amortization periods of three and five years , respectively.

The weighted-average estimated amortization period of all intangibles acquired is nineteen years .

The acquired capitalized software has an estimated amortization period of ten years .

Acquisition-related costs for BIS amounted to approximately $ 374 and were expensed as incurred.

Certain provisions in the purchase agreement provide for additional consideration of up to $ 16,000 in the aggregate, to be paid based upon achievement of specified financial performance targets, as defined in the purchase agreement, in the 24 months from February 1, 2021 through January 31, 2023.

The Company determined the acquisition date fair value of the liability for the contingent consideration based on a probability forecast and discounted cash flow analysis.

In each subsequent reporting period, the Company will reassess the current estimates of performance relative to the targets and adjust the contingent liability to its fair value through earnings.

See additional disclosures in Note 10.

Purchase of ImageSoft, Inc.

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

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

ImageSoft, is within the Proprietary Software & Payments segment.

Total purchase consideration was $ 46,300 , including $ 40,000 in cash consideration, funded by proceeds from the Company's revolving credit facility, and $ 6,300 in contingent consideration.

The goodwill associated with the acquisition is deductible for tax purposes.

The acquired merchant relationships intangible asset has an estimated amortization period of twenty years .

The non-compete agreement and trade name have estimated amortization periods of three and five years , respectively.

The weighted-average estimated amortization period of all intangibles acquired is nineteen years .

The acquired capitalized software has an estimated amortization period of seven years .

Acquisition-related costs for ImageSoft amounted to approximately $ 403 and were expensed as incurred.

Certain provisions in the purchase agreement provide for additional consideration of up to $ 20,000 in the aggregate, to be paid based upon achievement of specified financial performance targets, as defined in the purchase agreement, in the 24 months from May 1, 2021 through April 30, 2023.

The Company determined the acquisition date fair value of the liability for the contingent consideration based on a probability forecast and discounted cash flow analysis.

In each subsequent reporting period, the Company will reassess the current estimates of performance relative to the targets and adjust the contingent liability to its fair value through earnings.

See additional disclosures in Note 10.

Other Business Combinations

From October 1, 2020 to September 30, 2021, the Company completed the acquisitions of six other businesses to expand the Company’s software offerings in the Public Sector and Healthcare vertical markets and to add proprietary technology that will augment the Company’s existing platform across several verticals.

Five of these businesses are within the Proprietary Software & Payments segment and one is within the Merchant Services segment.

During the year ended September 30, 2022, the Company completed the acquisitions of three businesses to expand the Company’s software offerings in the Public Sector and Healthcare vertical markets.

Certain of the purchase price allocations assigned for these acquisitions are considered preliminary as of December 31, 2022.

Total purchase consideration was $ 107,681 , including $ 101,400 in cash consideration, funded by proceeds from the Company's revolving credit facility, and $ 6,281 of contingent consideration.

For each of these businesses acquired, the goodwill associated with the acquisition is deductible for tax purposes.

The acquired merchant relationships intangible assets have estimated amortization periods of between

The goodwill associated with two of the three acquisitions is deductible for tax purposes.

The acquired customer relationships intangible assets have estimated amortization periods of between ten and nineteen years .

The trade names have estimated weighted-average amortization periods of four years .

The weighted-average amortization period for all intangibles acquired is fifteen years .

The acquired capitalized software have amortization periods of seven years .

Acquisition-related costs for these businesses amounted to approximately $ 773 and were expensed as incurred.

The Company determined the acquisition date fair values of the liabilities for the contingent consideration based on probability forecasts and discounted cash flow analyses.

i3 VERTICALS, Inc.

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(in thousands, except unit, share and per share amounts)

ten and twenty-five years .

The non-compete agreement and trade names have estimated amortization periods of four years .

The weighted-average amortization period for all intangibles acquired is sixteen years .

The acquired capitalized software has a weighted-average amortization period of seven years .

Acquisition-related costs for these businesses amounted to approximately $ 1,101 and were expensed as incurred.

Certain provisions in the purchase agreements provide for additional consideration of up to $ 50,200 , in the aggregate, to be paid based upon the achievement of specified financial performance targets, as defined in the purchase agreements, through no later than June 2023.

The Company determined the acquisition date fair values of the liabilities for the contingent consideration based on probability forecasts and discounted cash flow analyses.

See additional disclosures in Note 10.

Summary of Business Combinations during the year ended September 30, 2022

The fair values assigned to certain assets and liabilities assumed, as of the acquisition dates, during the year ended September 30, 2022 were as follows:

BIS ImageSoft, Inc.

Accounts receivable $ 651

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Operating lease liabilities, less current portion 181

Other long-term liabilities 6,725

Net assets acquired $ 107,681

The fair values assigned were updated to reflect the retrospective adoption of ASU 2021-08, which resulted in increases to the fair values assigned to deferred revenue and goodwill as of the acquisition dates.

Refer to Note 2 for further discussion.

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except unit, share and per share amounts)

PREPAID EXPENSES AND OTHER CURRENT ASSETS

A summary of the Company's prepaid expenses and other current assets as of June 30, 2022 and September 30, 2021 is as follows:

June 30, September 30,

A summary of the Company's prepaid expenses and other current assets as of December 31, 2022 and September 30, 2022 is as follows:

December 31, September 30,

Inventory $ 4,960 $ 4,121

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Prepaid insurance 1,487 736

Notes receivable — current portion 5,117 4,930

Other current assets 4,282 3,915

Prepaid expenses and other current assets $ 23,133 $ 19,445

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except unit, share and per share amounts)

GOODWILL AND INTANGIBLE ASSETS

Changes in the carrying amount of goodwill are as follows:

Merchant Services Proprietary Software and Payments Other Total

Merchant Services Software and Services Other Total

Balance at September 30, 2022

$ 119,086 $ 234,553 $ — $ 353,639

Goodwill attributable to preliminary purchase price adjustments and acquisitions during the nine months ended June 30, 2022 — 61,639 — 61,639

Balance at June 30, 2022 $ 119,086 $ 234,796 $ — $ 353,882

Intangible assets consisted of the following as of June 30, 2022:

Goodwill attributable to preliminary purchase price adjustments and acquisitions during the three months ended December 31, 2022 2,844 42,315 — 45,159

Balance at December 31, 2022 $ 121,930 $ 276,868 $ — $ 398,798

Intangible assets consisted of the following as of December 31, 2022:

Cost Accumulated

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Total identifiable intangible assets $ 320,898 $ ( 93,681 ) $ 227,217

Amortization expense for intangible assets amounted to $ 13,303 and $ 11,786 during the three and nine months ended June 30, 2022, and 2021 respectively.

