What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-09 compared with 2023-05-10 · 112 added, 126 removed, 271 unchanged (47% of the section changed)

17 unchanged sentences

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

• impact of inflation and fluctuations in interest rates and the potential effect of such fluctuations on revenues, expenses and resulting margins;

• impact of inflation and fluctuations in interest rates (including current elevated interest rate levels) and the potential effect of such fluctuations on revenues, expenses and resulting margins;

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

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• our ability to attract, recruit, retain and develop key personnel and qualified employees;

• 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;

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

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

17 unchanged sentences

Economic Trends

Inflationary pressures, rising interest rates, monetary policy, and the current geopolitical situation, are causing broad economic uncertainty and 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.

Inflationary pressures, elevated interest rate levels, monetary policy, and the current geopolitical situation, are causing broad economic uncertainty and could potentially cause new, or exacerbate existing, economic challenges that we may face.

These conditions could worsen, or other adverse economic developments 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 March 31, 2023, we had $4.0 million of cash and cash equivalents and $103.9 million of available capacity under our Senior Secured Credit Facility subject to our financial covenants.

As of March 31, 2023, we were in compliance with these covenants with a consolidated interest coverage ratio, total leverage ratio and consolidated senior leverage ratio of 4.61x, 4.00x and 2.78x, respectively.

On May 8, 2023, the Company replaced the Senior Secured Credit Facility with the 2023 Credit Agreement (as defined below).

For additional information about our Senior Secured Credit Facility, Exchangeable Notes and 2023 Credit Agreement, see the section entitled “Liquidity and Capital Resources” below.

Acquisitions during the six months ended March 31, 2023

At June 30, 2023, we had $5.0 million of cash and cash equivalents and $172.6 million of available capacity under our 2023 Credit Agreement subject to our financial covenants.

As of June 30, 2023, we were in compliance with these covenants with a consolidated interest coverage ratio and total leverage ratio 4.31x, and 4.00x, respectively.

For additional information about our Exchangeable Notes and 2023 Credit Agreement, see the section entitled “Liquidity and Capital Resources” below.

Acquisitions during the nine months ended June 30, 2023

On October 1, 2022, we completed the acquisition of Celtic Cross Holdings, Inc., in Scottsdale, Arizona and Celtic Systems Pvt.

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Total purchase consideration was $85.0 million in cash consideration, funded by the proceeds from our revolving credit facility.

During the six months ended March 31, 2023, we completed the acquisition of two other businesses to expand our software offerings.

During the nine months ended June 30, 2023, we completed the acquisition of two other businesses to expand our software offerings.

Total purchase consideration was $19.8 million, including $17.0 million in cash funded by the proceeds from our revolving credit facility, $2.0 million of our Class A Common Stock, and $0.8 million in contingent consideration.

Acquisitions during the six months ended March 31, 2022

During the six months ended March 31, 2022, we completed the acquisition of two business to expand our software offerings in the Healthcare vertical.

Acquisitions during the nine months ended June 30, 2022

During the nine months ended June 30, 2022, we completed the acquisition of three business 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 funded by the proceeds from our revolving credit facility, and $6.3 million in contingent consideration.

Our Revenue and Expenses

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

We generate revenue from software and related services revenue, including the sale of subscriptions, recurring services, ongoing support, licenses, and installation and implementation services specific to software.

We also generate revenue from volume-based payment processing fees (“discount fees”) and POS-related solutions that we provide to our customers directly and through our distribution partners.

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

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Interest expense, net.

Our interest expense consists of interest on our outstanding indebtedness under our Senior Secured Credit Facility and Exchangeable Notes, and amortization of debt discount and issuance costs.

Our interest expense consists of interest on our outstanding indebtedness under our 2023 Credit Agreement and Exchangeable Notes, and amortization of debt discount and issuance costs.

How We Assess Our Business

Merchant Services

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

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These solutions often include embedded payments or other recurring services.

Merchant Services

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.

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

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

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.

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

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

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

It does not take into account seasonality.

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

ARR for the three months ended March 31, 2023 and 2022 was $305.7 million and $254.5 million, respectively, representing a period-to-period growth rate of 20.1%.

