What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-09 compared with 2022-08-09 · 104 added, 176 removed, 208 unchanged (57% of the section changed)

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

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

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

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

• developments related to the COVID-19 pandemic, including, without limitation, the length and severity of its impact;

• our indebtedness and our ability to maintain compliance with the financial covenants in our Senior Secured Credit Facility (as defined below);

• our ability to meet our liquidity needs;

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

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• risks related to laws, regulations and industry standards;

• risk of significant chargeback liability if our customers refuse or cannot reimburse chargebacks resolved in favor of their customers;

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

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• risks related to the conditional exchange feature of the Exchangeable Notes;

• risks related to the cessation or modification of the London Inter Bank Offered Rate ("LIBOR");

• the "Risk Factors" included in our Form 10-K and included in Part II, Item 1A of this Quarterly Report on Form 10-Q, if any.

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Executive Overview

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

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

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

COVID-19 Update

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

We deliver seamless integrated software and services to customers in strategic vertical markets.

Building on its broad suite of software and services solutions, we create and acquire software products to serve the specific needs of our customers.

Our primary strategic verticals are Public Sector (including Education) and Healthcare.

COVID-19 Update and Economic Trends

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic.

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

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

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

The economic impact of these conditions materially impacted our business.

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

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

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

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

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

While uncertainty around the pandemic has diminished, uncertainty remains regarding broader economic impacts as a result of inflationary pressures, rising rates, monetary policy, and the current geopolitical situation, which could potentially cause new, or exacerbate existing, economic challenges that we may face.

These conditions could worsen, or others could arise, if the U.S.

and global economies were to enter recessionary periods, triggered or exacerbated by monetary policy designed to curb inflation.

As the future magnitude, duration and effects of these conditions are difficult to predict at this time, we are unable to predict the extent of the potential effect on our financial results.

At December 31, 2022, we had $3.6 million of cash and cash equivalents and $111.8 million of available capacity under our Senior Secured Credit Facility subject to our financial covenants.

As of December 31, 2022, we were in compliance with these covenants with a consolidated interest coverage ratio, total leverage ratio and consolidated senior leverage ratio of 5.18x, 4.03x and 2.77x, respectively.

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

Acquisitions during the nine months ended June 30, 2022

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

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

Acquisitions during the nine months ended June 30, 2021

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

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

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

to expand our software offerings, primarily in the Public Sector vertical.

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

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

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

Recent acquisitions

Effective January 1, 2023, we completed the acquisition of one business to expand our software offerings in the Public Sector vertical.

The total purchase consideration was $14.5 million, including $12.5 million in cash funded by the proceeds from our revolving credit facility, $2.0 million of our Class A Common Stock, and an amount in contingent consideration which is still being valued.

Acquisitions during the three months ended December 31, 2022

During the three months ended December 31, 2022, we completed the acquisition of two businesses to expand our software offerings.

Total purchase consideration consisted of $89.5 million in cash funded by the proceeds from our revolving credit facility.

Acquisitions during the three months ended December 31, 2021

During the three months ended December 31, 2021, we completed the acquisition of two business to expand our software offerings in the Healthcare vertical.

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

Our Revenue and Expenses

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Merchant Services

Our Merchant Services segment provides comprehensive payment solutions.

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

Proprietary Software and Payments

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

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

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

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

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

Software and Services

Our Software and Services segment delivers vertical market software solutions to customers across all of our strategic vertical markets.

These solutions often include embedded payments or other recurring services.

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

For additional information on our segments, see Note 14 to our condensed consolidated financial statements.

Key Performance Indicators

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• annualized recurring revenue ("ARR");

• software and related services as a percentage of total revenue;

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

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

• period-to-period payment volume attrition.

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

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

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

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

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

ARR for the three months ended December 31, 2022 and 2021 was $290.2 million and $240.4 million, respectively, representing a period-to-period growth rate of 20.7%.

Software and related services revenue includes the sale of subscriptions, recurring services, ongoing support, licenses, and installation and implementation services specific to software.

We focus on software and related

services revenue as a percentage of total revenue because it is a strategic goal to expand the software services we provide our customers.

Software and related services typically result in long-term partnerships with strong recurring revenues.

Software and related services revenue as a percentage of total revenue for the three months ended December 31, 2022 and 2021 was 47.79% and 49.15%.

Our payment volume for the three months ended December 31, 2022 and 2021 was $5.9 billion and $5.3 billion, respectively, representing a period-to-period growth rate of 11.4%.

