i3 Verticals, Inc. 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with our audited financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those under the heading “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K. Certain amounts in this section may not foot due to rounding. 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. 54 Economic Trends Inflationary pressures, elevated interest rate levels, monetary policy, and the current geopolitical situation (including the military conflicts in Ukraine and in the Middle East), are causing broad economic uncertainty and could potentially cause new, or exacerbate existing, economic challenges that may impact us. These conditions could worsen as a result of adverse economic developments impacting the U.S. and/or global economies, including as a result of 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. Liquidity At September 30, 2023, we had $3.1 million of cash and cash equivalents and $177.5 million of available capacity under our 2023 Senior Secured Credit Facility subject to our financial covenants. As of September 30, 2023, we were in compliance with these covenants with a consolidated interest coverage ratio and total leverage ratio 4.39x, and 3.77x, respectively. For additional information about our Exchangeable Notes and 2023 Senior Secured Credit Facility, see the section entitled “Liquidity and Capital Resources” below. Acquisitions A core component of our growth strategy includes a disciplined approach to acquisitions of companies and technology, evidenced by numerous platform acquisitions and tuck-in acquisitions since our inception in 2012. Our acquisitions have opened new strategic vertical markets, increased the number of businesses and organizations to whom we provide solutions and augmented our existing payment and software solutions and capabilities. Acquisitions during the year ended September 30, 2023 On October 1, 2022, we completed the acquisition of Celtic Cross Holdings, Inc., in Scottsdale, Arizona and Celtic Systems Pvt. Ltd. in Vadodara, India (collectively "Celtic") to expand the Company’s software offerings in the Public Sector vertical. Total purchase consideration was $85.0 million in cash consideration, funded by the proceeds from our revolving credit facility. During the year ended September 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 year ended September 30, 2022 During the year ended September 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. Our Revenue and Expenses Revenues 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. Revenues are also derived from a variety of fixed transaction or service fees, including authorization fees, convenience fees, statement fees, annual fees and fees for other miscellaneous services, such as handling chargebacks. Interchange and network fees. Interchange and network fees consist primarily of pass-through fees that make up a portion of discount fee revenue. These include assessment fees payable to card associations, which are a percentage of the processing volume we generate from Visa and Mastercard. These fees are presented net of revenue. 55 Expenses Other costs of services . Other costs of services include costs directly attributable to processing and bank sponsorship costs. These also include related costs such as residual payments to our distribution partners, which are based on a percentage of the net revenues (revenue less interchange and network fees) generated from customer referrals. Losses resulting from excessive chargebacks against a customer are included in other cost of services. The cost of equipment sold is also included in cost of services. Other costs of services are recognized at the time the customer’s transactions are processed. Selling, general and administrative . Selling, general and administrative expenses include salaries and other employment costs, professional services, rent and utilities and other operating costs. Depreciation and amortization . Depreciation expense consists of depreciation on our investments in property, equipment and computer hardware and software. Depreciation expense is recognized on a straight-line basis over the estimated useful life of the asset. Amortization expense for acquired intangible assets and internally developed software is recognized using a proportional cash flow method. Amortization expense for internally developed software is recognized over the estimated useful life of the asset. The useful lives of contract-based intangible assets are equal to the terms of the agreement. Interest expense, net. Our interest expense consists of interest on our outstanding indebtedness under our 2023 Senior Secured Credit Facility, our Prior Senior Secured Credit Facility and Exchangeable Notes, and amortization of debt discount and issuance costs. How We Assess Our Business 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. 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. Other Our Other category includes corporate overhead expenses, when presenting reportable segment information. For additional information on our segments, see Note 17 to our consolidated financial statements. Key Performance Indicators We evaluate our performance through key performance indicators, including: • 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”); and • processing margin. 