ARR for the three months ended June 30, 2023 and 2022 was $311.4 million and $266.7 million, respectively, representing a period-to-period growth rate of 16.8%.

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.

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 March 31, 2023 and 2022 was 50.40% and 49.89%.

Our payment volume for the three months ended March 31, 2023 and 2022 was $6.0 billion and $5.3 billion, respectively, representing a period-to-period growth rate of 11.7%.

Our payment volume for the six months ended March 31, 2023 and 2022 was $11.9 billion and $10.6 billion, respectively, representing a period-to-period growth rate of 11.5%.

Software and related services revenue as a percentage of total revenue for the three months ended June 30, 2023 and 2022 was 50.32% and 48.42%.

Our payment volume for the three months ended June 30, 2023 and 2022 was $6.3 billion and $5.9 billion, respectively, representing a period-to-period growth rate of 5.8%.

Our payment volume for the nine months ended June 30, 2023 and 2022 was $18.1 billion and $16.6 billion, respectively, representing a period-to-period growth rate of 9.5%.

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

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Results of Operations

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

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

Three months ended March 31, Change

Three months ended June 30, Change

(in thousands) 2023 2022 Amount %

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Loss before income taxes (4,001) (6,498) 2,497 (38.4) %

(Benefit from) provision for income taxes (563) 884 (1,447) n/m

Provision for (benefit from) income taxes 2,077 (1,810) 3,887 n/m

Net loss (6,078) (4,688) (1,390) 29.7 %

Net loss attributable to non-controlling interest (923) (960) 37 (3.9) %

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

$ 36 $ (7,373) $ 7,409 n/m

Net loss attributable to i3 Verticals, Inc.

$ (5,155) $ (3,728) $ (1,427) 38.3 %

n/m = not meaningful

Revenue increased $15.8 million, or 20.2%, to $93.9 million for the three months ended March 31, 2023 from $78.1 million for the three months ended March 31, 2022.

This increase was principally driven by incremental revenue from acquisitions of $6.0 million, net of intercompany eliminations, all of which were within the Software and Services segment.

Revenue increased $13.4 million, or 16.6%, to $93.9 million for the three months ended June 30, 2023 from $80.6 million for the three months ended June 30, 2022.

This increase was partially driven by incremental revenue from acquisitions of $5.0 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 $11.8 million, or 24.2%, to $60.8 million for the three months ended March 31, 2023 from $49.0 million for the three months ended March 31, 2022.

Revenue within Software and Services increased $11.1 million, or 23.1%, to $58.9 million for the three months ended June 30, 2023 from $47.8 million for the three months ended June 30, 2022.

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

Revenue within Merchant Services increased $3.9 million, or 13.4%, to $33.1 million for the three months ended March 31, 2023 from $29.2 million for the three months ended March 31, 2022.

Payment volume from new and existing customers increased $0.4 billion, or 9.2%, to $5.2 billion for the three months ended March 31, 2023 from $4.8 billion for the three months ended March 31, 2022.

Revenue within Merchant Services increased $2.3 million, or 7.1%, to $35.0 million for the three months ended June 30, 2023 from $32.7 million for the three months ended June 30, 2022.

Payment volume from new and existing customers increased $0.2 billion, or 4.1%, to $5.6 billion for the three months ended June 30, 2023 from $5.4 billion for the three months ended June 30, 2022.

Other Costs of Services

Other costs of services increased $3.3 million, or 19.8%, to $19.9 million for the three months ended March 31, 2023 from $16.6 million for the three months ended March 31, 2022.

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 $2.2 million, or 16.2%, to $15.7 million for the three months ended March 31, 2023 from $13.5 million for the three months ended March 31, 2022, driven primarily by the growth in payment volume.

Other costs of services within Software and Services increased $1.1 million, or 35.4%, to $4.2 million for the three months ended March 31, 2023 from $3.1 million for the three months ended March 31, 2022, driven primarily by acquisitions.

Other costs of services increased $0.8 million, or 4.0%, to $20.5 million for the three months ended June 30, 2023 from $19.7 million for the three months ended June 30, 2022.

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

Other costs of services within Software and Services increased $0.7 million, or 20.5%, to $4.2 million for the three months ended June 30, 2023 from $3.5 million for the three months ended June 30, 2022, driven primarily by the growth in payment volume and acquisitions.

Other costs of services within Merchant Services increased $0.1 million, or 0.5%, to $16.4 million for the three months ended June 30, 2023 from $16.3 million for the three months ended June 30, 2022, driven primarily by the growth in payment volume.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $8.5 million, or 17.4%, to $57.2 million for the three months ended March 31, 2023 from $48.7 million for the three months ended March 31, 2022.

Selling, general and administrative expenses increased $7.7 million, or 16.0%, to $55.4 million for the three months ended June 30, 2023 from $47.8 million for the three months ended June 30, 2022.

This increase was primarily driven by a $6.9 million increase in employment expenses, primarily resulting from an increase in headcount that resulted from acquisitions and an increase in stock compensation expense.

Depreciation and Amortization

Depreciation and amortization increased $1.6 million, or 21.1%, to $9.0 million for the three months ended March 31, 2023 from $7.4 million for the three months ended March 31, 2022.

Amortization expense increased $1.4 million to $8.2 million for the three months ended March 31, 2023 from $6.8 million for the three months ended March 31, 2022 primarily due to acquisitions completed during the 2022 and 2023 fiscal years.

Depreciation expense increased $0.2 million to $0.8 million for the three months ended March 31, 2023 from $0.6 million for the three months ended March 31, 2022.

Depreciation and amortization increased $1.7 million, or 22.0%, to $9.2 million for the three months ended June 30, 2023 from $7.5 million for the three months ended June 30, 2022.

Amortization expense increased $1.4 million to $8.3 million for the three months ended June 30, 2023 from $6.9 million for the three months ended June 30, 2022 primarily due to acquisitions completed during the 2022 and 2023 fiscal years.

Depreciation expense increased $0.2 million to $0.9 million for the three months ended June 30, 2023 from $0.6 million for the three months ended June 30, 2022.

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 $2.3 million for the three months ended March 31, 2023 primarily due to the performance of some of our acquisitions exceeding our expectations.

The change in fair value of contingent consideration for the three months ended March 31, 2022 was a charge of $11.5 million.

Change in fair value of contingent consideration to be paid in connection with acquisitions was a charge of $6.2 million for the three months ended June 30, 2023 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, 2022 was a charge of $8.3 million.

Interest Expense, net

Interest expense, net, increased $2.8 million, or 83.6%, to $6.2 million for the three months ended March 31, 2023 from $3.4 million for the three months ended March 31, 2022.

The increase reflects a higher average interest rate and a higher average outstanding debt balance for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022.

(Benefit from) Provision for Income Taxes

The provision for income taxes decreased to a benefit of $0.6 million for the three months ended March 31, 2023 from a provision of $0.9 million for three months ended March 31, 2022.

Our effective tax rate was 74.6% for the three months ended March 31, 2023.

Interest expense, net, increased $3.0 million, or 78.5%, to $6.7 million for the three months ended June 30, 2023 from $3.8 million for the three months ended June 30, 2022.

The increase reflects a higher average interest rate and a higher average outstanding debt balance for the three months ended June 30, 2023, as compared to the three months ended June 30, 2022.

Provision for (Benefit from) Income Taxes

The provision for income taxes increased to a provision for $2.1 million for the three months ended June 30, 2023 from a benefit of $1.8 million for three months ended June 30, 2022.

Our effective tax rate was (51.9)% for the three months ended June 30, 2023.

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

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

Six Months Ended March 31, 2023 Compared to Six Months Ended March 31, 2022

Nine Months Ended June 30, 2023 Compared to Nine Months Ended June 30, 2022

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

Six months ended March 31, Change

Nine months ended June 30, Change

(in thousands) 2023 2022 Amount %

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Loss before income taxes (4,205) (19,961) 15,756 (78.9) %

(Benefit from) provision for income taxes (181) 656 (837) n/m

Provision for (benefit from) income taxes 1,896 (1,154) 3,050 n/m

Net loss (6,101) (18,807) 12,706 (67.6) %

Net income (loss) attributable to non-controlling interest 181 (4,218) 4,399 n/m

Net loss attributable to non-controlling interest (742) (5,178) 4,436 (85.7) %

Net loss attributable to i3 Verticals, Inc.

$ (5,359) $ (13,629) $ 8,270 (60.7) %

Revenue increased $27.8 million, or 18.3%, to $179.9 million for the six months ended March 31, 2023 from $152.1 million for the six months ended March 31, 2022.

Revenue increased $41.2 million, or 17.7%, to $273.8 million for the nine months ended June 30, 2023 from $232.6 million for the nine months ended June 30, 2022.

This increase was partially driven by revenue from acquisitions of $17.1 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 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 Software and Services increased $20.3 million, or 21.6%, to $114.0 million for the six months ended March 31, 2023 from $93.7 million for the six months ended March 31, 2022.

Revenue within Software and Services increased $31.3 million, or 22.1%, to $172.9 million for the nine months ended June 30, 2023 from $141.6 million for the nine months ended June 30, 2022.

The increase was principally driven by growth in software and related services revenues as well as integrated volume driving increases in payments revenue in our Public Sector vertical.

Revenue within Merchant Services increased $7.6 million, or 13.0%, to $65.9 million for the six months ended March 31, 2023 from $58.4 million for the six months ended March 31, 2022.

Payment volume from new and existing customers increased $0.9 billion, or 9.2%, to $10.5 billion for the six months ended March 31, 2023 from $9.6 billion for the six months ended March 31, 2022.

Revenue within Merchant Services increased $9.9 million, or 10.9%, to $101.0 million for the nine months ended June 30, 2023 from $91.1 million for the nine months ended June 30, 2022.

Payment volume from new and existing customers increased $1.1 billion, or 7.4%, to $16.1 billion for the nine months ended June 30, 2023 from $15.0 billion for the nine months ended June 30, 2022.

Other Costs of Services

Other costs of services increased $5.9 million, or 17.7%, to $39.0 million for the six months ended March 31, 2023 from $33.1 million for the six months ended March 31, 2022.

Other costs of services increased $6.6 million, or 12.6%, to $59.5 million for the nine months ended June 30, 2023 from $52.9 million for the nine months ended June 30, 2022.

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

Other costs of services within Merchant Services increased $4.3 million, or 16.0%, to $31.3 million for the six months ended March 31, 2023 from $27.0 million for the six months ended March 31, 2022, driven primarily by the growth in payment volume.

Other costs of services within Software and Services increased $1.5 million, or 25.0%, to $7.8 million for the six months ended March 31, 2023 from $6.2 million for the six months ended March 31, 2022, driven by the growth in payment volume and acquisitions.

Other costs of services within Software and Services increased $2.3 million, or 23.4%, to $11.9 million for the nine months ended June 30, 2023 from $9.7 million for the nine months ended June 30, 2022, driven by the growth in payment volume and acquisitions.

Other costs of services within Merchant Services increased $4.4 million, or 10.1%, to $47.7 million for the nine months ended June 30, 2023 from $43.3 million for the nine months ended June 30, 2022, driven primarily by the growth in payment volume.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $13.1 million, or 13.8%, to $108.2 million for the six months ended March 31, 2023 from $95.1 million for the six months ended March 31, 2022.

Selling, general and administrative expenses increased $20.8 million, or 14.5%, to $163.6 million for the nine months ended June 30, 2023 from $142.9 million for the nine months ended June 30, 2022.

This increase was primarily driven by a $16.6 million increase in employment expenses, primarily resulting from an increase in headcount that resulted from acquisitions and an increase in stock compensation expense.

Depreciation and Amortization

Depreciation and amortization increased $3.4 million, or 23.6%, to $17.7 million for the six months ended March 31, 2023 from $14.3 million for the six months ended March 31, 2022.

Amortization expense increased $3.1 million to $16.1 million for the six months ended March 31, 2023 from $13.0 million for the six months ended March 31, 2022, primarily due to acquisitions completed during the 2022 and 2023 fiscal years.

Depreciation expense increased $0.3 million to $1.6 million for the six months ended March 31, 2023 from $1.3 million for the six months ended March 31, 2022.