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

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

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

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

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

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

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

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

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

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

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

Results of Operations

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

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

Three months ended June 30, Change

(in thousands) 2022 2021 (1)

Revenue $ 80,553 $ 63,129 $ 17,424 27.6 %

Operating expenses

Other costs of services 19,749 16,064 3,685 22.9 %

Selling, general and administrative 47,775 37,296 10,479 28.1 %

Depreciation and amortization 7,506 6,995 511 7.3 %

Change in fair value of contingent consideration 8,254 3,609 4,645 128.7 %

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

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

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

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

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

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

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

Net loss attributable to i3 Verticals, Inc.

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

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__________________________

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

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

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

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

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

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

The increase was principally driven by growth in software and related services revenues in our Public Sector and Healthcare verticals.

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

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

Other Costs of Services

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

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

Other costs of services within Merchant Services increased $2.1 million, or 14.8%, to $16.3 million for the three months ended June 30, 2022 from $14.2 million for the three months ended June 30, 2021, driven primarily by the growth in payment volume.

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

Selling, General and Administrative Expenses

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

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

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

Depreciation and Amortization

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

Amortization expense increased $0.4 million to $6.9 million for the three months ended June 30, 2022 from $6.4 million for the three months ended June 30, 2021 primarily due to acquisitions completed during the 2021 and 2022 fiscal years.

Depreciation expense increased $0.1 million to $0.6 million for the three months ended June 30, 2022 from $0.6 million for the three months ended June 30, 2021.

Change in Fair Value of Contingent Consideration

Change in fair value of contingent consideration to be paid in connection with acquisitions was a charge of $8.3 million for the three months ended June 30, 2022 primarily due to the performance of some of our acquisitions exceeding our expectations.

The change in fair value of contingent consideration for the three months ended June 30, 2021 was a charge of $3.6 million.

Interest Expense, net

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

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

Provision for (Benefit from) Income Taxes

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

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

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

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

i3 Verticals, Inc.

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

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

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

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

Nine Months Ended June 30, Change

Three months ended December 31, Change

(in thousands) 2022 2021

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Total operating expenses 80,191 74,694 5,497 7.4 %

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

Income (loss) from operations 5,838 (755) 6,593 n/m

Other expenses

Interest expense, net 5,490 3,154 2,336 74.1 %

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

Other income (203) — (203) n/m

Total other expenses 5,287 3,154 2,133 67.6 %

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

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

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

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

Income (loss) before income taxes 551 (3,909) 4,460 n/m

Provision for (benefit from) income taxes 382 (228) 610 n/m

Net income (loss) 169 (3,681) 3,850 n/m

Net income (loss) attributable to non-controlling interest 409 (1,153) 1,562 n/m

Net loss attributable to i3 Verticals, Inc.

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__________________________

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

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

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

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

The increase was principally driven by growth in software and related services revenues in our Public Sector and Healthcare verticals.

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

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

Revenue increased $12.1 million, or 16.4%, to $86.0 million for the three months ended December 31, 2022 from $73.9 million for the three months ended December 31, 2021.

This increase was principally driven by incremental revenue from acquisitions of $6.1 million, net of intercompany eliminations, all of which were within the Software and Services segment.

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

Revenue within Software and Services increased $8.4 million, or 18.8%, to $53.2 million for the three months ended December 31, 2022 from $44.8 million for the three months ended December 31, 2021.

The increase was principally driven by growth in software and related services revenues in our Public Sector vertical.

Revenue within Merchant Services increased $3.7 million, or 12.5%, to $32.8 million for the three months ended December 31, 2022 from $29.2 million for the three months ended December 31, 2021.

Payment volume from new and existing customers increased $0.4 billion, or 9.2%, to $5.3 billion for the three months ended December 31, 2022 from $4.8 billion for the three months ended December 31, 2021.

Other Costs of Services

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

Other costs of services increased $2.6 million, or 15.5%, to $19.1 million for the three months ended December 31, 2022 from $16.5 million for the three months ended December 31, 2021.

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

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

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

Other costs of services within Merchant Services increased $2.1 million, or 15.8%, to $15.6 million for the three months ended December 31, 2022 from $13.4 million for the three months ended December 31, 2021, driven primarily by the growth in payment volume.

Other costs of services within Software and Services increased $0.4 million, or 14.4%, to $3.5 million for the three months ended December 31, 2022 from $3.1 million for the three months ended December 31, 2021, driven primarily by acquisitions.