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. We focus on ARR because it helps us to assess the health and trajectory of our business. ARR does not have a standardized definition and is therefore unlikely to be comparable to similarly titled measures presented by other companies. It should be reviewed independently of revenue and it is not a forecast. Additionally, ARR 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 September 30, 2023 and 2022 was $312.9 million and $281.2 million, respectively, representing a period-to-period growth rate of 11.3%. 56 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 years ended September 30, 2023 and 2022 was 50% and 49%. Our payment volume for the years ended September 30, 2023 and 2022 was $24.4 billion and $22.6 billion, respectively, representing a period-to-period growth rate of 8%. 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. Processing margin is equal to revenue less other cost of services plus residuals expense, which is a component of other cost of services. We focus on processing margin because it represents the profitability of the operating segments, exclusive of sales efforts and overhead. Our processing margin for the years ended September 30, 2023 and 2022 was $333.3 million and $282.7 million, respectively. 57 Results of Operations Year Ended September 30, 2023 Compared to Year Ended September 30, 2022 The following table presents our historical results of operations for the periods indicated: Year ended September 30, Change (in thousands) 2023 2022 Amount % Revenue $ 370,239 $ 317,862 $ 52,377 16.5 % Operating expenses Other costs of services 80,552 73,367 7,185 9.8 % Selling general and administrative 219,736 193,790 25,946 13.4 % Depreciation and amortization 36,461 29,424 7,037 23.9 % Change in fair value of contingent consideration 10,781 23,725 (12,944) n/m Total operating expenses 347,530 320,306 27,224 8.5 % Income (loss) from operations 22,709 (2,444) 25,153 n/m Other expenses Interest expense, net 25,128 14,775 10,353 70.1 % Other expense 1,436 991 445 n/m Total other expenses 26,564 15,766 10,798 68.5 % Loss before income taxes (3,855) (18,210) 14,355 (78.8) % (Benefit from) provision for income taxes (1,203) 5,007 (6,210) n/m Net loss (2,652) (23,217) 20,565 (88.6) % Net loss attributable to non-controlling interest (1,841) (6,115) 4,274 (69.9) % Net loss attributable to i3 Verticals $ (811) $ (17,102) $ 16,291 (95.3) % n/m = not meaningful Revenue Revenue increased $52.4 million, or 16.5%, to $370.2 million for the year ended September 30, 2023 from $317.9 million for the year ended September 30, 2022. This increase was partially driven by revenue from acquisitions completed during the 2023 and 2022 fiscal years of $21.5 million, net of intercompany eliminations, all of which were within Software and Services. 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 $39.6 million, or 20.5%, to $233.0 million for the year ended September 30, 2023 from $193.4 million for the year ended September 30, 2022. This increase was principally driven by revenue of $21.5 million from acquisitions completed during 2023 and 2022, and the remaining growth was driven by an increase in software and related services revenue in our Public Sector vertical and an increase in processing revenue in our Education vertical. 58 Revenue within Merchant Services increased $12.9 million, or 10.3%, to $137.3 million for the year ended September 30, 2023 from $124.5 million for the year ended September 30, 2022. Payment volume from new and existing customers within Merchant Services increased $1.2 billion, or 5.8%, to $21.7 billion for the year ended September 30, 2023 from $20.5 billion for the year ended September 30, 2022. Other Costs of Services Other costs of services increased $7.2 million, or 9.8%, to $80.6 million for the year ended September 30, 2023 from $73.4 million for the year ended September 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 $4.9 million, or 8.2%, to $64.5 million for the year ended September 30, 2023 from $59.6 million for the year ended September 30, 2022, driven primarily by the growth in payment volume. Other costs of services within Software and Services increased $2.3 million, or 16.9%, to $16.1 million for the year ended September 30, 2023 from $13.8 million for the year ended September 30, 2022. Acquisitions completed during the 2022 and 2023 fiscal years contributed an incremental $1.1 million, net of intercompany eliminations, to our other cost of services for the year ended September 30, 2023. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $25.9 million, or 13.4%, to $219.7 million for the year ended September 30, 2023 from $193.8 million for the year ended September 30, 2022. This increase was principally driven by a $22.4 million increase in employment expense, primarily resulting from an increase in headcount that resulted from inflationary pressures, acquisitions and an increase in stock compensation expense. The majority of the remaining increase was comprised of increases in technology expense. Depreciation and Amortization Depreciation and amortization increased $7.0 million, or 23.9%, to $36.5 million for the year ended September 30, 2023 from $29.4 million for the year ended September 30, 2022. Amortization expense increased $6.2 million to $33.1 million for the year ended September 30, 2023 from $26.9 million for the year ended September 30, 2022 primarily due to greater amortization expense resulting from acquisitions completed during the 2023 and 2022 fiscal years. Depreciation expense increased $0.8 million to $3.4 million for the year ended September 30, 2023 from $2.5 million for the year ended September 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 $10.8 million for the year ended September 30, 2023 due to the performance of some of our acquisitions exceeding our expectations. The change in fair value of contingent consideration for the year ended September 30, 2022 was a charge of $23.7 million. Interest Expense, net Interest expense, net, increased $10.4 million, or 70.1%, to $25.1 million for the year ended September 30, 2023 from $14.8 million for the year ended September 30, 2022. The increase reflected a higher average interest rate and a higher average outstanding debt balance for the year ended September 30, 2023, as compared to the year ended September 30, 2022. Other expense Other expense was $1.4 million for the year ended September 30, 2023, related to a $2.7 million write down of an internal use software project, offset by $0.9 million relating to adjustments of liabilities under our Tax Receivable Agreement related to the remeasurement of the underlying deferred tax asset for changes in estimated income tax rates and $0.3 million contingent consideration received for an investment that was sold in a prior year. Other expense was $1.0 million for the year ended September 30, 2022, relating to adjustments of liabilities under our Tax Receivable Agreement related to the remeasurement of the underlying deferred tax asset for changes in estimated income tax rates. 59 (Benefit from) Provision for Income Taxes The benefit from income taxes was $1.2 million for the year ended September 30, 2023 as compared to $5.0 million for the year ended September 30, 2022. The benefit from deferred income taxes changed to a benefit of $5.9 million for the year ended September 30, 2023 from a provision of $2.6 million for the year ended September 30, 2022, driven by a reduction in valuation allowances. Additionally, the provision for current income tax expense increased to $4.7 million for the year ended September 30, 2023 from $2.4 million for the year ended September 30, 2022, driven by the decrease in the loss before income taxes, limitations on interest expense deduction, and the phase in of deferral of research and development expenses. Our effective tax rate of 31% for the year ended September 30, 2023 differs from the federal statutory rate primarily due to valuation allowance and state tax expense. 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. Year Ended September 30, 2022 Compared to Year Ended September 30, 2021 For discussion of our results of operations for fiscal 2022 compared to fiscal 2021, refer to the Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of our Form 10-K for the fiscal year ended September 30, 2022, filed with the SEC on November 18, 2022. Seasonality We have experienced in the past, and may continue to experience, seasonal fluctuations in our revenues as a result of consumer and business spending patterns. Revenues during the first quarter of the calendar year, which is our second fiscal quarter, tend to decrease in comparison to the remaining three quarters of the calendar year on a same store basis. This decrease is due to the relatively higher number and amount of electronic payment transactions related to seasonal retail events, such as holiday and vacation spending in their second, third and fourth quarters of the calendar year. The number of business days in a month or quarter also may affect seasonal fluctuations. Revenue in our Education vertical fluctuates with the school calendar. Revenue for our Education customers is strongest in August, September, October, January and February, at the start of each semester, and generally weakens throughout the semester, with little revenue in the summer months of June and July. Operating expenses show less seasonal fluctuation, with the result that net income is subject to the same seasonal factors as our revenues. The growth in our business may have partially overshadowed seasonal trends to date, and seasonal impacts on our business may be more pronounced in the future. Liquidity and Capital Resources We have historically financed our operations and working capital through net cash from operating activities. As of September 30, 2023, we had $3.1 million of cash and cash equivalents and available borrowing capacity of $177.5 million under our 2023 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 September 30, 2023, we had borrowings outstanding of $272.5 million under the 2023 Senior Secured Credit Facility. For additional information about our 2023 Senior Secured Credit Facility, see the section entitled "— 2023 Senior Secured Credit Facility" below. 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. We consistently have positive cash flow provided by operations and expect that our cash flow from operations, current cash and cash equivalents and available borrowing capacity under the 2023 Senior Secured Credit Facility will be sufficient to fund our operations and planned capital expenditures and to service our debt obligations for at least the next twelve months and foreseeable future. Our growth strategy includes acquisitions. We expect to fund acquisitions through a combination of net cash from operating activities, borrowings under our 2023 Senior Secured Credit Facility and through the issuance of equity and debt securities. As a holding company, we depend on distributions or loans from i3 Verticals, LLC to access funds earned by our operations. The covenants contained in the 2023 Senior Secured Credit Facility may restrict i3 Verticals, LLC’s ability to provide funds to i3 Verticals, Inc. 60 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 Prior Senior Secured Credit Facility. During the year ended September 30, 2020, we repurchased $21.0 million in aggregate principal amount of the Exchangeable Notes for an aggregate purchase price of approximately $17.4 million. We recorded a loss on retirement of debt of $2.3 million due to the carrying value exceeding the fair value of the repurchased portion of the Exchangeable Notes at the dates of repurchases. We may elect from time to time to purchase our outstanding debt in open market purchases, privately negotiated transactions or otherwise. Any such debt repurchases will depend upon prevailing market conditions, our liquidity requirements, contractual restrictions, applicable securities law and other factors. Our 2023 Senior Secured Credit Facility, as amended, requires us to maintain a consolidated interest coverage ratio not less than 3.0 to 1.0 and total leverage ratio not exceeding 5.0 to 1.0. As of September 30, 2023, we were in compliance with these covenants with a consolidated interest coverage ratio and total leverage ratio of 4.39x and 3.77x, respectively. Although we believe our liquidity position remains strong, there can be no assurance that we will be able to raise additional funds, in the form of debt or equity, or to amend our 2023 Senior Secured Credit Facility on terms acceptable to us, if at all, even if we determined such actions were necessary in the future. Any material adverse change in customer demand and our ability to retain customers, competitive market forces, as well as other factors listed under the heading “Note Regarding Forward-looking Statements,” and in our risk factors included herein could affect our ability to continue to fund our liquidity needs from business operations. Cash Flows The following table presents a summary of cash flows from operating, investing and financing activities for the following comparative periods. Year Ended September 30, 2023 Compared to Year Ended September 30, 2022 Year ended September 30, 2023 2022 (in thousands) Net cash provided by operating activities $ 34,503 $ 45,846 Net cash used in investing activities $ (121,520) $ (113,045) Net cash provided by financing activities $ 75,652 $ 73,033 Cash Flow from Operating Activities Net cash provided by operating activities decreased $11.3 million to $34.5 million for the year ended September 30, 2023 from $45.8 million for the year ended September 30, 2022. The primary driver of the decrease in cash provided by operating activities was decreases in operating assets and liabilities of $17.4 million, which are impacted by the timing of collections and payments. Offsetting the decreases in operating assets and liabilities, our net loss decreased $20.6 million to a net loss of $2.7 million for the year ended September 30, 2023 from a net loss of $23.2 million for the year ended September 30, 2022; however, $12.9 million of the decrease in net loss was driven by a decrease in changes in the fair value of non-cash contingent consideration, $8.5 million of the decrease in net loss was driven by a decrease in the provision for deferred income taxes to a benefit from deferred income taxes, and $4.3 million of the decrease in net loss was driven by a decrease in amortization of debt discount and issuance costs, all of which decrease the net loss but do not result in cash inflows. These decreases to the net loss were partially offset by increases to the net loss of an increase in depreciation and amortization expense of $7.0 million, an increase in the write down of an intangible asset of $2.7 million and an increase in equity-based compensation expense of $1.6 million, all of which increase the net loss but are not cash expenditures. 61 Cash Flow from Investing Activities Net cash used in investing activities increased $8.5 million to $121.5 million for the year ended September 30, 2023 from $113.0 million for the year ended September 30, 2022. The largest driver of cash used in investing activities for the years ended September 30, 2023 and 2022 was cash used in acquisitions, net of cash acquired. For the year ended September 30, 2023, we used $102.0 million of cash for acquisitions, net of cash acquired compared to $100.7 million for the year ended September 30, 2022. Additionally, expenditures for purchases of merchant portfolios and residual buyouts increased $2.1 million, expenditures for capitalized software increased by $2.0 million and expenditures for property and equipment increased by $1.9 million for the year ended September 30, 2023 compared to the year ended September 30, 2022. Cash Flow from Financing Activities Net cash provided by financing activities increased $2.6 million to $75.7 million for the year ended September 30, 2023 from $73.0 million for the year ended September 30, 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 $29.3 million and a decrease in cash paid for contingent consideration up to our original estimates of $18.5 million, partially offset by an increase in payments on the revolving credit facility of $26.4 million and a decrease in proceeds from issuance of Class A common stock, net of underwriting discounts and offering costs of $17.7 million for the year ended September 30, 2023 compared to the year ended September 30, 2022. Year Ended September 30, 2022 Compared to Year Ended September 30, 2021 For a discussion of the cash flows for the year ended September 30, 2022 compared to the year ended September 30, 2021, refer to Part II, Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, which was filed with the Securities and Exchange Commission on November 18, 2022. 2023 Senior Secured Credit Facility On May 8, 2023, i3 Verticals, LLC (the “Borrower”), entered into that certain Credit Agreement (the “2023 Senior Secured Credit Facility”) with the guarantors and lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (“JPMorgan”). The 2023 Senior Secured Credit Facility replaces the Prior Senior Secured Credit Facility (as defined below). The 2023 Senior Secured Credit Facility provides for aggregate commitments of $450 million in the form of a senior secured revolving credit facility (the “Revolver”). The 2023 Senior Secured Credit Facility 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 Senior Secured Credit Facility) 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 Senior Secured Credit Facility) would not be less than 3.0 to 1.0 and the Borrower’s consolidated total net leverage ratio (as defined in the 2023 Senior Secured Credit Facility) would not exceed 5.0 to 1.0. As of September 30, 2023, the Borrower's consolidated interest coverage ratio was 4.39x and total leverage ratio was 3.77x. 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. The lenders under the 2023 Senior Secured Credit Facility are not under any obligation to provide any such additional term loan facilities or revolving credit commitments. 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 Senior Secured Credit Facility) and (iii) to refinance certain existing indebtedness. 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. 62 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%, plus an applicable margin of 2.00% to 3.00% (3.00% at September 30, 2023). The Adjusted Term SOFR rate shall not be less than 0% in any event. 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%, plus an applicable margin of 1.00% to 2.00% (2.00%% at September 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 Senior Secured Credit Facility), as reflected in the schedule below: Consolidated Total Net Leverage Ratio Commitment Fee Letter of Credit Fee Term Benchmark Loans Base Rate Loans > 3.0 to 1.0 0.30 % 3.00 % 3.00 % 2.00 % > 2.5 to 1.0 but < 3.0 to 1.0 0.25 % 2.50 % 2.50 % 1.50 % > 2.0 to 1.0 but < 2.5 to 1.0 0.20 % 2.25 % 2.25 % 1.25 % < 2.0 to 1.0 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, 0.30% at September 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 Senior Secured Credit Facility, 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. In addition, if the total amount borrowed under the Revolver exceeds $450 million at any time, the 2023 Senior Secured Credit Facility requires the Borrower to prepay such excess outstanding amounts. All obligations under the 2023 Senior Secured Credit Facility are unconditionally guaranteed by the Company, and each of the Company’s existing and future direct and indirect material, wholly owned domestic subsidiaries, subject to certain exceptions. The obligations are secured by first-priority security interests in substantially all tangible and intangible assets of the Borrower, the Company and each subsidiary guarantor, in each case whether owned on the date of the initial borrowings or thereafter acquired. The 2023 Senior Secured Credit Facility places certain restrictions on the ability of the Borrower, the Company and their subsidiaries to, among other things, incur debt and liens; merge, consolidate or liquidate; dispose of assets; enter into hedging arrangements; make certain restricted payments; undertake transactions with affiliates; enter into sale-leaseback transactions; make certain investments; prepay or modify the terms of certain indebtedness; and modify the terms of certain organizational agreements. The 2023 Senior Secured Credit Facility 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 events with respect to employee benefit plans, invalidity of loan documents and certain changes in control. As of September 30, 2023, we were in compliance with these covenants, with a consolidated interest coverage ratio and total leverage ratio of 4.39x and 3.77x, respectively. 63 Exchangeable Notes On February 18, 2020, i3 Verticals, LLC issued $138.0 million aggregate principal amount of its 1.0% Exchangeable Senior Notes due February 15, 2025. The Exchangeable Notes bear interest at a fixed rate of 1.0% per year, payable semiannually in arrears on February 15 and August 15 of each year, beginning on August 15, 2020. The Exchangeable Notes are exchangeable on the terms set forth in the Indenture into cash, shares of Class A common stock, or a combination thereof, at i3 Verticals, LLC’s election. The Exchangeable Notes mature on February 15, 2025, unless earlier exchanged, redeemed or repurchased. We received approximately $132.8 million in net proceeds from the sale of the Exchangeable Notes, as determined by deducting estimated offering expenses paid to third-parties from the aggregate principal amount. i3 Verticals, LLC used a portion of the net proceeds of the Exchangeable Notes offering to pay down outstanding borrowings under the Prior Senior Secured Credit Facility in connection with the effectiveness of the operative provisions of the Amendment and to pay the cost of the note hedge transactions. During the year ended September 30, 2020, we repurchased $21.0 million in aggregate principal amount of the Exchangeable Notes for an aggregate purchase price of approximately $17.4 million. As of September 30, 2023, $117.0 million of the original aggregate principal amount of $138.0 million was outstanding. At-the-Market 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 and year ended September 30, 2023, we did not sell any Class A common stock under the ATM Program. As of September 30, 2023, we had a remaining capacity to sell up to $107.1 million of our Class A common stock under the ATM Program. 64 Material Cash Requirements The following table summarizes our material cash requirements as of September 30, 2023 related to contracts, leases and borrowings: Payments Due by Period Material Cash Requirements Total Less than 1 year 1 to 3 years 3 to 5 years More than 5 years (in thousands) Processing minimums (1) $ 5,070 $ 4,582 $ 488 $ — $ — Facility leases (2) 16,562 5,055 7,893 2,352 1,262 2023 Senior Secured Credit Facility and related interest (3) 386,399 23,913 47,990 314,496 — Exchangeable Notes and related interest (4) 118,609 1,170 117,439 — — Contingent consideration (5) 8,239 6,825 1,414 — — Total $ 534,879 $ 41,545 $ 175,224 $ 316,848 $ 1,262 __________________________ 1. We have non-exclusive agreements with several processors to provide us services related to transaction processing and transmittal, transaction authorization and data capture, and access to various reporting tools. Certain of these agreements require us to submit a minimum monthly number of transactions for processing. 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. 2. In addition to the facility leases presented, we have $52 thousand in short-term leases. These payments will be made within the next twelve months. 3. We estimated interest payments through the maturity of our 2023 Senior Secured Credit Facility by applying the interest rate of 8.85% in effect on the outstanding balance as of September 30, 2023, plus the unused fee rate of 0.30% in effect as of September 30, 2023. 4. We calculated interest payments through the maturity of our Exchangeable Notes by applying the coupon interest rate of 1.00% on the outstanding principal balance as of September 30, 2023 of $117.0 million. 5. 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. i3 Verticals, Inc. accounts for the fair values of such contingent payments in accordance with the Level 3 financial instrument fair value hierarchy at the close of each subsequent reporting period. The acquisition-date fair value of contingent consideration is valued using a Monte Carlo simulation. i3 Verticals, Inc. subsequently reassesses such fair value based on probability estimates with respect to the acquired entity’s likelihood of achieving the respective financial performance targets. Potential payments under the Tax Receivable Agreement are not reflected in this table. See “—Tax Receivable Agreement” below. Tax Receivable Agreement We are a party to a Tax Receivable Agreement with i3 Verticals, LLC and each of the Continuing Equity Owners, as described in Note 11 of our consolidated financial statements. As a result of the Tax Receivable Agreement, we have been required to establish a liability in our consolidated financial statements. That liability, which will increase upon the redemptions or exchanges of Common Units for our Class A common stock, generally represents 85% of the estimated future tax benefits, if any, relating to the increase in tax basis associated with the Common Units we received as a result of the Reorganization Transactions and other redemptions or exchanges by holders of Common Units. If this election is made, the accelerated payment will be based on the present value of 100% of the estimated future tax benefits and, as a result, the associated liability reported on our consolidated financial statements may be increased. We expect that the payments required under the Tax Receivable Agreement will be substantial. The actual increase in tax basis, as well as the amount and timing of any payments under the Tax Receivable Agreement, will vary depending upon a number of factors, including the timing of redemptions or exchanges by the holders of Common Units, the price of our Class A common stock at the time of the redemption or exchange, whether such redemptions or exchanges are taxable, the amount and timing of the taxable income we generate in the future and the tax rate then applicable as well as the portion of our payments under the Tax Receivable Agreement constituting imputed interest. 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. 65 As of September 30, 2023, the total amount due under the Tax Receivable Agreement was $40.1 million, and payments to the Continuing Equity Owners related to exchanges through September 30, 2023 will range from approximately $0 to $3.2 million per year and are expected to be paid over the next 24 years. The amounts recorded as of September 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. Future payments under the Tax Receivable Agreement with respect to subsequent exchanges would be in addition to these amounts. Critical Accounting Estimates The preparation of consolidated financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“GAAP”) and the Company’s discussion and analysis of its financial condition and operating results requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Note 2, “Summary of Significant Accounting Policies” in the notes to the accompanying consolidated financial statements in Part II, Item 8 of this Form 10-K describe the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. Estimates include, but are not limited to, the value of purchase consideration paid and identifiable assets acquired and assumed in acquisitions, goodwill and intangible asset impairment review, determination of performance obligations for revenue recognition, loss reserves, assumptions used in the calculation of equity-based compensation and in the calculation of income taxes, and certain tax assets and liabilities as well as the related valuation allowances. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates. Below is a summary of our critical accounting estimates for which the nature of management’s assumptions are material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and for which the impact of the estimates and assumptions on financial condition or operating performance is material. Contingent Consideration in Acquisitions On occasion, we may have acquisitions that include contingent consideration. Accounting for business combinations requires us to estimate the fair value of any contingent purchase consideration at the acquisition date. Where relevant, the fair value of material contingent consideration included in an acquisition is calculated using a Monte Carlo simulation. The contingent consideration is revalued each period until it is settled. Management reviews the historical and projected performance of each acquisition with contingent consideration and uses an income probability method to revalue the contingent consideration. The revaluation requires management to make certain assumptions and represent management's best estimate at the valuation date. The probabilities are determined based on a management review of the expected likelihood of triggering events that would cause a change in the contingent consideration paid. For example, if management’s forecasted performance for an acquisition increased, we would have anticipated a higher probability of contingent consideration being paid on the acquisition and would have recorded additional losses from the change in fair value of contingent consideration. Conversely, if management’s forecasted performance for an acquisition decreased, we would have anticipated a higher probability of contingent consideration being paid on the acquisition and would have recorded a gain from change in fair value of contingent consideration. As of September 30, 2023, the fair value of contingent consideration recorded is $8.2 million, with maximum contingent consideration payout of $18.9 million dependent upon achievement of specified financial performance targets, as defined in the purchase agreements. Goodwill We test goodwill for impairment using a fair value approach at least annually, absent some triggering event that would require an interim impairment assessment. Absent any impairment indicators, we perform our goodwill impairment testing as of July 1 each year. 66 In our goodwill impairment review, we use significant estimates and assumptions that include the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units and determining the fair value of each reporting unit. Our assessment of qualitative factors involves significant judgments about expected future business performance and general market conditions. In a quantitative assessment, the fair value of each reporting unit is determined based on a combination of techniques, including the present value of future cash flows, applicable multiples of competitors and multiples from sales of like businesses, and requires management to make estimates and assumptions regarding discount rates, growth rates and our future long-term business plans. Changes in any of these estimates or assumptions could materially affect the determination of fair value and the associated goodwill impairment charge for each reporting unit. For example, if management’s forecasted earnings decreased for a reporting unit, we may have recorded an impairment loss for that reporting unit. Related Parties Transactions involving related parties cannot be presumed to be carried out at an arm's length basis, as the requisite conditions of competitive, free-dealing markets may not exist. A description of related-party transactions is provided in Note 16 in the accompanying consolidated financial statements. Recently Issued Accounting Pronouncements Refer to Note 2, “Summary of Significant Accounting Policies” in the notes to the accompanying consolidated financial statements for further discussion.