Depreciation and amortization increased $5.0 million, or 23.0%, to $26.8 million for the nine months ended June 30, 2023 from $21.8 million for the nine months ended June 30, 2022.

Amortization expense increased $4.5 million to $24.4 million for the nine months ended June 30, 2023 from $19.9 million for the nine months ended June 30, 2022, primarily due to acquisitions completed during the 2022 and 2023 fiscal years.

Depreciation expense increased $0.5 million to $2.5 million for the nine months ended June 30, 2023 from $1.9 million for the nine months ended June 30, 2022.

Change in Fair Value of Contingent Consideration

Change in fair value of contingent consideration to be paid in connection with acquisitions was a charge of $3.7 million for the six months ended March 31, 2023 primarily due to the performance of some of our acquisitions exceeding our expectations.

The change in fair value of contingent consideration for the six months ended March 31, 2022 was a charge of $16.4 million.

Change in fair value of contingent consideration to be paid in connection with acquisitions was a charge of $9.9 million for the nine months ended June 30, 2023 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, 2022 was a charge of $24.7 million.

Interest Expense, net

Interest expense, net, increased $5.2 million, or 79.0%, to $11.7 million for the six months ended March 31, 2023 from $6.5 million for the six months ended March 31, 2022.

The increase reflects a higher average interest rate and a higher average outstanding debt balance for the six months ended March 31, 2023, as compared to the six months ended March 31, 2022.

Other income was $0.2 million related to contingent consideration received for an investment that was sold in a prior year for the six months ended March 31, 2023.

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

(Benefit from) Provision for Income Taxes

The provision for income taxes decreased to a benefit of $0.2 million for the six months ended March 31, 2023 from a provision of $0.7 million for six months ended March 31, 2022.

Our effective tax rate was 88.7% for the six months ended March 31, 2023.

Interest expense, net, increased $8.1 million, or 78.8%, to $18.4 million for the nine months ended June 30, 2023 from $10.3 million for the nine months ended June 30, 2022.

The increase reflects a higher average interest rate and a higher average outstanding debt balance for the nine months ended June 30, 2023, as compared to the nine months ended June 30, 2022.

Other income was $0.3 million related to contingent consideration received for an investment that was sold in a prior year for the nine months ended June 30, 2023.

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

Provision for (Benefit from) Income Taxes

The provision for income taxes increased to a provision for $1.9 million for the nine months ended June 30, 2023 from a benefit of $1.2 million for nine months ended June 30, 2022.

Our effective tax rate was (45.1)% for the nine months ended June 30, 2023.

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

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

As of March 31, 2023, we had $4.0 million of cash and cash equivalents and available borrowing capacity of $103.9 million under our Senior Secured Credit Facility, subject to the financial covenants.

As of June 30, 2023, we had $5.0 million of cash and cash equivalents and available borrowing capacity of $172.6 million under our 2023 Credit Agreement, subject to the financial covenants.

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

As of March 31, 2023, we had borrowings outstanding of $271.1 million under the Senior Secured Credit Facility.

On May 8, 2023, the Company replaced the Senior Secured Credit Facility with the 2023 Credit Agreement (as defined below).

As of June 30, 2023, we had borrowings outstanding of $277.4 million under the 2023 Credit Agreement.

For additional information about our 2023 Credit Agreement, see the section entitled "—Senior Secured Revolving Credit Facility" below.

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The covenants contained in the 2023 Credit Agreement may restrict i3 Verticals, LLC’s ability to provide funds to i3 Verticals, Inc.

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

As of March 31, 2023, the aggregate principal amount outstanding of the Exchangeable Notes was $117.0 million.

As of June 30, 2023, 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.

Six Months Ended March 31, 2023 and 2022

Six months ended March 31,

Nine Months Ended June 30, 2023 and 2022

Nine months ended June 30,

(in thousands)

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Cash Flow from Operating Activities

Net cash provided by operating activities decreased $5.7 million to $25.5 million for the six months ended March 31, 2023 from $31.2 million for the six months ended March 31, 2022.

Our net loss decreased from a net loss of $14.1 million for the six months ended March 31, 2022 to a net loss of $23 thousand for the six months ended March 31, 2023.

Net cash provided by operating activities decreased $6.2 million to $29.6 million for the nine months ended June 30, 2023 from $35.8 million for the nine months ended June 30, 2022.

Our net loss decreased from a net loss of $18.8 million for the nine months ended June 30, 2022 to a net loss of $6.1 million for the nine months ended June 30, 2023.

Some of this decrease in net loss 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 decrease in net loss, were a decrease in non-cash contingent consideration of $12.7 million, a decrease in amortization of debt discount and issuance costs of $2.1 million and a decrease in the provision for income taxes of $0.9 million, partially offset by an increase in depreciation and amortization of $3.4 million for the six months ended March 31, 2023 compared to the six months ended March 31, 2022.

Other changes include decreases in operating assets and liabilities of $8.5 million, which are impacted by the timing of collections and payments, for the six months ended March 31, 2023 compared to the six months ended March 31, 2022.

The primary drivers of the decrease in cash provided by operating activities, despite the decrease in net loss, were a decrease in non-cash contingent consideration of $14.8 million, a decrease in amortization of debt discount and issuance costs of $3.0 million and an increase in the provision for income taxes of $3.0 million, partially offset by an increase in depreciation and amortization of $5.0 million for the nine months ended June 30, 2023 compared to the nine months ended June 30, 2022.

Other changes include decreases in operating assets and liabilities of $10.0 million, which are impacted by the timing of collections and payments, for the nine months ended June 30, 2023 compared to the nine months ended June 30, 2022.

Cash Flow from Investing Activities

Net cash used in investing activities increased $11.5 million to $111.1 million for the six months ended March 31, 2023 from $99.6 million for the six months ended March 31, 2022.

The largest driver of cash used in investing activities for the six months ended March 31, 2023 and 2022 was cash used in acquisitions, net of cash acquired.

For the six months ended March 31, 2023, we used $102.0 million of cash for acquisitions, net of cash acquired compared to $94.3 million for the six months ended March 31, 2022.

Net cash used in investing activities increased $6.1 million to $115.4 million for the nine months ended June 30, 2023 from $109.4 million for the nine months ended June 30, 2022.

The largest driver of cash used in investing activities for the nine months ended June 30, 2023 and 2022 was cash used in acquisitions, net of cash acquired.

For the nine months ended June 30, 2023, we used $102.0 million of cash for acquisitions, net of cash acquired compared to $100.7 million for the nine months ended June 30, 2022.

As a result, most of the increase in net cash used in investing activities was primarily the result of an increase of $1.3 million in cash used in acquisitions, net of cash acquired.

Additionally, expenditures for property and equipment increased $1.4 million, payments for other investing activities increased $1.2 million and expenditures for capitalized software increased $1.1 million for the six months ended March 31, 2023 compared to the six months ended March 31, 2022.

Additionally, expenditures for property and equipment increased $1.7 million, payments for other investing activities increased $1.2 million and expenditures for capitalized software increased $1.7 million for the nine months ended June 30, 2023 compared to the nine months ended June 30, 2022.

Cash Flow from Financing Activities

Net cash provided by financing activities increased $6.4 million to $84.2 million for the six months ended March 31, 2023 from $77.8 million for the six months ended March 31, 2022.

The increase in net cash provided by financing activities was primarily the result of an increase in proceeds from the revolving credit facility of $86.0 million and a decrease in cash paid for contingent consideration up to our original estimates of $5.0 million, partially offset by an increase in payments on the revolving credit facility of $84.0 million for the six months ended March 31, 2023 from the six months ended March 31, 2022.

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”).

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 accrued 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 March 31, 2023), 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 March 31, 2023), in each case depending upon the consolidated total leverage ratio, as defined in the agreement.

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

Additionally, the Senior Secured Credit Facility required us to pay unused commitment fees of 0.15% to 0.30% (0.30% as of March 31, 2023) 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.

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

As of March 31, 2023, we were in compliance with these covenants, and there was $103.9 million available for borrowing under the revolving credit facility, subject to the financial covenants.

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

The lenders under the Senior Secured Credit Facility held senior rights to collateral and principal repayment over all other creditors.

The provisions of the Senior Secured Credit Facility placed certain restrictions and limitations upon us.

These include, among others, restrictions on liens, investments, indebtedness, fundamental changes and dispositions, maintenance of certain financial ratios, and certain non-financial covenants pertaining to our activities during the period covered.

Net cash provided by financing activities decreased $3.5 million to $82.2 million for the nine months ended June 30, 2023 from $85.7 million for the nine months ended June 30, 2022.

The decrease in net cash provided by financing activities was primarily the result of an increase in proceeds from the revolving credit facility of $51.8 million and a decrease in cash paid for contingent consideration up to our original estimates of $12.5 million, partially offset by an increase in payments on the revolving credit facility of $66.4 million for the nine months ended June 30, 2023 from the nine months ended June 30, 2022.

2023 Senior Secured Revolving Credit Facility

On May 8, 2023, i3 Verticals, LLC (the “Borrower”), entered into that certain Credit Agreement (the “2023 Credit Agreement”) with the guarantors and lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (“JPMorgan”).

The 2023 Credit Agreement replaces the Senior Secured Credit Facility.

The 2023 Credit Agreement replaced our prior credit agreement which was entered into on May 9, 2019 (for additional information regarding such prior credit agreement, see Note 7 to our condensed consolidated financial statements).

The 2023 Credit Agreement provides for aggregate commitments of $450 million in the form of a senior secured revolving credit facility (the “Revolver”).

The 2023 Credit Agreement provides that the Borrower has the right to seek additional commitments to provide additional term loan facilities or additional revolving credit commitments in an aggregate principal amount up to, as of any date of determination, the sum of (i) the greater of $100 million and 100% of the Borrower’s consolidated EBITDA (as defined in the 2023 Credit Agreement) for the most recently completed four quarter period, plus (ii) the amount of certain prepayments of certain indebtedness, so long as, among other things, after giving pro forma effect to the incurrence of such additional borrowings and any related transactions, the Borrower’s consolidated interest coverage ratio (as defined in the 2023 Credit Agreement) would not be less than 3.0 to 1.0 and the Borrower’s consolidated total net leverage ratio (as defined in the 2023 Credit Agreement) would not exceed 5.0 to 1.0.

As of June 30, 2023, the Borrower's consolidated interest coverage ratio was 4.31x and total leverage ratio was 4.00x.

The provision of any such additional amounts under the additional term loan facilities or additional revolving credit commitments are subject to certain additional conditions and the receipt of certain additional commitments by existing or additional lenders.

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The proceeds of the Revolver, together with proceeds from any additional amounts under the additional term loan facilities or additional revolving credit commitments, may only be used by the Borrower to (i) finance working capital, capital expenditures and other lawful corporate purposes, (ii) finance permitted acquisitions (as defined in the 2023 Credit Agreement) and (iii) to refinance certain existing indebtedness.

Borrowings under the Revolver will be made, at the Borrower’s option, at the base rate or the Adjusted Term SOFR rate, plus, in each case, an applicable margin.

The base rate is a fluctuating rate of interest per annum equal to the highest of (a) the greater of the federal funds rate or the overnight bank funding rate, plus ½ of 1%, (b) Wall Street Journal prime rate and (c) the Adjusted Term SOFR rate for an interest period of one month, plus 1%;

provided, that the base rate shall not be less than 1% in any event.

Borrowings under the Revolver will be made, at the Borrower’s option, at the Adjusted Term SOFR rate or the base rate, plus, in each case, an applicable margin.

The Adjusted Term SOFR rate will be the rate of interest per annum equal to the Term SOFR rate (based upon an interest period of one, three or six months), plus 0.10%;

provided, that the Adjusted Term SOFR rate shall not be less than 0% in any event.

applicable margin is based upon the Borrower’s consolidated total net leverage ratio (as defined in the 2023 Credit Agreement), as reflected in the schedule below:

plus an applicable margin of 2.00% to 3.00% (3.00% at June 30, 2023).

The Adjusted Term SOFR rate shall not be less than 0% in any event.

plus an applicable margin of 1.00% to 2.00% (2.00% at June 30, 2023).

The base rate shall not be less than 1% in any event.

The applicable margin is based upon the Borrower’s consolidated total net leverage ratio (as defined in the 2023 Credit Agreement), as reflected in the schedule below:

Consolidated Total Net Leverage Ratio Commitment Fee Letter of Credit Fee Term Benchmark Loans Base Rate Loans

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0.15 % 2.00 % 2.00 % 1.00 %

In addition to paying interest on outstanding principal under the Revolver, the Borrower will be required to pay a commitment fee equal to the product of between 0.15% and 0.30% (the applicable percentage depending on the Borrower’s consolidated total net leverage ratio as reflected in the schedule above) times the actual daily amount by which $450 million exceeds the total amount outstanding under the Revolver and available to be drawn under all outstanding letters of credit.

In addition to paying interest on outstanding principal under the Revolver, the Borrower will be required to pay a commitment fee equal to the product of between 0.15% and 0.30% (the applicable percentage depending on the Borrower’s consolidated total net leverage ratio as reflected in the schedule above, 0.30% at June 30, 2023) times the actual daily amount by which $450 million exceeds the total amount outstanding under the Revolver and available to be drawn under all outstanding letters of credit.

The Borrower will be permitted to voluntarily reduce the unutilized portion of the commitment amount and repay outstanding loans under the 2023 Credit Agreement, whether such amounts are issued under the Revolver or under the additional term loan facilities or additional revolving credit facilities, at any time without premium or penalty.

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and modify the terms of certain organizational agreements.

The 2023 Credit Agreement contains customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, certain events of bankruptcy and insolvency, material judgments, certain ERISA events, invalidity of loan documents and certain changes in control.

of bankruptcy and insolvency, material judgments, certain events with respect to employee benefit plans, invalidity of loan documents and certain changes in control.

Exchangeable Notes

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The net proceeds from the sale of the Exchangeable Notes were approximately $132.8 million, after deducting discounts and commissions to the certain initial purchasers and other estimated fees and expenses.

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

i3 Verticals, LLC used a portion of the net proceeds of the Exchangeable Notes offering to pay down outstanding borrowings under the Prior Senior Secured Credit Facility in connection with the effectiveness of the operative provisions of the amendment to the Prior Senior Secured Credit Facility and to pay the cost of the Note Hedge Transactions.

At-the-Market Program

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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 March 31, 2023, we did not sell any Class A common stock under the ATM Program.

As of March 31, 2023, 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.

During the quarter ended June 30, 2023, we did not sell any Class A common stock under the ATM Program.

As of June 30, 2023, we had a remaining capacity to sell up to $107 million of our Class A common stock under the ATM Program.

Material Cash Requirements

The following table summarizes our material cash requirements as of March 31, 2023 related to leases and borrowings:

The following table summarizes our material cash requirements as of June 30, 2023 related to leases and borrowings:

Payments Due by Period

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Facility leases 17,635 5,163 8,075 2,951 1,446

Senior Secured Credit Facility and related interest (2)

2023 Credit Agreement and related interest (2)

391,715 22,755 45,780 323,180 —

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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 8.17% in effect on the outstanding balance as of March 31, 2023, plus the unused fee rate of 0.30% in effect as of March 31, 2023.

We calculated interest payments through the maturity of our Exchangeable Notes by applying the coupon interest rate of 1.0% on the principal balance as of March 31, 2023 of $117.0 million.

We estimated interest payments through the maturity of our 2023 Credit Agreement by applying the interest rate of 8.30% in effect on the outstanding balance as of June 30, 2023, plus the unused fee rate of 0.30% in effect as of June 30, 2023.

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, 2023 of $117.0 million.

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

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

As of March 31, 2023, the total amount due under the Tax Receivable Agreement was $40.9 million, and payments to the Continuing Equity Owners related to exchanges through March 31, 2023 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 March 31, 2023, approximate the current estimate of expected tax savings and are subject to change after the filing of the Company’s U.S.

As of June 30, 2023, the total amount due under the Tax Receivable Agreement was $40.9 million, and payments to the Continuing Equity Owners related to exchanges through June 30, 2023 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 June 30, 2023, approximate the current estimate of expected tax savings and are subject to change after the filing of the Company’s U.S.

federal and state income tax returns.

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

As of March 31, 2023, 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.

As of June 30, 2023, 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