Selling, General and Administrative Expenses

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

Selling, general and administrative expenses increased $4.6 million, or 10.0%, to $51.0 million for the three months ended December 31, 2022 from $46.4 million for the three months ended December 31, 2021.

This increase was primarily driven by a $3.7 million increase in employment expenses, primarily resulting from an increase in headcount that resulted from acquisitions and an increase in stock compensation expense.

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

Depreciation and Amortization

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

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

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

Depreciation and amortization increased $1.8 million, or 26.3%, to $8.7 million for the three months ended December 31, 2022 from $6.9 million for the three months ended December 31, 2021.

Amortization expense increased $1.7 million to $7.9 million for the three months ended December 31, 2022 from $6.2 million for the three months ended December 31, 2021 primarily due to acquisitions completed during the 2022 and 2023 fiscal years.

Depreciation expense increased $0.1 million to $0.8 million for the three months ended December 31, 2022 from $0.6 million for the three months ended December 31, 2021.

Change in Fair Value of Contingent Consideration

Change in fair value of contingent consideration to be paid in connection with acquisitions was a charge of $24.7 million for the nine months ended June 30, 2022 primarily due to the performance of some of our acquisitions exceeding our expectations.

The change in fair value of contingent consideration for the nine months ended June 30, 2021 was a charge of $5.8 million.

Change in fair value of contingent consideration to be paid in connection with acquisitions was a charge of $1.4 million for the three months ended December 31, 2022 primarily due to the performance of some of our acquisitions exceeding our expectations.

The change in fair value of contingent consideration for the three months ended December 31, 2021 was a charge of $4.9 million.

Interest Expense, net

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

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

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

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

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

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

Interest expense, net, increased $2.3 million, or 74.1%, to $5.5 million for the three months ended December 31, 2022 from $3.2 million for the three months ended December 31, 2021.

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

Other income was $0.2 million related to contingent consideration received for an investment that was sold in a prior year for the three months ended December 31, 2022.

There was no other income for the three months ended December 31, 2021.

Provision for (Benefit from) Income Taxes

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

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

The provision for income taxes increased to a provision for $0.4 million for the three months ended December 31, 2022 from a benefit of $0.2 million for three months ended December 31, 2021.

Our effective tax rate was 69.3% for the three months ended December 31, 2022.

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

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

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

As of December 31, 2022, we had $3.6 million of cash and cash equivalents and available borrowing capacity of $111.8 million under our Senior Secured Credit Facility, subject to the financial covenants.

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

As of June 30, 2022, we had borrowings outstanding of $207.4 million under the Senior Secured Credit Facility.

As of December 31, 2022, we had borrowings outstanding of $263.2 million under the Senior Secured Credit Facility.

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

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Our liquidity profile reflects our completed offering in February 2020 of an aggregate principal amount of $138.0 million in 1.0% Exchangeable Senior Notes due 2025, with substantially all the proceeds being used to pay down outstanding borrowings under our Senior Secured Credit Facility.

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

As of December 31, 2022, the aggregate principal amount outstanding of the Exchangeable Notes was $117.0 million.

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

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

Nine Months Ended June 30, 2022 and 2021

Nine months ended June 30,

2022 2021 (1)

Three Months Ended December 31, 2022 and 2021

Three months ended December 31,

(in thousands)

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Net cash provided by financing activities $ 76,925 $ 49,223

__________________________

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 $2.0 million and a decrease of $7.0 million in cash outflows for acquisitions of businesses, net of cash and restricted cash acquired within cash flows used in investing activities, resulting in a combined increase of $5.0 million in cash, cash equivalents, and restricted cash at the end of the period.

Cash Flow from Operating Activities

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

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

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

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

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

Net cash provided by operating activities decreased $3.7 million to $18.2 million for the three months ended December 31, 2022 from $21.9 million for the three months ended December 31, 2021.

Our net income increased from a net loss of $3.7 million for the three months ended December 31, 2021 to net income of $0.2 million for the three months ended December 31, 2022.

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

The primary drivers of the decrease in cash provided by operating activities, despite the increase in net income, were a decrease in non-cash contingent consideration of $3.5 million and a decrease in amortization of debt discount and issuance costs of $1.1 million, partially offset by an increase in depreciation and amortization of $1.8 million and an increase in the provision for income taxes of $0.6 million for the three months ended December 31, 2022 compared to the three months ended December 31, 2021.

Other changes include decreases in operating assets and liabilities of $5.7 million, which are impacted by the timing of collections and payments, for the three months ended December 31, 2022 compared to the three months ended December 31, 2021.