Amortization expense for intangible assets amounted to $ 5,059 and $ 4,178 during the three months ended December 31, 2022, and 2021 respectively.

Based on net carrying amounts at December 31, 2022, the Company's estimate of future amortization expense for intangible assets are presented in the table below for fiscal years ending September 30:

2023 (nine months remaining) $ 14,884

Thereafter 138,853

i3 VERTICALS, Inc.

1 unchanged sentence

(in thousands, except unit, share and per share amounts)

Based on net carrying amounts at June 30, 2022, the Company's estimate of future amortization expense for intangible assets are presented in the table below for fiscal years ending September 30:

2022 (three months remaining) $ 4,588

Thereafter 128,970

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

A summary of the Company's accrued expenses and other current liabilities as of June 30, 2022 and September 30, 2021 is as follows is as follows:

June 30, September 30,

ACCRUED EXPENSES AND OTHER LIABILITIES

A summary of the Company's accrued expenses and other current liabilities as of December 31, 2022 and September 30, 2022 is as follows is as follows:

December 31, September 30,

Accrued wages, bonuses, commissions and vacation $ 7,143 $ 8,117

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Escrow liabilities 8,494 12,285

Tax receivable agreement liability — current portion 21 20

Customer deposits 1,583 1,575

Employee health self-insurance liability 581 732

Accrued interchange 1,877 2,096

Other current liabilities 10,929 10,981

Accrued expenses and other current liabilities $ 50,967 $ 57,833

A summary of the Company's long-term liabilities as of December 31, 2022 and September 30, 2022 is as follows:

December 31, September 30,

Accrued contingent consideration — long-term portion $ 1,217 $ 1,448

Deferred tax liability — long-term 19,872 7,896

Other long-term liabilities 200 196

Total other long-term liabilities $ 21,289 $ 9,540

LONG-TERM DEBT, NET

A summary of long-term debt, net as of June 30, 2022 and September 30, 2021 is as follows:

June 30, September 30,

A summary of long-term debt, net as of December 31, 2022 and September 30, 2022 is as follows:

December 31, September 30,

Maturity 2022 2022

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received approximately $ 132,762 in net proceeds from the sale of the Exchangeable Notes, as determined by deducting estimated offering expenses paid to third-parties from the aggregate principal amount.

On October 1, 2022, the Company adopted ASU 2020-06 using the modified retrospective method, which resulted in the Exchangeable Notes being presented as a single liability instrument with no separate accounting for embedded conversion features.

Refer to Note 2 for further discussion.

The Exchangeable Notes bear interest at a fixed rate of 1.00 % per year, payable semiannually in arrears on February 15 and August 15 of each year, beginning on August 15, 2020.

The Exchangeable Notes will mature on February 15, 2025, unless converted or repurchased at an earlier date.

i3 Verticals, LLC issued the Exchangeable Notes pursuant to an Indenture, dated as of February 18, 2020 (the “Indenture”), among i3 Verticals, LLC, the Company and U.S.

i3 Verticals, LLC issued the Exchangeable Notes pursuant to an Indenture, dated as of February 18, 2020, among i3 Verticals, LLC, the Company and U.S.

Bank National Association, as trustee.

As of June 30, 2022, the aggregate principal amount outstanding of the Exchangeable Notes was $ 117,000 .

As of December 31, 2022, the aggregate principal amount outstanding of the Exchangeable Notes was $ 117,000 .

For a discussion of the terms of the Exchangeable Notes, refer to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022.

Non-cash interest expense, including amortization of debt issuance costs, related to the Exchangeable Notes for the three and nine months ended June 30, 2022 was $ 169 , and $ 492 , and $ 149 and $ 434 for the three and nine months ended June 30, 2021, respectively.

Total unamortized debt issuance costs related to the Exchangeable Notes were $ 2,113 as of June 30, 2022.

The estimated fair value of the Exchangeable Notes was $ 107,453 as of June 30, 2022.

Non-cash interest expense, including amortization of debt issuance costs, related to the Exchangeable Notes for the three months ended December 31, 2022 was $ 227 , and $ 159 for the three months ended December 31, 2021.

Total unamortized debt issuance costs related to the Exchangeable Notes were $ 2,223 as of December 31, 2022.

The estimated fair value of the Exchangeable Notes was $ 103,990 as of December 31, 2022.

The estimated fair value of the Exchangeable Notes was determined through consideration of quoted market prices for similar instruments.

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Warrant Transactions

On February 12, 2020, concurrently with the pricing of the Exchangeable Notes, and on February 13, 2020, concurrently with the exercise by the initial purchasers of their right to purchase additional Exchangeable Notes, the Company entered into warrant transactions to sell to the Counterparties warrants (the “Warrants”) to acquire, subject to customary adjustments, up to initially 3,376,391 shares of Class A common stock in the aggregate at an initial exercise price of $ 62.88 per share.

The Company offered and sold the Warrants in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.

The Warrants will expire over a period beginning on May 15, 2025.

i3 VERTICALS, Inc.

1 unchanged sentence

(in thousands, except unit, share and per share amounts)

the Company entered into warrant transactions to sell to the Counterparties warrants (the “Warrants”) to acquire, subject to customary adjustments, up to initially 3,376,391 shares of Class A common stock in the aggregate at an initial exercise price of $ 62.88 per share.

The Company offered and sold the Warrants in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.

The Warrants will expire over a period beginning on May 15, 2025.

The Warrants are separate transactions, entered into by the Company with the Counterparties, and are not part of the terms of the Exchangeable Notes.

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Senior Secured Credit Facility

On May 9, 2019, the Company replaced its existing senior secured credit facility with a new credit agreement (the "Senior Secured Credit Facility").

On February 18, 2020, the Company entered into the second amendment to the Senior Secured Credit Facility in connection with the offering of the Company's Exchangeable Notes.

The second amendment reduced the Company's borrowing capacity under the Senior Secured Credit Facility.

The Senior Secured Credit Facility consists of a $ 275,000 revolving credit facility, together with an option to increase the revolving credit facility and/or obtain incremental term loans in an additional principal amount of up to $ 50,000 in the aggregate (subject to the receipt of additional commitments for any such incremental loan amounts).

The Senior Secured Credit Facility accrues interest at the London Inter Bank Offered Rate ("LIBOR") (based upon an interest period of one, two, three or six months or, under some circumstances, up to twelve months) plus an applicable margin of 2.25 % to 3.25 % ( 3.25 % as of June 30, 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.

On May 9, 2019, the Company replaced its then existing credit facility with a new credit agreement (the "Senior Secured Credit Facility").

Effective October 3, 2022, the Senior Secured Credit Facility, as amended, consisted of a $ 375,000 revolving credit facility, together with an option to increase the revolving credit facility and/or obtain incremental term loans in an additional principal amount of up to $ 50,000 in the aggregate (subject to the receipt of additional commitments for any such incremental loan amounts).

The Senior Secured Credit Facility accrues interest at Term SOFR (based upon an interest period of one, three or six months), plus an adjustment of 0.10 %, plus an applicable margin of 2.25 % to 3.25 % ( 3.25 % as of December 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) Term SOFR, plus an adjustment of 0.10%, plus 1.00 %), plus an applicable margin of 0.25 % to 1.25 % ( 1.25 % as of December 31, 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 the Company 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.

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

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

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

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

As of June 30, 2022, the Company was in compliance with these covenants, and there was $ 67,594 available for borrowing under the revolving credit facility, subject to the financial covenants.

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

As of December 31, 2022, the Company was in compliance with these covenants, and there was $ 111,826 available for borrowing under the revolving credit facility, subject to the financial covenants.

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

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

The Company was in compliance with such covenants as of June 30, 2022.

The Company was in compliance with such covenants as of December 31, 2022.

In addition, the Senior Secured Credit Facility restricts the Company's ability to make dividends or other distributions to the holders of the Company's equity.

The Company is permitted to (i) make cash distributions to the holders of the Company's equity in order to pay taxes incurred by owners of equity in i3 Verticals, LLC, by reason of such ownership, (ii) move intercompany cash between subsidiaries that are joined to the Senior Secured Credit Facility, (iii) repurchase equity from employees, directors, officers or consultants in an aggregate amount not to exceed $ 3,000 per year, (iv) make certain payments in connection with the Tax Receivable Agreement (discussed in Note 8 below), and (v) make other dividends or distributions in an aggregate amount not to exceed 5 % of the net cash proceeds received from any additional common equity issuance.

The Company is also permitted to make non-cash dividends in the form of additional equity issuances.

Each subsidiary may make ratable distributions to persons that own equity interests in such subsidiary.

All other forms of dividends or distributions are prohibited under the Senior Secured Credit Facility.

i3 VERTICALS, Inc.

1 unchanged sentence

(in thousands, except unit, share and per share amounts)

amount not to exceed 5 % of the net cash proceeds received from any additional common equity issuance.

The Company is also permitted to make non-cash dividends in the form of additional equity issuances.

Each subsidiary may make ratable distributions to persons that own equity interests in such subsidiary.

All other forms of dividends or distributions are prohibited under the Senior Secured Credit Facility.

Debt issuance costs

The Company incurred no debt issuance costs during the three and nine months ended June 30, 2022 and 2021.

The Company incurred $ 265 in debt issuance costs during the three months ended December 31, 2022 and did not incur any debt issuance costs during the three months ended December 31, 2021.

The Company's debt issuance costs are being amortized over the related term of the debt using the straight-line method, which is not materially different than the effective interest rate method, and are presented net against long-term debt in the condensed consolidated balance sheets.

The amortization of deferred debt issuance costs is included in interest expense and amounted to approximately $ 263 and $ 776 during the three and nine months ended June 30, 2022, respectively and $ 244 and $ 719 during the three and nine months ended June 30, 2021, respectively.

The amortization of deferred debt issuance costs is included in interest expense and amounted to approximately $ 361 during the three months ended December 31, 2022 and $ 254 during the three months ended December 31, 2021.

i3 Verticals, Inc.

6 unchanged sentences

Each quarter, the Company updates its estimate of the annual effective tax rate, and if the Company’s estimated tax rate changes, it makes a cumulative adjustment in that period.

The Company’s provision for income taxes was a benefit of $ 1,810 and $ 1,154 for the three and nine months ended June 30, 2022, respectively and a provision of $ 662 and $ 516 during the three and nine months ended June 30, 2021, respectively.

The Company’s provision for income taxes was a provision of $ 382 for the three months ended December 31, 2022, and a benefit of $ 228 during the three months ended December 31, 2021.

Tax Receivable Agreement

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The Company expects to benefit from the remaining 15 % of the tax benefits, if any, that the Company may realize.

During the nine months ended June 30, 2022, the Company acquired an aggregate of 111,000 Common Units in i3 Verticals, LLC in connection with the redemption of Common Units from the Continuing Equity Owners, which resulted in an increase in the tax basis of our investment in i3 Verticals, LLC subject to the provisions of the Tax Receivable Agreement.

As a result of the exchange, during the nine months ended June 30, 2022, the Company recognized an increase to its net deferred tax assets in the amount of $ 875 , and corresponding Tax

i3 VERTICALS, Inc.

1 unchanged sentence

(in thousands, except unit, share and per share amounts)

Receivable Agreement liabilities of $ 744 , representing 85 % of the tax benefits due to the Continuing Equity Owners.

The deferred tax asset and corresponding Tax Receivable Agreement liability balances were $ 40,617 and $ 39,866 , respectively, as of June 30, 2022.

Payments to the Continuing Equity Owners related to exchanges through June 30, 2022 will range from $ 0 to $ 3,225 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.

During the three months ended December 31, 2022, the Company did not acquire any Common Units in i3 Verticals, LLC in connection with the redemption of Common Units from the Continuing Equity Owners.

As a result, the Company did not recognize any activity related to exchanges during the three months ended December 31, 2022 in its net deferred tax assets and corresponding Tax Receivable Agreement liabilities.

The deferred tax asset and corresponding Tax Receivable Agreement liability balances were $ 40,346 and $ 40,832 , respectively, as of December 31, 2022.

Payments to the Continuing Equity Owners related to exchanges through December 31, 2022 will range from $ 0 to $ 3,315 per year and are expected to be paid over the next 24 years.

The amounts recorded as of December 31, 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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At contract inception, the Company determines whether an arrangement is or contains a lease, and for each identified lease, evaluates the classification as operating or financing.

The Company had no finance leases as of June 30, 2022.

The Company had no finance leases as of December 31, 2022.

Leased assets and obligations are recognized at the lease commencement date based on the present value of fixed lease payments to be made over the term of the lease.

Renewal and termination options are factored into determination of the lease term only if the option is reasonably certain to be exercised.

The weighted-average remaining lease term at June 30, 2022 and 2021 was five and six years , respectively.

The Company had no significant short-term leases during the three and nine months ended June 30, 2022 and 2021.

The weighted-average remaining lease term at December 31, 2022 and 2021 was four and five years , respectively.

The Company had no significant short-term leases during the three months ended December 31, 2022 and 2021.

The Company’s leases do not provide a readily determinable implicit interest rate and the Company uses its incremental borrowing rate to measure the lease liability and corresponding right-of-use asset.

The incremental borrowing rates were determined based on a portfolio approach considering the Company’s current secured borrowing rate adjusted for market conditions and the length of the lease term.

The weighted-average discount rate used in the measurement of our lease liabilities was 7.6 % and 7.3 % as of June 30, 2022 and 2021, respectively.

The weighted-average discount rate used in the measurement of our lease liabilities was 6.1 % and 6.7 % as of December 31, 2022 and 2021, respectively.

Operating lease cost is recognized on a straight-line basis over the lease term.

Operating lease costs for the three and nine months ended June 30, 2022 were $ 1,469 and $ 4,415 , respectively, which are included in selling, general and administrative expenses in the condensed consolidated statements of operations.

Operating lease costs for the three and nine months ended June 30, 2021 were $ 1,164 and $ 3,064 , respectively.

Total operating lease costs for the three and nine months ended June 30, 2022 include variable lease costs of approximately $ 14 and $ 58 , respectively, which are primarily comprised of costs of maintenance and utilities and changes in rates, and are determined based on the actual costs incurred during the period.

Operating lease costs for the three months ended December 31, 2022 and 2021 were $ 1,504 and $ 1,491 , respectively, which are included in selling, general and administrative expenses in the condensed consolidated statements of operations.

Total operating lease costs for the three months ended December 31, 2022 and 2021 include variable lease costs of approximately $ 11 and $ 38 , respectively, which are primarily comprised of costs of maintenance and utilities and changes in rates, and are determined based on the actual costs incurred during the period.

Variable payments are expensed in the period incurred and not included in the measurement of lease assets and liabilities.

Total operating lease costs for the three and nine months ended June 30, 2021 were $ 1 and $ 5 , respectively.

Short-term rent expense for the three and nine months ended June 30, 2022 was $ 51 and $ 144 , respectively, and are included in selling, general and administrative expenses in the condensed consolidated statements of operations.

Short term rent expense for the three and nine months ended June 30, 2021 was $ 410 and $ 540 , respectively.

Short-term rent expense for the three months ended December 31, 2022 and 2021 were $ 35 and $ 47 , respectively, and are included in selling, general and administrative expenses in the condensed consolidated statements of operations.

i3 VERTICALS, Inc.

1 unchanged sentence

(in thousands, except unit, share and per share amounts)

As of June 30, 2022, maturities of lease liabilities are as follows:

As of December 31, 2022, maturities of lease liabilities are as follows:

Years ending September 30:

2022 (three months remaining) $ 1,457

2023 (nine months remaining) $ 4,195

Thereafter 2,017

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Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable in active exchange markets.

The carrying value of the Company’s financial instruments, including cash and cash equivalents, restricted cash, settlement assets and obligations, accounts receivable, other assets, accounts payable, and accrued expenses, approximated their fair values as of June 30, 2022 and 2021, because of the relatively short maturity dates on these instruments.

The carrying amount of debt approximates fair value as of June 30, 2022 and 2021, because interest rates on these instruments approximate market interest rates.

The carrying value of the Company’s financial instruments, including cash and cash equivalents, restricted cash, settlement assets and obligations, accounts receivable, other assets, accounts payable, and accrued expenses, approximated their fair values as of December 31, 2022 and 2021, because of the relatively short maturity dates on these instruments.

The carrying amount of debt approximates fair value as of December 31, 2022 and 2021, because interest rates on these instruments approximate market interest rates.

i3 VERTICALS, Inc.

8 unchanged sentences

Contingent consideration paid ( 4,212 )

Balance at June 30, 2022 $ 38,411

Balance at December 31, 2022 $ 20,064

Accrued Contingent Consideration

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Contingent consideration paid ( 9,755 )

Balance at June 30, 2021 $ 34,750

Balance at December 31, 2021 $ 36,882

The fair value of contingent consideration obligations includes inputs not observable in the market and thus represents a Level 3 measurement.

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The Company develops the projected future financial results based on an analysis of historical results, market conditions, and the expected impact of anticipated changes in the Company's overall business and/or product strategies.

Approximately $ 27,327 and $ 25,768 of contingent consideration was recorded in accrued expenses and other current liabilities as of June 30, 2022 and September 30, 2021, respectively.

Approximately $ 11,084 and $ 10,461 of contingent consideration was recorded in other long-term liabilities as of June 30, 2022 and September 30, 2021, respectively.

Approximately $ 18,847 and $ 21,385 of contingent consideration was recorded in accrued expenses and other current liabilities as of December 31, 2022 and September 30, 2022, respectively.

Approximately $ 1,217 and $ 1,448 of contingent consideration was recorded in other long-term liabilities as of December 31, 2022 and September 30, 2022, respectively.

Disclosure of Fair Values

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The Company estimates the fair value of the Exchangeable Notes through consideration of quoted market prices of similar instruments, classified as Level 2 as described above.

The estimated fair value of the Exchangeable Notes was $ 107,453 as of June 30, 2022.

The estimated fair value of the Exchangeable Notes was $ 103,990 as of December 31, 2022.

i3 VERTICALS, Inc.

2 unchanged sentences

EQUITY-BASED COMPENSATION

A summary of equity-based compensation expense recognized during the three and nine months ended June 30, 2022 and 2021 is as follows:

Three months ended June 30, Nine months ended June 30,

2022 2021 2022 2021

A summary of equity-based compensation expense recognized during the three months ended December 31, 2022 and 2021 is as follows:

Three months ended December 31,

Stock options $ 6,288 $ 6,624

2 unchanged sentences

Amounts are included in general and administrative expense on the condensed consolidated statements of operations.

Income tax benefits of $ 169 and $ 264 were recognized during the three and nine months ended June 30, 2022, respectively, and $ 102 and $ 584 during the three and nine months ended June 30, 2021.

Income tax benefits of $ 47 and $ 27 were recognized during the three months ended December 31, 2022 and 2021, respectively.

In May 2018, the Company adopted the 2018 Equity Incentive Plan (the “2018 Plan”) under which the Company may grant up to 3,500,000 stock options and other equity-based awards to employees, directors and officers.

The number of shares of Class A common stock available for issuance under the 2018 Plan includes an annual increase on the first day of each year, beginning with the 2019 calendar year, equal to 4.0 % of the outstanding shares of all classes of the Company's common stock as of the last day of the immediately preceding calendar year, unless the Company’s board of directors determines prior to the last trading day of December of the immediately preceding calendar year that the increase shall be less than 4.0 %.

As of June 30, 2022, equity awards with respect to 1,020,402 shares of the Company's Class A common stock were available for grant under the 2018 Plan.

The number of shares of Class A common stock available for issuance under the 2018 Plan includes an annual increase on the first day of each calendar year equal to 4.0 % of the outstanding shares of all classes of the Company's common stock as of the last day of the immediately preceding calendar year, unless the Company’s board of directors determines prior to the last trading day of December of the immediately preceding calendar year that the increase shall be less than 4.0 %.

As of December 31, 2022, equity awards with respect to 434,500 shares of the Company's Class A common stock were available for grant under the 2018 Plan.

In September 2020, the Company adopted the 2020 Acquisition Equity Incentive Plan (the “2020 Inducement Plan”) under which the Company may grant up to 1,500,000 stock options and other equity-based awards to individuals that were not previously employees of the Company or its subsidiaries in connection with acquisitions, as a material inducement to the individual's entry into employment with the Company or its subsidiaries within the meaning of Rule 5635(c)(4) of the Nasdaq Listing Rules.

In May 2021, the Company amended the 2020 Inducement Plan to increase the number of shares of the Company's Class A common stock available for issuance from 1,500,000 to 3,000,000 shares.

As of June 30, 2022, equity awards with respect to 973,994 shares of the Company's Class A common stock were available for grant under the 2020 Inducement Plan.

As of December 31, 2022, equity awards with respect to 1,035,338 shares of the Company's Class A common stock were available for grant under the 2020 Inducement Plan.

Share-based compensation expense includes the estimated effects of forfeitures, which will be adjusted over the requisite service period to the extent actual forfeitures differ or are expected to differ from such estimates.

1 unchanged sentence

The Company has issued stock option awards under the 2018 Plan and the 2020 Inducement Plan.

The fair value of the stock option awards during the nine months ended June 30, 2022 and during the year ended September 30, 2021 was determined on the grant date using the Black-Scholes valuation model based on the following weighted-average assumptions:

June 30, 2022 September 30, 2021

The fair value of the stock option awards during the three months ended December 31, 2022 and during the year ended September 30, 2022 was determined on the grant date using the Black-Scholes valuation model based on the following weighted-average assumptions:

December 31, 2022 September 30, 2022

Expected volatility (1)

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The Company has assumed a dividend yield of zero as management has no plans to declare dividends in the foreseeable future.

Expected term represents the estimated period of time until an award is exercised and was determined using the simplified method.

Expected term represents the estimated period of time until an award is exercised and was determined using the simplified method as details of employee exercise behavior are limited due to limited historical data.

The risk-free rate is an interpolation of yields on U.S.

3 unchanged sentences

(in thousands, except unit, share and per share amounts)

A summary of stock option activity for the nine months ended June 30, 2022 is as follows:

A summary of stock option activity for the three months ended December 31, 2022 is as follows:

Stock Options Weighted Average Exercise Price

3 unchanged sentences

Forfeited ( 116,894 ) 29.41

Outstanding at June 30, 2022 8,288,616 $ 25.09

Exercisable at June 30, 2022 4,362,585 $ 22.97

The weighted-average grant date fair value of stock options granted during the nine months ended June 30, 2022 was $ 12.89 .

As of June 30, 2022, total unrecognized compensation expense related to unvested stock options, including an estimate for pre-vesting forfeitures, was $ 38,178 , which is expected to be recognized over a weighted-average period of two years .

The total fair value of stock options that vested during the three and nine months ended June 30, 2022 was $ 6,339 and $ 22,447 , respectively.

Outstanding at December 31, 2022 8,429,498 $ 24.90

Exercisable at December 31, 2022 4,905,460 $ 23.17

The weighted-average grant date fair value of stock options granted during the three months ended December 31, 2022 was $ 12.12 .

As of December 31, 2022, total unrecognized compensation expense related to unvested stock options, including an estimate for pre-vesting forfeitures, was $ 31,271 , which is expected to be recognized over a weighted-average period of 1.78 years.

The Company's policy is to account for forfeitures of stock-based compensation awards as they occur.

The total fair value of stock options that vested during the three months ended December 31, 2022 was $ 7,022 .

Restricted Stock Units

The Company has issued Class A common stock in the form of restricted stock units ("RSUs") under the 2018 Plan.

A summary of activity related to restricted stock units for the nine months ended June 30, 2022 is as follows:

A summary of activity related to restricted stock units for the three months ended December 31, 2022 is as follows:

Restricted Stock Units Weighted Average Grant Date Fair Value

1 unchanged sentence

Granted 145,084 21.39

Exercised — —

Forfeited ( 30,416 ) 24.14

Outstanding at June 30, 2022 265,425 $ 26.59

As of June 30, 2022, total unrecognized compensation expense related to unvested RSUs, including an estimate for pre-vesting forfeitures, was $ 5,499 , which is expected to be recognized over a weighted average period of four years .

No RSUs vested during the nine months ended June 30, 2022.

Outstanding at December 31, 2022 601,320 $ 24.21

As of December 31, 2022, total unrecognized compensation expense related to unvested RSUs, including an estimate for pre-vesting forfeitures, was $ 7,373 , which is expected to be recognized over a weighted average period of 3.55 years.

No RSUs vested during the three months ended December 31, 2022.

COMMITMENTS AND CONTINGENCIES

The Company utilizes office space and equipment under operating leases.

Rent expense under these leases amounted to $ 1,520 and $ 4,559 during the three and nine months ended June 30, 2022, respectively and $ 1,201

Rent expense under these leases amounted to $ 1,539 during the three months ended December 31, 2022 and $ 1,494 during the three months

i3 VERTICALS, Inc.

1 unchanged sentence

(in thousands, except unit, share and per share amounts)

and $ 3,231 during the three and nine months ended June 30, 2021, respectively.

ended December 31, 2021.

Refer to Note 9 for further discussion and a table of the future minimum payments under these leases.

3 unchanged sentences

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

As of June 30, 2022, such minimum fee commitments were as follows:

As of December 31, 2022, such minimum fee commitments were as follows:

Years ending September 30:

2022 (three months remaining) $ 1,090

2023 (nine months remaining) $ 3,098

Total $ 4,508

8 unchanged sentences

However, the Company in some instances may be unable to estimate an amount of possible loss or range of loss based on the significant uncertainties involved in, or the preliminary nature of, the matter, and in these instances the Company will disclose the nature of the contingency and describe why the Company is unable to determine an estimate of possible loss or range of loss.

The Company is involved in ordinary course legal proceedings, which include all claims, lawsuits, investigations and proceedings, including unasserted claims, which are probable of being asserted, arising in the ordinary course of business.

The Company has considered all such ordinary course legal proceedings in formulating its disclosures and assessments.

After taking into consideration the evaluation of such legal matters by the Company's legal counsel, the Company's management believes at this time such matters will not have a material impact on the Company's consolidated balance sheet, results of operations or cash flows.

i3 VERTICALS, Inc.

1 unchanged sentence

(in thousands, except unit, share and per share amounts)

The Company has considered all such ordinary course legal proceedings in formulating its disclosures and assessments.

S&S Litigation

On June 2, 2021, the State of Louisiana, Division of Administration (the “State”) and a putative class of Louisiana law enforcement districts filed a petition (the “Petition”) in the 19th Judicial District Court for the Parish of East Baton Rouge against i3-Software & Services, LLC (“S&S”), a subsidiary of the Company located in Shreveport, Louisiana, the Company, i3 Verticals, LLC, the current leader of the S&S business, the former leader of the S&S business, and 1120 South Pointe Properties, LLC (“South Pointe”), the former owner of the assets of the S&S business.

On June 2, 2021, the State of Louisiana, Division of Administration (the “State”) and a putative class of Louisiana law enforcement districts (collectively "Plaintiffs") filed a Petition (as amended on October 4, 2021, the “Petition”), in the 19 th Judicial District Court for the Parish of East Baton Rouge against i3-Software & Services, LLC (“S&S”), a subsidiary of the Company located in Shreveport, Louisiana, the Company, i3 Verticals, LLC, the current leader of the S&S business, the former leader of the S&S business, and 1120 South Pointe Properties, LLC (“South Pointe”), the former owner of the assets of the S&S business (collectively "Defendants") .

See State of Louisiana, by and through its Division of Administration, East Baton Rouge Parish Law Enforcement District, by and through the duly elected East Baton Rouge Parish Sheriff, Sid J.

6 unchanged sentences

and Scott Carrington .

The Petition was amended on October 4, 2021 (the “Amended Petition”) to add a putative class of Louisiana sheriffs (the “Sheriffs”) and subsequently removed to the United States District Court for the Middle District of Louisiana.

The Amended Petition seeks monetary damages for the cost of network remediation of $ 15,000 purportedly spent by the State and $ 7,000 purportedly spent by the Sheriffs, return of purchase prices, potential additional expenses related to remediation and any obligation to notify parties of an alleged data breach as and if required by applicable law, and reasonable attorneys’ fees.

The Petition was amended on October 4, 2021 to add a putative class of Louisiana sheriffs (the “Sheriffs”) and subsequently removed to the United States District Court for the Middle District of Louisiana.

The Petition seeks monetary damages for the cost of network remediation of $ 15,000 purportedly spent by the State and $ 7,000 purportedly spent by the Sheriffs, return of purchase prices, potential additional expenses related to remediation and any obligation to notify parties of an alleged data breach as and if required by applicable law, and reasonable attorneys’ fees.

The claimed damages relate to a third-party remote access software product used in connection with services provided by S&S to certain Louisiana Parish law enforcement districts and alleged inadequacies in the Company’s cybersecurity practices.

3 unchanged sentences

On August 3, 2022, the Plaintiffs filed a response to those objections.

The district court judge will decide whether the case remains in federal court after reviewing the objections and Plaintiffs response to the objections.

The assets of the S&S business were acquired from South Pointe by the Company in 2018 for and aggregate purchase price of $ 17,000 , including upfront cash consideration and contingent consideration, and provides software and payments services within the Company’s Public Sector vertical to local government agencies almost exclusively in Louisiana.

On August 16, 2022, the district court granted the Plaintiffs’ motion to remand, and all Defendants appealed.

The case is fully briefed with the United States Fifth Circuit Court of Appeals, with oral argument to take place in April 2023.

The assets of the S&S business were acquired from South Pointe by the Company in 2018 for $ 17,000 , including upfront cash consideration and contingent consideration, and S&S provides software and payments services within the Company’s Public Sector vertical to local government agencies almost exclusively in Louisiana.

The Company is unable to predict the outcome of this litigation.

4 unchanged sentences

However, after taking into consideration the evaluation of such matters by the Company’s legal counsel, the Company’s management believes at this time that the anticipated outcome of any existing or potential indemnification liabilities related to this matter will not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

RELATED PARTY TRANSACTIONS

In connection with the Company’s IPO, the Company and i3 Verticals, LLC entered into a Tax Receivable Agreement with the Continuing Equity Owners that provides for the payment by the Company to the Continuing Equity Owners of 85 % of the amount of certain tax benefits, if any, that it actually realizes, or in some circumstances, is deemed to realize in its tax reporting, as a result of (i) future redemptions funded by the

i3 VERTICALS, Inc.

1 unchanged sentence

(in thousands, except unit, share and per share amounts)

Company or exchanges, or deemed exchanges in certain circumstances, of Common Units of i3 Verticals, LLC for Class A common stock of i3 Verticals, Inc.

RELATED PARTY TRANSACTIONS

or cash, and (ii) certain additional tax benefits attributable to payments made under the Tax Receivable Agreement.

See Note 8 for further information.

As of June 30, 2022, the total amount due under the Tax Receivable Agreement was $ 39,866 .

As of December 31, 2022, the total amount due under the Tax Receivable Agreement was $ 40,832 .

The Company determines its operating segments based on ASC 280, Segment Reporting , in alignment with how the chief operating decision making group monitors and manages the performance of the business as well as the level at which financial information is reviewed.

1 unchanged sentence

The Company's core business is delivering seamlessly integrated payment and software solutions customers in strategic vertical markets.

This is accomplished through the Merchant Services and Proprietary Software and Payments segments.

The Merchant Services segment provides comprehensive payment solutions.

This is accomplished through the Merchant Services and Software and Services segments.

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

The Merchant Services segment includes third-party integrated payment solutions as well as traditional merchant processing services across the Company's strategic vertical markets.

The Proprietary Software and Payments segment delivers solutions, including embedded payments, to the Company's customers through proprietary software.

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

The Software and Services segment delivers vertical market software solutions to customers across all of the Company's strategic vertical markets.

These solutions often include embedded payments or other recurring services.

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

4 unchanged sentences

Processing margin is equal to revenue less other cost of services plus residuals expense, which are a component of other cost of services.

The following is a summary of reportable segment operating performance for the three and nine months ended June 30, 2022 and 2021.

As of and for the Three Months Ended June 30, 2022

Merchant Services Proprietary Software and Payments Other Total

Revenue $ 32,714 $ 47,839 $ — $ 80,553

Other costs of services ( 16,303 ) ( 3,456 ) 10 ( 19,749 )

Residuals 10,320 348 ( 11 ) 10,657

Processing margin $ 26,731 $ 44,731 $ ( 1 ) $ 71,461

Residuals ( 10,657 )

Selling, general and administrative ( 47,775 )

Depreciation and amortization ( 7,506 )

Change in fair value of contingent consideration ( 8,254 )

Loss from operations

Total assets $ 204,656 $ 510,336 $ 65,432 $ 780,424

Goodwill $ 119,086 $ 234,796 $ — $ 353,882

As of and for the Nine Months Ended June 30, 2022

Merchant Services Proprietary Software and Payments Other Total

Revenue $ 91,071 $ 141,575 $ ( 34 ) $ 232,612

Other costs of services ( 43,273 ) ( 9,660 ) 43 ( 52,890 )

Residuals 26,555 1,139 ( 28 ) 27,666

Processing margin $ 74,353 $ 133,054 $ ( 19 ) $ 207,388

Residuals ( 27,666 )

Selling, general and administrative ( 142,878 )

Depreciation and amortization ( 21,823 )

Change in fair value of contingent consideration ( 24,684 )

Loss from operations

Total assets $ 204,656 $ 510,336 $ 65,432 $ 780,424

Goodwill $ 119,086 $ 234,796 $ — $ 353,882

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except unit, share and per share amounts)

As of and for the Three months ended June 30, 2021 (1)

Merchant Services Proprietary Software and Payments Other Total

The following is a summary of reportable segment operating performance for the three months ended December 31, 2022 and 2021.

As of and for the Three Months Ended December 31, 2022

Merchant Services Software and Services Other Total

Revenue $ 32,834 $ 53,213 $ ( 18 ) $ 86,029

6 unchanged sentences

Change in fair value of contingent consideration ( 1,443 )

Loss from operations

Income from operations

Total assets $ 206,782 $ 607,010 $ 55,657 $ 869,449

Goodwill $ 121,930 $ 276,868 $ — $ 398,798

__________________________

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

As of and for the Nine Months Ended June 30, 2021 (1)

Merchant Services Proprietary Software and Payments Other Total

As of and for the Three Months Ended December 31, 2021

Merchant Services Software and Services Other Total

Revenue $ 29,177 $ 44,774 $ ( 12 ) $ 73,939

9 unchanged sentences

Goodwill $ 119,086 $ 230,511 $ — $ 349,597

__________________________

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

The Company has not disclosed expenditures on long-lived assets as such expenditures are not reviewed by or provided to the chief operating decision maker.

i3 VERTICALS, Inc.

1 unchanged sentence

(in thousands, except unit, share and per share amounts)

The Company has not disclosed expenditures on long-lived assets as such expenditures are not reviewed by or provided to the chief operating decision maker.

NON-CONTROLLING INTEREST

4 unchanged sentences

As such, future redemptions or direct exchanges of Common Units of i3 Verticals, LLC by the Continuing Equity Owners will result in a change in ownership and reduce or increase the amount recorded as non-controlling interest and increase or decrease additional paid-in capital when i3 Verticals, LLC has positive or negative net assets, respectively.

As of June 30, 2022, i3 Verticals, Inc.

owned 22,252,640 of i3 Verticals, LLC's Common Units, representing a 68.7 % economic ownership interest in i3 Verticals, LLC.

As of December 31, 2022 and 2021, respectively, i3 Verticals, Inc.

owned 23,011,193 and 22,064,317 of i3 Verticals, LLC's Common Units, representing a 69.5 % and 68.4 % economic ownership interest in i3 Verticals, LLC.

The following table summarizes the impact on equity due to changes in the Company's ownership interest in i3 Verticals, LLC:

Nine months ended June 30,

Net loss attributable to non-controlling interest

Three months ended December 31,

Net income (loss) attributable to non-controlling interest

$ 409 $ ( 1,153 )

Transfers to (from) non-controlling interests:

Transfers (from) to non-controlling interests:

Redemption of common units in i3 Verticals, LLC — ( 123 )

Allocation of equity to non-controlling interests 5,594 12,374

Net transfers to non-controlling interests 4,676 660

Change from net loss attributable to non-controlling interests and transfers from non-controlling interests $ ( 502 ) $ ( 1,258 )

__________________________

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

Allocation of equity (from) to non-controlling interests ( 1,906 ) 1,899

Net transfers (from) to non-controlling interests ( 1,906 ) 1,776

Change from net (loss) income attributable to non-controlling interests and transfers (from) to non-controlling interests $ ( 1,497 ) $ 623

EARNINGS PER SHARE

6 unchanged sentences

(in thousands, except unit, share and per share amounts)

The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per share of Class A common stock for the three and nine months ended June 30, 2022 and 2021:

Three months ended June 30, Nine months ended June 30,

2022 2021 (1)

Basic (2) and diluted (3) net loss per share:

$ ( 4,688 ) $ ( 4,201 ) $ ( 18,807 ) $ ( 5,894 )

Net loss attributable to non-controlling interests

The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per share of Class A common stock for the three months ended December 31, 2022 and 2021:

Three months ended December 31,

Basic and diluted (1) net income (loss) per share:

Net income (loss) $ 169 $ ( 3,681 )

Net income (loss) attributable to non-controlling interests

409 ( 1,153 )

6 unchanged sentences

__________________________

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

Excludes 2,949 and 8,965 restricted Class A common stock units for the three and nine months ended June 30, 2021, respectively.

For the three and nine months ended June 30, 2022, all potentially dilutive securities were anti-dilutive, so diluted net loss per share was equivalent to basic net loss per share.

The following securities were excluded from the weighted average effect of dilutive securities in the computation of diluted net loss per share of Class A common stock:

10,131,878 and 10,188,369 shares of weighted average Class B common stock for the three and nine months ended June 30, 2022, respectively, along with the reallocation of net income assuming conversion of these shares, were excluded because the effect would have been anti-dilutive,

4,547,783 and 5,201,394 stock options for the three and nine months ended June 30, 2022, respectively, were excluded because the exercise price of these stock options exceeded the average market price of our Class A common stock during the period (“out-of-the-money”) and the effect of including them would have been anti-dilutive, and

716,276 and 724,484 shares for the three and nine months ended June 30, 2022, respectively, resulting from estimated stock option exercises and restricted stock units vesting as calculated by the treasury stock method were excluded because of the effect of including them would have been anti-dilutive.

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except unit, share and per share amounts)

For the three and nine months ended June 30, 2021, all potentially dilutive securities were anti-dilutive, so diluted net loss per share was equivalent to basic net loss per share.

For the three months ended December 31, 2022 and 2021 all potentially dilutive securities were anti-dilutive, so diluted net loss per share was equivalent to basic net loss per share.

The following securities were excluded from the weighted average effect of dilutive securities in the computation of diluted net loss per share of Class A common stock:

10,229,142 and 10,884,874 shares of weighted average Class B common stock for the three and nine months ended June 30, 2021, respectively, along with the reallocation of net income assuming conversion of these shares, were excluded because the effect would have been anti-dilutive,

2,100,833 and 2,419,305 stock options for the three and nine months ended June 30, 2021, respectively, were excluded because the exercise price of these stock options exceeded the average market price of our Class A common stock during the period (“out-of-the-money”) and the effect of including them would have been anti-dilutive, and

1,678,774 and 1,531,722 shares for the three and nine months ended June 30, 2021, respectively, resulting from estimated stock option exercises as calculated by the treasury stock method, and 2,949 and 8,965 restricted Class A common units for the three and nine months ended June 30, 2021, were excluded because the effect of including them would have been anti-dilutive.

Since the Company expects to settle the principal amount of its outstanding Exchangeable Notes in cash and any excess in cash or shares of the Company's Class A common stock, the Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable.

10,118,142 and 10,222,946 weighted average shares of Class B common stock for the three months ended December 31, 2022 and 2021, respectively, along with the reallocation of net income assuming conversion of these shares, were excluded because the effect would have been anti-dilutive.

5,652,711 and 5,444,557 stock options for the three months ended December 31, 2022 and 2021, respectively, were excluded because the exercise price of these stock options exceeded the average market price of our Class A common stock during the period (“out-of-the-money”) and the effect of including them would have been anti-dilutive, and

696,427 and 606,942 shares for the three months ended December 31, 2022 and 2021, respectively, resulting from estimated stock option exercises and restricted stock units vesting as calculated by the treasury stock method were excluded because of the effect of including them would have been anti-dilutive.

On September 22, 2022, the Company provided the trustee notice of the Company’s irrevocable election to settle the principal portion of its Exchangeable Notes only in cash and the conversion spread in cash or shares.

Accordingly, upon conversion, the Company will pay the principal in cash, and it will pay or deliver, as the case may be, the conversion premium in cash, shares of Class A Common Stock or a combination of cash and shares of Class A Common Stock, at its election.

The Company applies the if-converted method and only includes the number of incremental shares that would be issued upon conversion for calculating any potential dilutive effect of the conversion spread on diluted net income per share.

The conversion spread will have a dilutive impact on diluted net income per share of common stock when the average market price of the Company's Class A common stock for a given period exceeds the exchange price of $ 40.87 per share for the Exchangeable Notes.

5 unchanged sentences

As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented.

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except unit, share and per share amounts)

SIGNIFICANT NON-CASH TRANSACTIONS

The Company engaged in the following significant non-cash investing and financing activities during the nine months ended June 30, 2022 and 2021:

Nine months ended June 30,

Class A common stock issued as part of acquisition's purchase consideration (Note 3) $ — $ 35,245

The Company engaged in the following significant non-cash investing and financing activities during the three months ended December 31, 2022 and 2021:

Three months ended December 31,

Acquisition date fair value of contingent consideration in connection with business combinations $ — $ 5,481

Debt issuance costs financed with proceeds from the Senior Secured Credit Facility $ 178 $ —

Right-of-use assets obtained in exchange for operating lease obligations $ 838 $ 6,820

Purchase consideration accrued for December 31, 2021 acquisition $ — $ 35,000

SUBSEQUENT EVENTS

Recent Acquisitions

Subsequent to December 31, 2022, the Company completed an acquisition of a business that will expand the Company's software offerings in the Public Sector vertical within the Software and Services segment.

Total purchase consideration for the business was $ 14,500 , including $ 12,500 in cash funded by proceeds from the Company's revolving credit facility, $ 2,000 of the Company's Class A Common Stock, and an amount of contingent consideration, which is still being valued.

Certain provisions in the purchase agreement provide for additional consideration of up to $ 6,000 , in the aggregate, to be paid based upon the achievement of specified financial performance targets, as defined in the purchase agreement, through no later than December 2024.

The Company is in process of determining the acquisition date fair values of the liabilities for the contingent consideration based on discounted cash flow analyses.

The effect of the acquisition will be included in the condensed consolidated statements of operations beginning January 1, 2023.

The Company is still evaluating the allocations of the preliminary purchase consideration and pro forma results of operations.

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 1. Financial Statements