Cash Flow from Investing Activities

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

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

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

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

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

Net cash used in investing activities increased $32.2 million to $94.5 million for the three months ended December 31, 2022 from $62.4 million for the three months ended December 31, 2021.

The largest driver of cash used in investing activities for the three months ended December 31, 2022 and 2021 was cash used in acquisitions, net of cash acquired.

For the three months ended December 31, 2022, we used $89.5 million of cash for acquisitions, net of cash acquired compared to $60.0 million for the three months ended December 31, 2021.

As a result, most of the increase in net cash used in investing activities was primarily the result of an increase of $29.5 million in cash used in acquisitions, net of cash acquired.

Additionally, expenditures for property and equipment increased $1.1 million, payments for other investing activities increased $0.8 million and expenditures for capitalized software increased $0.8 million for the three months ended December 31, 2022 compared to the three months ended December 31, 2021.

Cash Flow from Financing Activities

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

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

Net cash provided by financing activities increased $27.7 million to $76.9 million for the three months ended December 31, 2022 from $49.2 million for the three months ended December 31, 2021.

The increase in net cash provided by financing activities was primarily the result of an increase in proceeds from the revolving credit facility of $52.0 million and a decrease in cash paid for contingent consideration up to our original estimates of $5.2 million, partially offset by an increase in payments on the revolving credit facility of $29.1 million for the three months ended December 31, 2022 from the three months ended December 31, 2021.

Senior Secured Credit Facility

On May 9, 2019, we replaced our senior secured credit facility with a new credit agreement (the “Senior Secured Credit Facility”).

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

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

Effective October 3, 2022, the Senior Secured Credit Facility, as amended, consisted of a $375.0 million revolving credit facility, together with an option to increase the revolving credit facility and/or obtain incremental term loans in an additional principal amount of up to $50.0 million in the aggregate (subject to the receipt of additional commitments for any such incremental loan amounts).

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

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

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

Additionally, the Senior Secured Credit Facility requires us to pay unused commitment fees of 0.15% to 0.30% (0.30% as of December 31, 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, we were in compliance with these covenants, and there was $67.6 million available for borrowing under the revolving credit facility, subject to the financial covenants.

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

As of December 31, 2022, we were in compliance with these covenants, and there was $111.8 million available for borrowing under the revolving credit facility, subject to the financial covenants.

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

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At-the-Market Program

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

LLC and BTIG, LLC (each a “Sales Agent”), as further amended on November 22, 2021, under which we may issue and sell, from time to time and through the Sales Agents, shares

of our Class A common stock having an aggregate offering price of up to $125.0 million (the “ATM Program”).

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

On August 20, 2021, we, together with i3 Verticals, LLC, entered into an at-the-market offering sales agreement with Raymond James & Associates, Inc., Morgan Stanley & Co.

LLC and BTIG, LLC (each a “Sales Agent”), under which we may issue and sell, from time to time and through the Sales Agents, shares of our Class A common stock having an aggregate offering price of up to $125 million (the “ATM Program”).

During the quarter ended December 31, 2022, we did not sell any Class A common stock under the ATM Program.

As of December

31, 2022, we had a remaining capacity to sell up to $107 million of our Class A common stock under the ATM Program.

The proceeds from these issuances were used to repay outstanding indebtedness under the Senior Secured Credit Facility and for other general corporate purposes.

Material Cash Requirements

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

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

Payments Due by Period

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

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

We calculated interest payments through the maturity of our Exchangeable Notes by applying the coupon interest rate of 1.0% on the principal balance as of June 30, 2022 of $117.0 million.

We estimated interest payments through the maturity of our Senior Secured Credit Facility by applying the interest rate of 7.69% in effect on the outstanding balance as of December 31, 2022, plus the unused fee rate of 0.30% in effect as of December 31, 2022.

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

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

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

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

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

As of December 31, 2022, the total amount due under the Tax Receivable Agreement was $40.8 million, and payments to the Continuing Equity Owners related to exchanges through December 31, 2022 will range from $0 to $3.3 million 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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Critical accounting policies are those that we consider the most critical to understanding our financial condition and results of operations.

As of June 30, 2022, there have been no significant changes to our critical accounting estimates disclosed in the Form 10-K filed with the SEC on November 22, 2021.

As of December 31, 2022, there have been no significant changes to our critical accounting estimates disclosed in the Form 10-K filed with the SEC on November 18, 2022.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis