i3 Verticals, Inc. 10-K

Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements Page i3 Verticals, Inc. and its Subsidiaries Report of Independent Registered Public Accounting Firm (PCAOB ID 34 ) 69 Consolidated Balance Sheets as of September 30, 2023 and September 30, 2022 71 Consolidated Statements of Operations for the Years Ended September 30, 2023, 2022 and 2021 72 Consolidated Statements of Changes in Equity for the Years Ended September 30, 2023, 2022 and 2021 73 Consolidated Statements of Cash Flows for the Years Ended September 30, 2023, 2022 and 2021 75 Notes to Consolidated Financial Statements 77 68 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of i3 Verticals, Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of i3 Verticals, Inc., and subsidiaries (the “Company”) as of September 30, 2023 and 2022, the related consolidated statements of operations, changes in equity, and cash flows, for each of the three years in the period ended September 30, 2023, and the related notes to the consolidated financial statements (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2023, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 22, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting Basis for Opinion These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. 69 2023 Business Combinations - Purchase of Celtic Cross Holdings, Inc. and Celtic Systems Pvt. Ltd. -- Refer to Note 4 to the Financial Statements Critical Audit Matter Description The Company completed the acquisition of Celtic Cross Holdings, Inc. and Celtic Systems Pvt. Ltd. (collectively “Celtic”), for $85 million in cash consideration during the year ended September 30, 2023. The Company allocated the purchase price between tangible and intangible assets acquired and liabilities assumed based on estimated fair values, with any residual of the purchase price recorded as goodwill. The provisional fair values assigned to the customer relationships and capitalized software were $33.8 million and $12.6 million, respectively. Management estimated the fair value of the customer relationships using the Income Approach and estimated the fair value of the capitalized software using the Relief from Royalty Method. We identified the fair values of the customer relationships and capitalized software acquired as a critical audit matter because of the significant judgments, estimates and assumptions made by management to estimate their fair values. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of the estimates used to develop the fair values of these intangible assets. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to testing the key valuation assumptions and business assumptions used to estimate the fair values of the acquired customer relationships and capitalized software included the following, among others: • We tested the operating effectiveness of controls over management's purchase price allocation, including those over the determination of the fair values of the customer relationships and capitalized software. • We evaluated the reasonableness of key business assumptions used in the valuation models by comparing these assumptions to historical results, current-year results, certain peer companies’ results, and industry data. • With the assistance of our fair value specialists, we evaluated the valuation methodologies, the reasonableness of key valuation assumptions, and tested the mathematical accuracy of the calculations. /s/ Deloitte & Touche LLP Nashville, Tennessee November 22, 2023 We have served as the Company's auditor since 2020. 70 i3 Verticals, Inc. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) September 30, 2023 2022 Assets Current assets Cash and cash equivalents $ 3,112 $ 3,490 Accounts receivable, net 65,110 53,334 Settlement assets 4,873 7,540 Prepaid expenses and other current assets 12,449 19,445 Total current assets 85,544 83,809 Property and equipment, net 12,308 5,670 Restricted cash 4,415 12,735 Capitalized software, net 62,577 52,341 Goodwill 409,563 353,639 Intangible assets, net 226,952 195,919 Deferred tax asset 52,514 43,458 Operating lease right-of-use assets 13,922 17,678 Other assets 13,698 5,063 Total assets $ 881,493 $ 770,312 Liabilities and equity Liabilities Current liabilities Accounts payable $ 11,064 $ 9,342 Accrued expenses and other current liabilities 37,740 57,833 Settlement obligations 4,873 7,540 Deferred revenue 35,275 31,975 Current portion of operating lease liabilities 4,509 4,568 Total current liabilities 93,461 111,258 Long-term debt, less current portion and debt issuance costs, net 385,081 287,020 Long-term tax receivable agreement obligations 40,079 40,812 Operating lease liabilities, less current portion 10,433 13,994 Other long-term liabilities 24,143 9,540 Total liabilities 553,197 462,624 Commitments and contingencies (see Note 15) Stockholders' equity Preferred stock, par value $ 0.0001 per share, 10,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2023 and 2022 — — Class A common stock, par value $ 0.0001 per share, 150,000,000 shares authorized; 23,253,272 and 22,986,448 shares issued and outstanding as of September 30, 2023 and 2022, respectively 2 2 Class B common stock, par value $ 0.0001 per share, 40,000,000 shares authorized; 10,093,394 and 10,118,142 shares issued and outstanding as of September 30, 2023 and 2022, respectively 1 1 Additional paid-in-capital 249,688 241,958 Accumulated deficit ( 12,944 ) ( 23,582 ) Total stockholders' equity 236,747 218,379 Non-controlling interest 91,549 89,309 Total equity 328,296 307,688 Total liabilities and equity $ 881,493 $ 770,312 See Notes to the Consolidated Financial Statements 71 i3 Verticals, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share amounts) Year ended September 30, 2023 2022 2021 Revenue $ 370,239 $ 317,862 $ 224,124 Operating expenses Other costs of services 80,552 73,367 57,706 Selling general and administrative 219,736 193,790 134,872 Depreciation and amortization 36,461 29,424 24,418 Change in fair value of contingent consideration 10,781 23,725 7,140 Total operating expenses 347,530 320,306 224,136 Income (loss) from operations 22,709 ( 2,444 ) ( 12 ) Other expenses Interest expense, net 25,128 14,775 9,799 Other expense (income) 1,436 991 ( 2,595 ) Total other expenses 26,564 15,766 7,204 Loss before income taxes ( 3,855 ) ( 18,210 ) ( 7,216 ) (Benefit from) provision for income taxes ( 1,203 ) 5,007 623 Net loss ( 2,652 ) ( 23,217 ) ( 7,839 ) Net loss attributable to non-controlling interest ( 1,841 ) ( 6,115 ) ( 3,382 ) Net loss attributable to i3 Verticals, Inc. $ ( 811 ) $ ( 17,102 ) $ ( 4,457 ) Net loss per share attributable to Class A common stockholders: Basic $ ( 0.04 ) $ ( 0.77 ) $ ( 0.21 ) Diluted $ ( 0.07 ) $ ( 0.77 ) $ ( 0.22 ) Weighted average shares of Class A common stock outstanding: Basic 23,137,586 22,249,656 20,994,598 Diluted 33,246,833 22,249,656 31,714,191 See Notes to the Consolidated Financial Statements 72 i3 Verticals, Inc. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (In thousands, except share amounts) Class A Common Stock Class B Common Stock Additional Paid-In Capital Retained Earnings (Deficit) Non-Controlling Interest Total Equity Shares Amount Shares Amount Balance at September 30, 2020 18,864,143 $ 2 11,900,621 $ 1 $ 157,598 $ ( 2,023 ) $ 84,590 $ 240,168 Equity-based compensation — — — — 20,860 — — 20,860 Net loss — — — — — ( 4,457 ) ( 3,382 ) ( 7,839 ) Redemption of common units in i3 Verticals, LLC 1,671,479 — ( 1,671,479 ) — 11,714 — ( 11,714 ) — Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis — — — — 269 — — 269 Exercise of equity-based awards 287,562 — — — 888 — — 888 Allocation of equity to non-controlling interests — — — — ( 15,337 ) — 15,337 — Issuance of Class A common stock under the 2020 Inducement Plan 1,202,914 — — — 35,245 — — 35,245 Balance at September 30, 2021 22,026,098 $ 2 10,229,142 $ 1 $ 211,237 $ ( 6,480 ) $ 84,831 $ 289,591 Equity-based compensation — — — — 26,230 — — 26,230 Net loss — — — — — ( 17,102 ) ( 6,115 ) ( 23,217 ) Redemption of common units in i3 Verticals, LLC 111,000 — ( 111,000 ) — 918 — ( 918 ) — Sale of Class A common stock, net 722,000 — — — 17,869 — — 17,869 Capitalization of public offering costs — — — — ( 440 ) — — ( 440 ) Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis — — — — ( 2,554 ) — — ( 2,554 ) Exercise of equity-based awards 127,350 — — — 209 — — 209 Allocation of equity to non-controlling interests — — — — ( 11,511 ) — 11,511 — Balance at September 30, 2022 22,986,448 $ 2 10,118,142 $ 1 $ 241,958 $ ( 23,582 ) $ 89,309 $ 307,688 See Notes to the Consolidated Financial Statements 73 i3 Verticals, Inc. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (In thousands, except share amounts) Class A Common Stock Class B Common Stock Additional Paid-In Capital Retained Earnings (Deficit) Non-Controlling Interest Total Equity Shares Amount Shares Amount Balance at September 30, 2022 22,986,448 $ 2 10,118,142 $ 1 $ 241,958 $ ( 23,582 ) $ 89,309 $ 307,688 Adoption of ASU 2020-06 — — — — ( 23,382 ) 11,449 ( 11,933 ) Equity-based compensation — — — — 27,878 — — 27,878 Net loss — — — — — ( 811 ) ( 1,841 ) ( 2,652 ) Redemption of common units in i3 Verticals, LLC 24,748 — ( 24,748 ) — 224 — ( 224 ) — Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis — — — — 6,407 — — 6,407 Exercise of equity-based awards 159,906 — — — ( 1,092 ) — — ( 1,092 ) Allocation of equity to non-controlling interests — — — — ( 4,305 ) — 4,305 — Issuance of Class A common stock under the 2020 Inducement Plan 82,170 — — — 2,000 — — 2,000 Balance at September 30, 2023 23,253,272 $ 2 10,093,394 $ 1 $ 249,688 $ ( 12,944 ) $ 91,549 $ 328,296 See Notes to the Consolidated Financial Statements 74 i3 Verticals, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year ended September 30, 2023 2022 2021 Cash flows from operating activities: Net loss $ ( 2,652 ) $ ( 23,217 ) $ ( 7,839 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 36,461 29,424 24,418 Equity-based compensation 27,878 26,230 20,860 Amortization of debt discount and issuance costs 1,514 5,795 5,450 Net gain on sale of investments ( 295 ) — ( 2,100 ) Write down of intangible asset 2,660 — — (Benefit from) Provision for deferred income taxes ( 5,935 ) 2,588 ( 287 ) Non-cash lease expense 4,683 4,922 3,204 Other non-cash adjustments to net income 1,546 1,131 555 Increase in non-cash contingent consideration expense from original estimate 10,781 23,725 7,140 Changes in operating assets: Accounts receivable ( 7,657 ) ( 15,771 ) ( 10,938 ) Prepaid expenses and other current assets 1,530 ( 3,629 ) ( 1,564 ) Other assets ( 1,865 ) ( 1,197 ) ( 4,054 ) Changes in operating liabilities: Accounts payable 1,674 1,537 3,883 Accrued expenses and other current liabilities 318 9,812 5,749 Acquisition escrow obligations ( 8,319 ) 3,218 4,704 Settlement obligations ( 2,667 ) 2,087 ( 2,241 ) Deferred revenue ( 1,319 ) 2,041 5,150 Operating lease liabilities ( 4,530 ) ( 4,753 ) ( 3,139 ) Other long-term liabilities — ( 25 ) ( 782 ) Contingent consideration paid in excess of original estimates ( 19,303 ) ( 18,072 ) ( 3,636 ) Net cash provided by operating activities 34,503 45,846 44,533 Cash flows from investing activities: Expenditures for property and equipment ( 4,204 ) ( 2,268 ) ( 1,938 ) Expenditures for capitalized software ( 12,171 ) ( 10,167 ) ( 6,159 ) Purchases of merchant portfolios and residual buyouts ( 2,191 ) ( 52 ) ( 1,819 ) Acquisitions of businesses, net of cash acquired ( 101,998 ) ( 100,715 ) ( 142,486 ) Payments for other investing activities ( 1,251 ) ( 443 ) ( 104 ) Proceeds from investments 295 600 3,200 Net cash used in investing activities ( 121,520 ) ( 113,045 ) ( 149,306 ) See Notes to the Consolidated Financial Statements 75 i3 Verticals, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (In thousands) Year ended September 30, 2023 2022 2021 Cash flows from financing activities: Proceeds from revolving credit facility 365,022 335,720 302,816 Payments on revolving credit facility ( 281,534 ) ( 255,100 ) ( 198,421 ) Payments of debt issuance costs ( 694 ) — — Proceeds from issuance of Class A common stock, net of underwriting discounts and offering costs — 17,692 — Payments of equity issuance costs — — ( 253 ) Cash paid for contingent consideration ( 6,832 ) ( 25,330 ) ( 2,886 ) Proceeds from stock option exercises 180 694 1,578 Payments for employee's tax withholdings from net settled stock option exercises ( 490 ) ( 643 ) ( 731 ) Net cash provided by financing activities 75,652 73,033 102,103 Net (decrease) increase in cash, cash equivalents, and restricted cash ( 11,365 ) 5,834 ( 2,670 ) Cash, cash equivalents, and restricted cash at beginning of period 23,765 17,931 20,601 Cash, cash equivalents, and restricted cash at end of period $ 12,400 $ 23,765 $ 17,931 Supplemental disclosure of cash flow information: Cash paid for interest $ 21,476 $ 8,985 $ 4,428 Cash paid for income taxes $ 3,236 $ 1,079 $ 287 The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets to that shown in the Consolidated Statements of Cash Flows: Year ended September 30, 2023 2022 2021 Beginning balance Cash and cash equivalents $ 3,490 $ 3,641 $ 15,568 Settlement assets 7,540 4,768 — Restricted cash 12,735 9,522 5,033 Total cash, cash equivalents, and restricted cash $ 23,765 $ 17,931 $ 20,601 Ending balance Cash and cash equivalents $ 3,112 $ 3,490 $ 3,641 Settlement assets 4,873 7,540 4,768 Restricted cash 4,415 12,735 9,522 Total cash, cash equivalents, and restricted cash $ 12,400 $ 23,765 $ 17,931 See Notes to the Consolidated Financial Statements 76 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) 1. ORGANIZATION AND OPERATIONS i3 Verticals, Inc. (the “Company”) was formed as a Delaware corporation on January 17, 2018. The Company was formed for the purpose of completing an initial public offering (“IPO”) of its Class A common stock and other related transactions in order to carry on the business of i3 Verticals, LLC and its subsidiaries. i3 Verticals, LLC was founded in 2012 and delivers seamlessly integrated software and payment solutions to customers in strategic vertical markets. The Company’s headquarters are in located Nashville, Tennessee, with operations throughout the United States. Unless the context otherwise requires, references to “we,” “us,” “our,” “i3 Verticals” and the “Company” refer to i3 Verticals, Inc. and its subsidiaries, including i3 Verticals, LLC. In connection with the IPO, the Company completed certain reorganization transactions, which among other things, resulted in i3 Verticals, Inc. being the sole managing member of i3 Verticals, LLC (the "Reorganization Transactions"). Following the completion of the IPO and Reorganization Transactions, the Company is a holding company and the principal asset that it owns are the common units in i3 Verticals, LLC. i3 Verticals, Inc. operates and controls all of i3 Verticals, LLC's operations and, through i3 Verticals, LLC and its subsidiaries, conducts i3 Verticals, LLC's business. i3 Verticals, Inc. has a majority economic interest in i3 Verticals, LLC. As the sole managing member of i3 Verticals, LLC, i3 Verticals, Inc. consolidates the financial results of i3 Verticals, LLC and reports a non-controlling interest representing the Common Units of i3 Verticals, LLC held by other owners other (the “Continuing Equity Owners”). i3 Verticals, Inc. is the sole managing member of i3 Verticals, LLC and as a result, consolidates the financial results of i3 Verticals, LLC and reports a non-controlling interest representing the Common Units of i3 Verticals, LLC held by the Continuing Equity Owners. As the Reorganization Transactions are considered transactions between entities under common control, the financial statements retroactively reflect the accounts of i3 Verticals, LLC for periods prior to the IPO and Reorganization Transactions. The Continuing Equity Owners who own Common Units in i3 Verticals, LLC may redeem at each of their options (subject in certain circumstances to time-based vesting requirements) their Common Units for, at the election of i3 Verticals, LLC, cash or newly-issued shares of the Company's Class A common stock. As of September 30, 2023, i3 Verticals, Inc. owned 69.7 % of the economic interest in i3 Verticals, LLC. As of September 30, 2023, the Continuing Equity Owners owned Common Units in i3 Verticals, LLC representing approximately 30.3 % of the economic interest in i3 Verticals, LLC, shares of Class A common stock in the Company representing approximately 0.7 % of the economic interest and voting power in the Company, and shares of Class B common stock in i3 Verticals, Inc., representing approximately 30.3 % of the voting power in the Company. Combining the Class A common stock and Class B common stock, the Continuing Equity Holders hold approximately 31.0 % of the economic interest and voting power in i3 Verticals, Inc. At-the-Market Program On August 20, 2021, the Company, 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 the Company may issue and sell, from time to time and through the Sales Agents, shares of the Company's Class A common stock having an aggregate offering price of up to $ 125,000 (the “ATM Program”). During the quarter and year ended September 30, 2023, the Company did no t sell any Class A common stock under the ATM Program. During the quarter and year ended September 30, 2022, the Company sold 722,000 shares of Class A common stock, raising $ 17,869 in net proceeds under the ATM Program. The aggregate compensation paid by the Company to the Sales Agents with respect to such sales was $ 440 . As of September 30, 2023, the Company had remaining capacity to sell up to $ 107,131 of our Class A common stock 77 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) under the ATM Program. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the reporting and disclosure rules and regulations of the Securities and Exchange Commission (“SEC”). Reclassifications Certain prior period amounts have been reclassified to conform to the current period presentation within the consolidated statements of cash flows. Principles of Consolidation These consolidated financial statements include the accounts of the Company and its subsidiary companies. All significant intercompany accounts and transactions have been eliminated in consolidation . Cash and Cash Equivalents For purposes of reporting cash flows, the Company considers cash on hand, checking accounts, and savings accounts to be cash and cash equivalents. At times, the balance in these accounts may exceed federal insured limits. Cash equivalents are defined as financial instruments readily transferable into cash with an original maturity less than 90 days. Restricted Cash Restricted cash represents funds held in escrow related to acquisitions or held-on-deposit with processing banks pursuant to agreements to cover potential merchant losses. It is presented as long-term assets on the accompanying consolidated balance sheets since the related agreements extend beyond the next twelve months. Following the adoption of Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows: Restricted Cash (Topic 230), the Company includes restricted cash along with the cash and cash equivalents balance for presentation in the consolidated statements of cash flows. Accounts Receivable and Credit Policies Accounts receivable consist primarily of uncollateralized credit card processing residual payments due from processing banks requiring payment within thirty days following the end of each month. Accounts receivable also include amounts due from the sales of the Company’s technology solutions to its customers. The carrying amount of accounts receivable is reduced by an allowance for doubtful accounts, if necessary, which reflects management’s best estimate of the amounts that will not be collected. The allowance is estimated based on management’s knowledge of its customers, historical loss experience and existing economic conditions. Accounts receivable and the allowance are written-off when, in management’s opinion, all collection efforts have been exhausted. The Company’s allowance for doubtful accounts was $ 743 and $ 590 as of September 30, 2023 and 2022, respectively; however, actual write-offs may exceed estimated amounts. Settlement Assets and Obligations Settlement assets and obligations result when funds are temporarily held or owed by the Company on behalf of merchants, consumers, schools, and other institutions. Timing differences, interchange expenses, merchant reserves and exceptional items cause differences between the amount received from the card networks and the amount funded to counterparties. These balances arising in the settlement process are reflected as settlement assets and obligations on the accompanying consolidated balance sheets. With the exception of merchant reserves, settlement assets or settlement obligations are generally collected and paid within one to four days . Settlement assets and settlement obligations were $ 4,873 as of September 30, 2023 and $ 7,540 as of September 30, 2022. 78 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) Inventories Inventories consist of point-of-sale equipment to be sold to customers and are stated at the lower of cost, determined on a weighted average or specific basis, or net realizable value. Inventories were $ 4,138 and $ 4,121 at September 30, 2023 and 2022, respectively, and are included within prepaid expenses and other current assets on the accompanying consolidated balance sheets. Property and Equipment Property and equipment are stated at cost or, if acquired through a business combination or an asset acquisition, fair value at the date of acquisition. Depreciation and amortization are provided over the assets’ estimated useful lives (or, if obtained in connection with a business acquisition, over their estimated remaining useful lives) using the straight-line method, except for leasehold improvements, which are depreciated over the shorter of the estimated useful lives of the assets or the lease term. Expenditures for maintenance and repairs are expensed when incurred. Expenditures for renewals or betterments are capitalized. Management reviews long-lived assets for impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The Company recognizes impairment when the sum of undiscounted estimated future cash flows expected to result from the use of the asset is less than the carrying value of the asset. There were no impairment charges during the years ended September 30, 2023, 2022 and 2021. Capitalized Software Development costs for software to be sold or leased to customers are capitalized once technological feasibility of the software product has been established. Costs incurred prior to establishing technological feasibility are expensed as incurred. Technological feasibility is established when the Company has completed a detailed program design and has determined that a product can be produced to meet its design specifications, including functions, features and technical performance requirements. Capitalization of costs ceases when the product is generally available to customers. Software development costs are amortized using the greater of the straight-line method or the usage method over its estimated useful life, which is generally estimated to be three years . Additionally, development costs for software to be used internally is capitalized under similar guidance as discussed above. Once the software product is in the application development stage, costs are required to be capitalized. Costs incurred during the preliminary product phase or post implementation stage are expensed as incurred. Overhead, general and administrative, and training costs are not capitalized. Software development costs may become impaired in situations where development efforts are abandoned due to the viability of a planned project becoming doubtful or due to technological obsolescence of a planned software product. Management evaluates the remaining useful lives and carrying values of capitalized software at least annually or when events and circumstances warrant such a review, to determine whether significant events or changes in circumstances indicate that impairment in value may have occurred. To the extent estimated net realizable values, which are estimated to equal future undiscounted cash flows, exceed the carrying value, no impairment is necessary. If estimated net realizable values are less than the carrying values, an impairment charge is recorded. During the year ended September 30, 2023, the Company recorded a loss on impairment of $ 2,660 related to an internal use software project. Impairment charges during the years ended September 30, 2022 and 2021 were nominal . Identifiable software technology intangible assets resulting from acquisitions are amortized using the straight-line method over periods not exceeding their remaining estimated useful lives. GAAP requires that intangible assets with estimated useful lives be amortized over their respective estimated useful lives to their residual values, and reviewed for impairment. Acquisition technology intangibles’ net book values are included in capitalized software, net in the accompanying consolidated balance sheets. 79 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) Notes Receivable Notes receivable consist of loans made to unrelated entities. Notes receivable were $ 199 and $ 5,125 at September 30, 2023 and 2022, respectively, and are included within prepaid expenses and other current assets and other assets on the accompanying consolidated balance sheets. Acquisitions Business acquisitions have been recorded using the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”), and, accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair value as of the date of acquisition. Where relevant, the fair value of contingent consideration included in an acquisition is calculated using a Monte Carlo simulation. The fair value of customer relationships and non-compete assets acquired is identified using the Income Approach. The fair values of trade names and internally-developed software acquired are identified using the Relief from Royalty Method. After the purchase price has been allocated, goodwill is recorded to the extent the total consideration paid for the acquisition, including the acquisition date fair value of contingent consideration, if any, exceeds the sum of the fair values of the separately identifiable acquired assets and assumed liabilities. Acquisition costs for business combinations are expensed when incurred and recorded in selling general and administrative expenses in the accompanying consolidated statements of operations. Acquisitions not meeting the accounting criteria to be accounted for as a business combination are accounted for as an asset acquisition. An asset acquisition is recorded at its purchase price, inclusive of acquisition costs, which is allocated among the acquired assets and assumed liabilities based upon their relative fair values at the date of acquisition. The operating results of an acquisition are included in the consolidated statements of operations from the date of such acquisition. Acquisitions completed during the year ended September 30, 2023 contributed $ 18,365 and $ 3,350 of revenue and net income, respectively, to the results in the Company's consolidated statements of operations for the year then ended. Goodwill In accordance with ASC 350, Intangibles—Goodwill and Other, the Company tests goodwill for impairment for each reporting unit on an annual basis in the fourth quarter, or when events or circumstances indicate the fair value of a reporting unit is below its carrying value. The Company’s goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in business combinations. The goodwill generated from the business combinations is primarily related to the value placed on the employee workforce and expected synergies. Judgment is involved in determining if an indicator or change in circumstances relating to impairment has occurred. Such changes may include, among others, a significant decline in expected future cash flows, a significant adverse change in the business climate, and unforeseen competition. The Company has the option of performing a qualitative assessment of impairment to determine whether any further quantitative testing for impairment is necessary. The option of whether or not to perform a qualitative assessment is made annually and may vary by reporting unit. Factors the Company considers in the qualitative assessment include general macroeconomic conditions, industry and market conditions, cost factors, overall financial performance of the Company’s reporting units, events or changes affecting the composition or carrying amount of the net assets of its reporting units, sustained decrease in its share price, and other relevant entity specific events. If the Company determines not to perform the qualitative assessment or if it determines, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying value, then the Company performs a quantitative test for that reporting unit. The fair value of each reporting unit is compared to the reporting unit’s carrying value, including goodwill. If the fair value of a reporting unit is less than 80 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) its carrying value, the Company recognizes an impairment equal to the excess carrying value, not to exceed the total amount of goodwill allocated to that reporting unit. For a discussion of the estimation methodology, the qualitative factors considered when performing a qualitative assessment and the significance of various inputs, please see the subheading below titled “Use of Estimates.” The Company has determined that it has five reporting units as of the date of the most recent annual goodwill impairment test. For each of the years ended September 30, 2023, 2022 and 2021 the Company performed a quantitative assessment for each of its reporting units. The Company determined that none of the reporting units were impaired. Intangible Assets Intangible assets include acquired customer relationships, residual buyouts, referral agreements, trademarks, trade names, website development costs and non-compete agreements. Customer relationships represent the fair value of customer relationships purchased by the Company. Residual buyouts represent the right to not have to pay a residual to an independent sales agent related to certain future transactions with the agent’s referred merchants. Referral agreements represent the right to exclusively obtain referrals from a partner for their customers' credit card processing services. The Company amortizes definite lived identifiable intangible assets using a method that reflects the pattern in which the economic benefits of the intangible asset are expected to be consumed or otherwise utilized. The estimated useful lives of the Company’s customer-related intangible assets approximate the expected distribution of cash flows, whether straight-line or accelerated, generated from each asset. The useful lives of contract-based intangible assets are equal to the terms of the agreement. Management evaluates the remaining useful lives and carrying values of long-lived assets, including definite lived intangible assets, at least annually, or when events and circumstances warrant such a review, to determine whether significant events or changes in circumstances indicate that a change in the useful life or impairment in value may have occurred. There were no impairment charges during the years ended September 30, 2023, 2022 and 2021. Income Taxes i3 Verticals, Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from i3 Verticals, LLC based on i3 Verticals, Inc.'s economic interest in i3 Verticals, LLC. i3 Verticals, LLC's members, including the Company, are liable for federal, state and local income taxes based on their share of i3 Verticals, LLC's pass-through taxable income. i3 Verticals, LLC is not a taxable entity for federal income tax purposes, but is subject to and reports entity level tax in both Tennessee and Texas. In addition, certain subsidiaries of i3 Verticals, LLC are corporations that are subject to state and federal income taxes. The amount provided for state income taxes is based upon the amounts of current and deferred taxes payable or refundable at the date of the consolidated financial statements as a result of all events recognized in the financial statements as measured by the provisions of enacted tax laws. Under GAAP, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company reports a liability for unrecognized tax positions taken or expected to be taken in a tax return. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as part of income tax expense. See additional discussion in Note 11. 81 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) Valuation of Contingent Consideration On occasion, the Company may have acquisitions which include contingent consideration. Accounting for business combinations requires the Company to estimate the fair value of any contingent purchase consideration at the acquisition date. For a discussion of the estimate methodology and the significance of various inputs, please see the subheading below titled “Use of Estimates.” Changes in estimates regarding the fair value contingent purchase consideration are reflected as adjustments to the related liability and recognized within operating expenses in the consolidated statements of operations. Short and long-term contingent liabilities are presented within accrued expenses and other current liabilities and other long-term liabilities on the Company's consolidated balance sheets, respectively. Classification of Financial Instruments The Company classifies certain financial instruments issued as either equity or as liabilities. Determination of classification is based upon the underlying properties of the instrument. See specific discussion regarding the nature of instruments issued, the presentation on the consolidated financial statements and the related valuation method applied in Notes 10, 13, and 14. Revenue Recognition and Deferred Revenue Revenue is recognized as each performance obligation is satisfied, in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). The Company accrues for rights of refund, processing errors or penalties, or other related allowances based on historical experience. The Company utilized the portfolio approach practical expedient within ASC 606-10-10-4 Revenue from Contracts with Customers—Objectives and the significant financing component practical expedient within ASC 606-10-32-18 Revenue from Contracts with Customers—The Existence of a Significant Financing Component in the Contract in performing the analysis. The Company's revenue for the years ended September 30, 2023, 2022 and 2021 is derived from the following sources: • Software and related services — Includes sales of software as a service, transaction-based fees, ongoing software maintenance and support, software licenses and other professional services related to our software offerings • Payments — Includes volume-based payment processing fees (“discount fees”), gateway fees and other related fixed transaction or service fees • Other — Includes sales of equipment, non-software related professional services and other revenues Revenues from sales of the Company’s software are recognized when the related performance obligations are satisfied. Sales of software licenses are categorized into one of two categories of intellectual property in accordance with ASC 606, functional or symbolic. The key distinction is whether the license represents a right to use (functional) or a right to access (symbolic) intellectual property. The Company generates sales of one-time software licenses, which is functional intellectual property. Revenue from functional intellectual property is recognized at a point in time, when delivered to the customer. The Company also offers access to its software under software-as-a-service (“SaaS”) arrangements, which represent services arrangements. Revenue from SaaS arrangements is recognized over time, over the term of the agreement. 82 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) Discount fees represent a percentage of the dollar amount of each credit or debit transaction processed or a specified per transaction amount, depending on the card type. The Company frequently enters into agreements with customers under which the customer engages the Company to provide both payment authorization services and transaction settlement services for all of the cardholder transactions of the customer, regardless of which issuing bank and card network to which the transaction relates. The Company’s core performance obligations are to stand ready to provide continuous access to the Company’s payment authorization services and transaction settlement services in order to be able to process as many transactions as its customers require on a daily basis over the contract term. These services are stand ready obligations, as the timing and quantity of transactions to be processed is not determinable. Under a stand-ready obligation, the Company’s performance obligation is defined by each time increment rather than by the underlying activities satisfied over time based on days elapsed. Because the service of standing ready is substantially the same each day and has the same pattern of transfer to the customer, the Company has determined that its stand-ready performance obligation comprises a series of distinct days of service. Discount fees are recognized each day based on the volume or transaction count at the time the merchants’ transactions are processed. The Company follows the requirements of ASC 606-10-55 Revenue from Contracts with Customers—Principal versus Agent Considerations , which states that the determination of whether a company should recognize revenue based on the gross amount billed to a customer or the net amount retained is a matter of judgment that depends on the facts and circumstances of the arrangement. The determination of gross versus net recognition of revenue requires judgment that depends on whether the Company controls the good or service before it is transferred to the merchant or whether the Company is acting as an agent of a third party. The assessment is provided separately for each performance obligation identified. Under its agreements, the Company incurs interchange and network pass-through charges from the third-party card issuers and card networks, respectively, related to the provision of payment authorization services. The Company has determined that it is acting as an agent with respect to these payment authorization services, based on the following factors: (1) the Company has no discretion over which card issuing bank will be used to process a transaction and is unable to direct the activity of the merchant to another card issuing bank, and (2) interchange and card network rates are pre-established by the card issuers or card networks, and the Company has no latitude in determining these fees. Therefore, revenue allocated to the payment authorization performance obligation is presented net of interchange and card network fees paid to the card issuing banks and card networks, respectively, for the years ended September 30, 2023, 2022 and 2021. With regards to the Company's discount fees, generally, where the Company has control over merchant pricing, merchant portability, credit risk and ultimate responsibility for the merchant relationship, revenues are reported at the time of sale equal to the full amount of the discount charged to the merchant, less interchange and network fees. Revenues generated from merchant portfolios where the Company does not have control over merchant pricing, liability for merchant losses or credit risk or rights of portability are reported net of interchange and network fees as well as third-party processing costs directly attributable to processing and bank sponsorship costs. Revenues are also derived from a variety of transaction fees, which are charged for accessing our payment and software solutions, and fees for other miscellaneous services. Revenues derived from such fees are recognized in the time the transactions occur and when there are no further performance obligations. Revenue from the sale of equipment, is recognized upon transfer of ownership to the customer, after which there are no further performance obligations. Arrangements may contain multiple performance obligations, such as payment authorization services, transaction settlement services, hardware, software products, maintenance, and professional installation and training services. Revenues are allocated to each performance obligation based on the standalone selling price of each good or service. The selling price for a deliverable is based on standalone selling price, if available, the adjusted market assessment approach, estimated cost plus margin approach, or residual approach. The Company establishes estimated selling price, based on the judgment of the Company's management, considering internal factors such as margin objectives, pricing practices and controls, customer segment pricing strategies and 83 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) the product life cycle. In arrangements with multiple performance obligations, the Company determines allocation of the transaction price at inception of the arrangement and uses the standalone selling prices for the majority of the Company's revenue recognition. Revenues from sales of the Company ’ s combined hardware and software element are recognized when each performance obligation has been satisfied which has been determined to be upon the delivery of the product. Revenues derived from service fees are recognized at the time the services are performed and there are no further performance obligations. The Company’s professional services, including training, installation, and repair services are recognized as revenue as these services are performed. The tables below present a disaggregation of the Company's revenue from contracts with customers by product by segment. Refer to Note 17 for discussion of the Company's segments. The Company's products are defined as follows: • Software and related services — Includes sales of SaaS, transaction-based fees, ongoing software maintenance and support, software licenses, and other professional services related to our software offerings. • Payments — Includes discount fees, gateway fees and other related fixed transaction or service fees. • Other — Includes sales of equipment, non-software related professional services and other revenues. For the year ended September 30, 2023 Software and Services Merchant Services Other Total Software and related services revenue 170,895 13,177 ( 41 ) 184,031 Payments revenue $ 51,834 $ 115,049 $ ( 29 ) $ 166,854 Other revenue 10,238 9,116 — 19,354 Total revenue $ 232,967 $ 137,342 $ ( 70 ) $ 370,239 For the year ended September 30, 2022 Software and Services Merchant Services Other Total Software and related services revenue 142,202 12,641 ( 35 ) 154,808 Payments revenue $ 40,951 $ 103,509 $ ( 8 ) $ 144,452 Other revenue 10,249 8,331 22 18,602 Total revenue $ 193,402 $ 124,481 $ ( 21 ) $ 317,862 For the year ended September 30, 2021 Software and Services Merchant Services Other Total Software and related services revenue 75,736 11,872 ( 18 ) 87,590 Payments revenue $ 29,451 $ 92,325 $ ( 2,095 ) $ 119,681 Other revenue 9,246 7,673 ( 66 ) 16,853 Total revenue $ 114,433 $ 111,870 $ ( 2,179 ) $ 224,124 The tables below present disaggregation of the Company's revenue from contracts with customers by timing of transfer of goods or services by segment. For the year ended September 30, 2021, $ 25,843 was included in revenue earned at a point in time related to professional services or other stand ready contract revenue for fixed 84 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) service fee arrangements. These types of revenue are included in revenue earned over time for the years ended September 30, 2023 and 2022. The Company's revenue included in each category are defined as follows: • Revenue earned over time — Includes discount fees, gateway fees, sales of SaaS, ongoing support or other stand-ready obligations and professional services; and • Revenue earned at a point in time — Includes point in time service fees that are not stand-ready obligations, software licenses sold as functional intellectual property and other equipment. For the year ended September 30, 2023 Software and Services Merchant Services Other Total Revenue earned over time $ 215,071 $ 115,982 $ ( 41 ) $ 331,012 Revenue earned at a point in time 17,896 21,360 ( 29 ) 39,227 Total revenue $ 232,967 $ 137,342 $ ( 70 ) $ 370,239 For the year ended September 30, 2022 Software and Services Merchant Services Other Total Revenue earned over time $ 173,368 $ 100,488 $ ( 36 ) $ 273,820 Revenue earned at a point in time 20,034 23,993 15 44,042 Total revenue $ 193,402 $ 124,481 $ ( 21 ) $ 317,862 For the year ended September 30, 2021 Software and Services Merchant Services Other Total Revenue earned over time $ 76,367 $ 83,203 $ ( 2,003 ) $ 157,567 Revenue earned at a point in time 38,066 28,667 ( 176 ) 66,557 Total revenue $ 114,433 $ 111,870 $ ( 2,179 ) $ 224,124 Contract Assets The Company bills for certain software and related services sales and fixed fee professional services upon pre-determined milestones in the contracts. Therefore, the Company may have contract assets other than trade accounts receivable for performance obligations that are partially completed, which would typically represent consulting services provided before a milestone is completed in a contract. Additionally, contract assets also include software licenses sold as a right to use license but paid for under a subscription model. Under this structure, the license revenue is recognized upfront while a portion of the revenue is unbilled. Unbilled amounts associated with these services are presented as accounts receivable as the Company has an unconditional right to payment for services performed. As of September 30, 2023 and September 30, 2022, the Company’s contract assets from contracts with customers was $ 15,131 and $ 9,716 , respectively Contract Liabilities Deferred revenue represents amounts billed to customers by the Company for services contracts. Payment is typically collected at the start of the contract term. The initial prepaid contract agreement balance is deferred. The balance is then recognized as the services are provided over the contract term. Deferred revenue that is expected to be recognized as revenue within one year is recorded as short-term deferred revenue and the remaining portion is recorded as other long-term liabilities in the consolidated balance sheets. The terms for most of the 85 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) Company's contracts with a deferred revenue component are one year. Substantially all of the Company's deferred revenue is anticipated to be recognized within the next year. The following table presents the changes in deferred revenue as of and for the year ended September 30, 2023: Balance at September 30, 2021 $ 30,024 Deferral of revenue 31,926 Recognition of unearned revenue ( 29,861 ) Balance at September 30, 2022 $ 32,089 Deferral of revenue 35,330 Recognition of unearned revenue ( 31,975 ) Balance at September 30, 2023 $ 35,444 Costs to Obtain and Fulfill a Contract The Company capitalizes incremental costs to obtain new contracts and contract renewals and amortizes these costs on a straight-line basis as an expense over the benefit period, which is generally the contract term, unless a commensurate payment is not expected at renewal. As of September 30, 2023, the Company had $ 4,966 of capitalized contract costs, compared to $ 4,185 of capitalized contract costs as of September 30, 2022. The contract costs relate to commissions paid to employees and agents as well as other incentives given to customers to obtain new sales, included within “Other assets" on the consolidated balance sheets. The Company recorded commissions expense related to these costs for the years ended September 30, 2023, 2022 and 2021 of $ 792 , $ 707 and $ 533 respectively. The Company expenses sales commissions as incurred for the Company's sales commission plans that are paid on recurring monthly revenues, portfolios of existing customers, or have a substantive stay requirement prior to payment. Other Cost of Services Other costs of services include third-party processing costs directly attributable to processing and bank sponsorship costs, which may not be based on a percentage of volume. These costs also include related costs such as residual payments to sales groups, which are based on a percentage of the net revenues generated from merchant referrals. In certain merchant processing bank relationships the Company is liable for chargebacks against a merchant equal to the volume of the transaction. Losses resulting from chargebacks against a merchant are included in other cost of services on the accompanying condensed consolidated statement of operations. The Company evaluates its risk for such transactions and estimates its potential loss from chargebacks based primarily on historical experience and other relevant factors. The reserve for merchant losses is included within accrued expenses and other current liabilities on the accompanying condensed consolidated balance sheets. The cost of equipment and software sold is also included in other cost of services. Other costs of services are recognized at the time the associated revenue is earned. The Company accounts for all governmental taxes associated with revenue transactions on a net basis. Selling, General and Administrative Selling general and administrative expenses include all personnel costs such as salaries, benefits, bonuses, stock based compensation and commissions, as well as marketing and advertising costs, contractor services, legal and other professional services fees, software and technological services, rental expenses and other general expenses. 86 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) Advertising and promotion costs are expensed as incurred. Advertising expense was $ 3,966 , $ 4,028 and $ 2,623 for the years ended September 30, 2023, 2022 and 2021, respectively, and is included in selling, general and administrative expenses in the Consolidated Statements of Operations. Equity-based Compensation The Company accounts for grants of equity awards to employees in accordance with ASC 718, Compensation—Stock Compensation. This standard requires compensation expense to be measured based on the estimated fair value of the share-based awards on the date of grant and recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. Equity-based compensation was $ 27,878 , $ 26,230 and $ 20,860 for the years ended September 30, 2023, 2022 and 2021, respectively. Use of Estimates The preparation of consolidated financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include, but are not limited to, the value of purchase consideration paid and identifiable assets acquired and assumed in acquisitions, goodwill and intangible asset impairment review, determination of performance obligations for revenue recognition, loss reserves, assumptions used in the calculation of equity-based compensation and in the calculation of income taxes, and certain tax assets and liabilities as well as the related valuation allowances. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. Recently Issued Accounting Pronouncements Recently Adopted Accounting Pronouncements In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40)—Accounting For Convertible Instruments and Contracts in an Entity's Own Equity (“ASU 2020-06”). ASU 2020-06 simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. ASU 2020-06 also simplifies the diluted net income per share calculation in certain areas. The amendments in ASU 2020-06 are effective for public business entities for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Effective October 1, 2022, the adoption of ASU 2020-06 resulted in an increase in long-term debt, less current portion and debt issuance costs, net of $ 11,933 , a decrease in additional paid-in-capital of $ 23,382 and a decrease in accumulated deficit of $ 11,449 . The adoption of ASU 2020-06 had no impact on net income. 3. CREDIT RISK AND OTHER CONCENTRATIONS The Company places its cash with high credit quality financial institutions which provide Federal Deposit Insurance Corporation insurance. The Company performs periodic evaluations of the relative credit standing of these institutions and does not expect any losses related to such concentrations. The Company’s revenues are earned by processing transactions for merchant businesses and other institutions under contract with the Company. The Company utilizes the funds settlement services of primarily six processing banks, from which most accounts receivable are remitted monthly. 87 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) No single customer accounted for more than 10% of the Company's revenue during the years ended September 30, 2023, 2022 and 2021. The Company believes that the loss of any single customer would not have a material adverse effect on the Company's financial condition or results of operations. The Company uses third party payment processors, three of which facilitate more than 10% of our processing revenues for the years ended September 30, 2023, 2022, and 2021. 4. ACQUISITIONS During the years ended September 30, 2023, 2022 and 2021 the Company acquired the following intangible assets and businesses: Residual Buyouts From time to time, the Company acquires future commission streams from sales agents in exchange for an upfront cash payment. This results in an increase in overall gross processing volume to the Company. The residual buyouts are treated as asset acquisitions, resulting in recording a residual buyout intangible asset at cost on the date of acquisition. These assets are amortized using a method of amortization that reflects the pattern in which the economic benefits of the intangible asset are expected to be utilized over their estimated useful lives. During the years ended September 30, 2023, 2022 and 2021, the Company purchased $ 8,051 , $ 52 and $ 1,819 , respectively, in residual buyouts using a combination of cash on hand, loan forgiveness and borrowings on the Company's revolving credit facility. The acquired residual buyout intangible assets weighted average estimated amortization period of eight years . Referral Agreements From time to time, the Company enters into referral agreements with agent banks or other organizations (“referral partner”). Under these agreements, the referral partner refers its customers to the Company for credit card processing services. Total consideration paid for these agreements in the year ended September 30, 2023, was $ 420 , all of which was settled with cash on hand. Because the Company pays an up-front fee to compensate the referral partner, the amount is treated as an asset acquisition in which the Company has acquired an intangible stream of referrals. This asset is amortized over a straight-line period of five years . 2023 Business Combinations Purchase of Celtic Cross Holdings, Inc. and Celtic Systems Pvt. Ltd. During the year ended September 30, 2023, the Company 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. Celtic is within the Software and Services segment. Total purchase consideration consisted of $ 85,000 in cash consideration, funded by proceeds from the Company's revolving credit facility. The goodwill associated with the Celtic acquisition is deductible for tax purposes. The acquired customer relationships intangible assets has an estimated amortization period of eighteen years . The trade name and non-compete agreements associated with the acquisition have amortization periods of five and three years , respectively. The weighted-average amortization period for all intangibles acquired is eighteen years . The acquired capitalized software has a weighted-average amortization period of ten years . Acquisition-related costs for this acquisition amounted to approximately $ 1,741 and were expensed as incurred. 88 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) Summary of Celtic Cross Holdings, Inc. and Celtic Systems Pvt. Ltd. The fair values assigned to certain assets and liabilities assumed, as of the acquisition date, were as follows: Accounts receivable $ 7,660 Prepaid expenses and other current assets 103 Property and equipment 5,437 Capitalized software 12,600 Customer relationships 33,800 Non-compete agreements 200 Trade name 600 Goodwill 43,695 Total assets acquired 104,095 Accounts payable 9 Accrued expenses and other current liabilities 3,182 Deferred revenue, current 2,741 Other long-term liabilities 13,162 Net assets acquired $ 85,001 Other Business Combinations during the year ended September 30, 2023 The Company completed the acquisition of two other businesses to expand the Company's software offerings. The total purchase consideration was $ 19,757 , including $ 16,997 in cash consideration, funded by proceeds from the Company's revolving credit facility, $ 2,000 of the Company's Class A Common Stock, and $ 760 contingent consideration. In connection with these acquisitions, the Company allocated approximately $ 159 of the consideration to net working capital, approximately $ 374 to property and equipment, approximately $ 670 to capitalized software, approximately $ 8,400 to customer relationships, approximately $ 100 to trade names, and the remainder, approximately $ 12,229 , to goodwill, of which $ 2,864 is deductible for tax purposes, and approximately $ 2,178 to other long-term liabilities. Certain of the purchase price allocations assigned for these acquisitions is considered preliminary as of September 30, 2023. The acquired capital software and customer relationships intangible assets have estimated amortization periods of seven to eight years and ten to fifteen years , respectively. Acquisition-related costs for these businesses amounted to approximately $ 317 and were expensed as incurred. Pro Forma Results of Operations for 2023 Business Combinations The following unaudited supplemental pro forma results of operations have been prepared as though each of the acquired businesses in the year ended September 30, 2023 had occurred on October 1, 2021. Pro forma adjustments were made to reflect the impact of depreciation and amortization, changes to executive compensation and the revised debt load, all in accordance with ASC 805. This supplemental pro forma 89 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) information does not purport to be indicative of the results of operations that would have been attained had the acquisitions been made on these dates, or of results of operations that may occur in the future. Year ended September 30, 2023 2022 Revenue $ 371,613 $ 340,051 Net loss $ ( 2,696 ) $ ( 22,565 ) 2022 Business Combinations During the year ended September 30, 2022, the Company completed the acquisitions of three businesses to expand the Company’s software offerings in the Public Sector and Healthcare vertical markets. Total purchase consideration was $ 107,681 , including $ 101,400 in cash consideration, funded by proceeds from the Company's revolving credit facility, and $ 6,281 of contingent consideration. The goodwill associated with two of the three acquisitions is deductible for tax purposes. The acquired customer relationships intangible assets have estimated amortization periods of between ten and nineteen years . The trade names have estimated weighted-average amortization periods of four years . The weighted-average amortization period for all intangibles acquired is fifteen years . The acquired capitalized software have amortization periods of seven years . Acquisition-related costs for these businesses amounted to approximately $ 773 and were expensed as incurred. Certain provisions in the purchase agreements provide for additional consideration of up to $ 23,000 , in the aggregate, to be paid based upon the achievement of specified financial performance targets, as defined in the purchase agreements, through no later than September 2024. The Company determined the acquisition date fair values of the liabilities for the contingent consideration based on probability forecasts and discounted cash flow analyses. In each subsequent reporting period, the Company will reassess its current estimates of performance relative to the targets and adjust the contingent liabilities to their fair values through earnings. See additional disclosures in Note 13. 90 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) Summary of 2022 Business Combinations The fair values assigned to certain assets and liabilities assumed, as of the acquisition dates, during the year ended September 30, 2022 were as follows: Accounts receivable $ 651 Settlement assets 685 Prepaid expenses and other current assets 83 Property and equipment 190 Capitalized software 9,790 Acquired customer relationships 41,090 Trade name 1,550 Goodwill 61,347 Operating lease right-of-use assets 263 Other assets 22 Total assets acquired 115,671 Accrued expenses and other current liabilities 287 Settlement obligations 685 Deferred revenue, current 30 Current portion of operating lease liabilities 82 Operating lease liabilities, less current portion 181 Other long-term liabilities 6,725 Net assets acquired $ 107,681 2021 Business Combinations During the year ended September 30, 2021, the Company completed the acquisitions of eight unrelated businesses, including Business Information Systems, Inc., ImageSoft Inc., and six other collectively material businesses. Purchase of Business Information Systems, Inc. On February 1, 2021, the Company completed the acquisition of substantially all of the assets of Business Information Systems, GP, a Tennessee general partnership and Business Information Systems, Inc., a Tennessee corporation (collectively “BIS”) to expand its software offerings, primarily in the Public Sector vertical. BIS is within the Software and Services segment. Total purchase consideration was $ 95,495 , including $ 52,500 in cash on hand and proceeds from the Company's revolving credit facility, 1,202,914 shares of the Company's Class A Common Stock (valued at $ 35,245 ), and $ 7,750 in contingent consideration. The goodwill associated with the acquisition is deductible for tax purposes. The acquired customer relationships intangible asset has an estimated amortization period of nineteen years . The non-compete agreement and trade name have estimated amortization periods of three and five years , respectively. The weighted-average estimated amortization period of all intangibles acquired is nineteen years . The acquired capitalized software has an estimated amortization period of ten years . Acquisition-related costs for BIS amounted to approximately $ 374 and were expensed as incurred. Certain provisions in the purchase agreement provide for additional consideration of up to $ 16,000 in the aggregate, to be paid based upon achievement of specified financial performance targets, as defined in the 91 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) purchase agreement, in the 24 months from February 1, 2021 through January 31, 2023. The Company determined the acquisition date fair value of the liability for the contingent consideration based on a probability forecast and discounted cash flow analysis. In each subsequent reporting period, the Company will reassess the current estimates of performance relative to the targets and adjust the contingent liability to its fair value through earnings. See additional disclosures in Note 13. Purchase of ImageSoft, Inc. On November 17, 2020, the Company completed the acquisition of substantially all of the assets of ImageSoft, Inc. (“ImageSoft”) to expand its software offerings, primarily in the Public Sector vertical. ImageSoft, is within the Software and Services segment. Total purchase consideration was $ 46,300 , including $ 40,000 in cash consideration, funded by proceeds from the Company's revolving credit facility, and $ 6,300 in contingent consideration. The goodwill associated with the acquisition is deductible for tax purposes. The acquired customer relationships intangible asset has an estimated amortization period of twenty years . The non-compete agreement and trade name have estimated amortization periods of three and five years , respectively. The weighted-average estimated amortization period of all intangibles acquired is nineteen years . The acquired capitalized software has an estimated amortization period of seven years . Acquisition-related costs for ImageSoft amounted to approximately $ 403 and were expensed as incurred. Certain provisions in the purchase agreement provide for additional consideration of up to $ 20,000 in the aggregate, to be paid based upon achievement of specified financial performance targets, as defined in the purchase agreement, in the 24 months from May 1, 2021 through April 30, 2023. The Company determined the acquisition date fair value of the liability for the contingent consideration based on a probability forecast and discounted cash flow analysis. In each subsequent reporting period, the Company will reassess the current estimates of performance relative to the targets and adjust the contingent liability to its fair value through earnings. See additional disclosures in Note 13. Other Business Combinations From October 1, 2020 to September 30, 2021, the Company completed the acquisitions of six other businesses to expand the Company’s software offerings in the Public Sector and Healthcare vertical markets and to add proprietary technology that will augment the Company’s existing platform across several verticals. Five of these businesses are within the Software and Services segment and one is within the Merchant Services segment. Total purchase consideration was $ 65,527 , including $ 57,000 in cash consideration, funded by proceeds from the Company's revolving credit facility, and $ 8,527 of contingent consideration. For each of these businesses acquired, the goodwill associated with the acquisition is deductible for tax purposes. The acquired customer relationships intangible assets have estimated amortization periods of between ten and twenty-five years . The non-compete agreement and trade names have weighted average estimated amortization periods of four years . The weighted-average amortization period for all intangibles acquired is sixteen years . The acquired capitalized software has a weighted-average amortization period of seven years . Acquisition-related costs for these businesses amounted to approximately $ 1,110 and were expensed as incurred. Certain provisions in the purchase agreements provide for additional consideration of up to $ 50,200 , in the aggregate, to be paid based upon the achievement of specified financial performance targets, as defined in the purchase agreements, through no later than June 2023. The Company determined the acquisition date fair values of the liabilities for the contingent consideration based on probability forecasts and discounted cash flow analyses. In each subsequent reporting period, the Company will reassess its current estimates of performance relative to 92 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) the targets and adjust the contingent liabilities to their fair values through earnings. See additional disclosures in Note 13. Summary of 2021 Business Combinations The fair values assigned to certain assets and liabilities assumed, as of the acquisition dates, during the year ended September 30, 2021 were as follows: BIS ImageSoft, Inc. Other Total Accounts receivable $ 1,567 $ 4,997 $ 3,141 $ 9,705 Settlement assets 6,889 120 — 7,009 Inventories 458 — 161 619 Prepaid expenses and other current assets 10 2,897 2,043 4,950 Property and equipment 206 433 312 951 Capitalized software 15,200 5,200 4,100 24,500 Acquired customer relationships 32,300 16,300 24,040 72,640 Non-compete agreements 100 610 390 1,100 Trade name 700 1,100 840 2,640 Goodwill 46,660 22,408 35,955 105,023 Operating lease right-of-use assets — 332 484 816 Other assets — 6 32 38 Total assets acquired 104,090 54,403 71,498 229,991 Accrued expenses and other current liabilities 138 910 1 1,049 Settlement obligations 6,889 120 — 7,009 Deferred revenue, current 1,568 6,748 5,498 13,814 Current portion of operating lease liabilities — 75 221 296 Operating lease liabilities, less current portion — 250 251 501 Net assets acquired $ 95,495 $ 46,300 $ 65,527 $ 207,322 5. PREPAID EXPENSES AND OTHER CURRENT ASSETS A summary of the Company's prepaid expenses and other current assets as of September 30, 2023 and 2022 is as follows: 2023 2022 Inventory $ 4,138 $ 4,121 Prepaid licenses 3,115 5,743 Prepaid insurance 697 736 Notes receivable — current portion 4 4,930 Other current assets 4,495 3,915 Prepaid expenses and other current assets $ 12,449 $ 19,445 93 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) 6. PROPERTY AND EQUIPMENT, NET A summary of the Company's property and equipment as of September 30, 2023 and 2022 is as follows: Estimated Useful Life 2023 2022 Buildings 20 years 4,711 — Computer equipment and software (1) 2 to 7 years 4,980 3,040 Furniture and fixtures 2 to 7 years 2,522 2,159 Terminals 2 to 3 years 1,035 813 Office equipment 2 to 5 years 1,643 1,289 Automobiles 3 years 526 477 Leasehold improvements 2 to 7 years 3,638 2,945 Accumulated depreciation ( 6,747 ) ( 5,053 ) Property and equipment, net $ 12,308 $ 5,670 ____________________ 1. Includes computer software of $ 299 and $ 129 as of September 30, 2023 and 2022, respectively. Depreciation expense for the years ended September 30, 2023, 2022 and 2021 amounted to $ 3,377 , $ 2,545 and $ 2,312 , respectively. 7. CAPITALIZED SOFTWARE, NET A summary of the Company's capitalized software as of September 30, 2023 and 2022 is as follows: Estimated Useful Life 2023 2022 Software development costs 3 to 7 years $ 81,141 $ 60,013 Development in progress 8,634 9,265 Accumulated amortization ( 27,198 ) ( 16,937 ) Capitalized software, net $ 62,577 $ 52,341 The Company capitalized software development costs (including acquisitions) totaling $ 25,441 and $ 19,957 during the years ended September 30, 2023 and 2022, respectively. Amortization expense for capitalized software development costs amounted to $ 12,545 , $ 8,987 and $ 6,276 during the years ended September 30, 2023, 2022 and 2021, respectively. During the year ended September 30, 2023, the Company wrote down $ 2,660 related to an internal use software project. There were no amounts written down to net realizable value during the years ended September 30, 2022 and 2021, respectively. 94 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) 8. GOODWILL AND INTANGIBLE ASSETS Changes in the carrying amount of goodwill are as follows: Software and Services Merchant Services Other Total Balance at September 30, 2021 (net of accumulated impairment losses of $ 11,458 , $ 0 and $ 0 , respectively) $ 173,157 $ 119,086 $ — $ 292,243 Goodwill attributable to preliminary purchase price adjustments and acquisition activity during the year ended September 30, 2022 61,396 — — 61,396 Balance at September 30, 2022 234,553 119,086 — 353,639 Goodwill attributable to preliminary purchase price adjustments and acquisition activity during the year ended September 30, 2023 53,060 2,864 — 55,924 Balance at September 30, 2023 $ 287,613 $ 121,950 $ — $ 409,563 Intangible assets consisted of the following as of September 30, 2023: Cost Accumulated Amortization Carrying Value Amortization Life and Method Finite-lived intangible assets: Customer relationships $ 310,501 $ ( 98,182 ) $ 212,319 9 to 25 years – accelerated or straight-line Non-compete agreements 1,300 ( 1,059 ) 241 3 to 6 years – straight-line Website and brand development costs 44 ( 37 ) 7 3 to 4 years – straight-line Trade names 6,531 ( 3,690 ) 2,841 3 to 7 years – straight-line Residual buyouts 14,220 ( 3,111 ) 11,109 8 years – straight-line Referral and exclusivity agreements 609 ( 217 ) 392 5 years – straight-line Total finite-lived intangible assets 333,205 ( 106,296 ) 226,909 Indefinite-lived intangible assets: Trademarks 43 — 43 Total identifiable intangible assets $ 333,248 $ ( 106,296 ) $ 226,952 95 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) Intangible assets consisted of the following as of September 30, 2022: Cost Accumulated Amortization Carrying Value Amortization Life and Method Finite-lived intangible assets: Customer relationships $ 268,301 $ ( 80,681 ) $ 187,620 10 to 25 years – accelerated or straight-line Non-compete agreements 1,190 ( 705 ) 485 3 to 6 years – straight-line Website development costs 268 ( 159 ) 109 3 to 4 years – straight-line Trade names 7,771 ( 4,203 ) 3,568 3 to 7 years – straight-line Residual buyouts 6,169 ( 2,141 ) 4,028 8 years – straight-line Referral and exclusivity agreements 800 ( 733 ) 67 5 years – straight-line Total finite-lived intangible assets 284,499 ( 88,622 ) 195,877 Indefinite-lived intangible assets: Trademarks 42 — 42 Total identifiable intangible assets $ 284,541 $ ( 88,622 ) $ 195,919 Amortization expense for intangible assets amounted to $ 20,539 , $ 17,892 and $ 15,830 during the years ended September 30, 2023, 2022 and 2021, respectively. Based on gross carrying amounts at September 30, 2023, the Company's estimate of future amortization expense for intangible assets are presented in this table as follows for each fiscal year ending September 30: 2024 $ 20,506 2025 20,215 2026 19,743 2027 19,123 2028 18,540 Thereafter 128,782 $ 226,909 96 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) 9. ACCRUED EXPENSES AND OTHER LIABILITIES A summary of the Company's accrued expenses and other current liabilities as of September 30, 2023 and 2022 is as follows: 2023 2022 Accrued wages, bonuses, commissions and vacation $ 8,713 $ 8,117 Accrued interest 1,313 642 Accrued contingent consideration — current portion 6,825 21,385 Escrow liabilities 3,965 12,285 Tax receivable agreement liability — current portion — 20 Customer deposits 1,258 1,575 Employee health self-insurance liability 1,014 732 Accrued interchange 2,191 2,096 Other current liabilities 12,461 10,981 Accrued expenses and other current liabilities $ 37,740 $ 57,833 A summary of the Company's long-term liabilities as of September 30, 2023 and 2022 is as follows: 2023 2022 Accrued contingent consideration — long-term portion $ 1,414 $ 1,448 Deferred tax liability — long-term 19,646 7,896 Other long-term liabilities 3,083 196 Total other long-term liabilities $ 24,143 $ 9,540 10. LONG-TERM DEBT, NET A summary of long-term debt, net as of September 30, 2023 and September 30, 2022 is as follows: Maturity 2023 2022 Revolving lines of credit to banks under the 2023 Senior Secured Credit Facility May 8, 2028 $ 272,505 $ — Revolving lines of credit to banks under the Prior Senior Secured Credit Facility May 9, 2024 — 185,017 1.0 % Exchangeable Senior Notes due 2025 February 15, 2025 117,000 104,557 Debt issuance costs, net ( 4,424 ) ( 2,554 ) Total long-term debt, net of issuance costs $ 385,081 $ 287,020 2020 Exchangeable Notes Offering On February 18, 2020, i3 Verticals, LLC issued $ 138,000 aggregate principal amount of 1.0 % Exchangeable Senior Notes due 2025 (the “Exchangeable Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The Company 97 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) received approximately $ 132,762 in net proceeds from the sale of the Exchangeable Notes, as determined by deducting estimated offering expenses paid to third-parties from the aggregate principal amount. On October 1, 2022, the Company adopted ASU 2020-06 using the modified retrospective method, which resulted in the Exchangeable Notes being presented as a single liability instrument with no separate accounting for embedded conversion features. Refer to Note 2 for further discussion. The Exchangeable Notes bear interest at a fixed rate of 1.00 % per year, payable semiannually in arrears on February 15 and August 15 of each year, beginning on August 15, 2020. The Exchangeable Notes will mature on February 15, 2025, unless converted or repurchased at an earlier date. i3 Verticals, LLC issued the Exchangeable Notes pursuant to an Indenture, dated as of February 18, 2020 (the “Indenture”), among i3 Verticals, LLC, the Company and U.S. Bank National Association, as trustee. Prior to August 15, 2024, the Exchangeable Notes are exchangeable only upon satisfaction of certain conditions and during certain periods described in the Indenture, and thereafter, the Exchangeable Notes are exchangeable at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. 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 exchange rate is initially 24.4666 shares of Class A common stock per $1,000 principal amount of Exchangeable Notes (equivalent to an initial exchange price of approximately $ 40.87 per share of Class A common stock). The exchange rate is subject to adjustment in certain circumstances. In addition, following certain corporate events that occur prior to the maturity date or i3 Verticals, LLC’s delivery of a notice of redemption, i3 Verticals, LLC will increase, in certain circumstances, the exchange rate for a holder who elects to exchange its Exchangeable Notes in connection with such a corporate event or notice of redemption, as the case may be. If the Company or i3 Verticals, LLC undergoes a fundamental change, holders may require i3 Verticals, LLC to repurchase all or part of their Exchangeable Notes at a repurchase price equal to 100 % of the principal amount of the Exchangeable Notes to be repurchased, plus accrued and unpaid interest to, but not including, the fundamental change repurchase date. As of September 30, 2023, none of the conditions permitting the holders of the Exchangeable Notes to early convert have been met. Prior to the 47th scheduled trading day immediately preceding the maturity date, if the last reported sale price per share of Class A common stock has been at least 130 % of the exchange price for the Exchangeable Notes for at least 20 trading days (whether or not consecutive), i3 Verticals, LLC may redeem all or any portion of the Exchangeable Notes at a cash redemption price equal to 100 % of the principal amount of the Exchangeable Notes to be redeemed plus accrued and unpaid interest on such note to, but not including, the redemption date. The Exchangeable Notes are general senior unsecured obligations of i3 Verticals, LLC and the guarantee is the Company’s senior unsecured obligation and rank senior in right of payment to all of i3 Verticals, LLC’s and the Company’s future indebtedness that is expressly subordinated in right of payment to the Exchangeable Notes or the guarantee, as applicable. The Exchangeable Notes and the guarantee rank equally in right of payment with all of i3 Verticals, LLC’s and the Company’s existing and future unsecured indebtedness that is not so expressly subordinated in the right of payment to the Exchangeable Notes or the guarantee, as applicable. The Exchangeable Notes and the guarantee are effectively subordinated to any of the Companies’ existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness (including obligations under the 2023 Senior Secured Credit Facility, defined below). The Exchangeable Notes and the guarantee will be structurally subordinated to all indebtedness and other liabilities and obligations (including the debt and trade payables) of the Company’s subsidiaries, other than i3 Verticals, LLC. In accounting for the issuance of the Exchangeable Notes, the Company separated the Exchangeable Notes into liability and equity components. The carrying amount of the liability component before the allocation of any transaction costs was calculated by measuring the fair value of a similar liability that does not have an associated 98 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) exchangeable feature. The carrying amount of the equity component (before the allocation of any transaction costs), representing the conversion option, which does not require separate accounting as a derivative as it meets a scope exception for certain contracts involving an entity's own equity, was determined by deducting the fair value of the liability component from the par value of the Exchangeable Notes. The difference between the principal amount of the Exchangeable Notes and the liability component represented the debt discount, which was recorded as a direct deduction from the related debt liability in the consolidated balance sheet and accreted over the period from the date of issuance to the contractual maturity date, resulting in the recognition of non-cash interest expense. The equity component of the Exchangeable Notes of approximately $ 28,662 was included in additional paid-in capital in the consolidated balance sheet and was not remeasured as longs as continued to meet the conditions for equity classification. Transaction costs were allocated to the liability and equity components in the same proportion as the allocation of the proceeds. Transaction costs attributable to the liability component were recorded as debt issuance costs in the consolidated balance sheet and are amortized to interest expense using the effective interest method over the term of the Exchangeable Notes, and transaction costs attributable to the equity component were netted with the equity component in stockholders' equity. Effective October 1, 2022, the Company adopted ASU 2020-06, which simplified the accounting for the Exchangeable Notes and they are now reported as a single liability instrument with no separate accounting for embedded conversion features. The adoption of ASU 2020-06 resulted an increase in long-term debt, less current portion and debt issuance costs, net of $ 11,933 , a decrease in additional paid-in-capital of $ 23,382 and a decrease in accumulated deficit of $ 11,449 . As of September 30, 2023, the aggregate principal amount outstanding of the Exchangeable Notes was $ 117,000 . Non-cash interest expense for amortization of debt issuance costs related to the Exchangeable Notes for the years ended September 30, 2023 and 2022 was $ 949 and $ 666 , respectively. The Company also wrote off a portion of the debt issuance costs in connection with the repurchase transactions in April and September 2020, as described below. Total unamortized debt issuance costs related to the Exchangeable Notes were $ 1,501 as of September 30, 2023. The estimated fair value of the Exchangeable Notes was $ 108,506 as of September 30, 2023. The estimated fair value of the Exchangeable Notes was determined through consideration of quoted market prices for similar instruments. The fair value is classified as Level 2, as defined in Note 13. The Company can choose to purchase its Exchangeable Notes on the open market. In April and September 2020, the Company paid $ 17,414 in aggregate to repurchase $ 21,000 in aggregate principal amount of the Exchangeable Notes and to repay approximately $ 24 in accrued interest on the repurchased portion of the Exchangeable Notes. Exchangeable Note Hedge Transactions On February 12, 2020, concurrently with the pricing of the Exchangeable Notes, and on February 13, 2020, concurrently with the exercise by the initial purchasers of their right to purchase additional Exchangeable Notes, i3 Verticals, LLC entered into exchangeable note hedge transactions with respect to Class A common stock (the “Note Hedge Transactions”) with certain financial institutions (collectively, the “Counterparties”). The Note Hedge Transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Exchangeable Notes, the same number of shares of Class A common stock that initially underlie the Exchangeable Notes in the aggregate and are exercisable upon exchange of the Exchangeable Notes. The Note Hedge Transactions are intended to reduce potential dilution to the Class A common stock upon any exchange of the Exchangeable Notes. The Note Hedge Transactions will expire upon the maturity of the Exchangeable Notes, if not earlier exercised. The Note Hedge Transactions are separate transactions, entered into by i3 Verticals, LLC with the Counterparties, and are not part of the terms of the Exchangeable Notes. Holders of the Exchangeable Notes will not have any rights with respect to the Note Hedge Transactions. i3 Verticals, LLC used approximately $ 28,676 of the net proceeds from the offering of the Exchangeable Notes (net of the premiums received for the warrant transactions described below) to pay the cost of the Note Hedge Transactions. 99 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) The Note Hedge Transactions do not require separate accounting as a derivative as they meet a scope exception for certain contracts involving an entity's own equity. The premiums paid for the Note Hedge Transactions have been included as a net reduction to additional paid-in capital within stockholders' equity. Warrant Transactions On February 12, 2020, concurrently with the pricing of the Exchangeable Notes, and on February 13, 2020, concurrently with the exercise by the initial purchasers of their right to purchase additional Exchangeable Notes, the Company entered into warrant transactions to sell to the Counterparties warrants (the “Warrants”) to acquire, subject to customary adjustments, up to initially 3,376,391 shares of Class A common stock in the aggregate at an initial exercise price of $ 62.88 per share. The Company offered and sold the Warrants in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act. The Warrants will expire over a period beginning on May 15, 2025. The Warrants are separate transactions, entered into by the Company with the Counterparties, and are not part of the terms of the Exchangeable Notes. Holders of the Exchangeable Notes will not have any rights with respect to the Warrants. The Company received approximately $ 14,669 from the offering and sale of the Warrants. The Warrants do not require separate accounting as a derivative as they meet a scope exception for certain contracts involving an entity's own equity. The premiums paid for the Warrants have been included as a net increase to additional paid-in capital within stockholders' equity. 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 $ 450,000 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 $ 100,000 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 4.39 x and total leverage ratio was 3.77 x. 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. 100 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) 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 $ 450,000 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 $ 450,000 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. 101 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) Prior Senior Secured Credit Facility On May 9, 2019, the Company replaced its then existing credit facility with a new credit agreement (the "Prior Senior Secured Credit Facility") (as noted above, the Prior Senior Secured Credit Facility was replaced by the 2023 Senior Secured Credit Facility in May 2023). Effective October 3, 2022, the Prior Senior Secured Credit Facility, as amended, consisted of a $ 375,000 revolving credit facility, together with an option to increase the revolving credit facility and/or obtain incremental term loans in an additional principal amount of up to $ 50,000 in the aggregate (subject to the receipt of additional commitments for any such incremental loan amounts). The Prior 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 %, 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 %, 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 Prior Senior Secured Credit Facility required the Company to pay unused commitment fees of 0.15 % to 0.30 % 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. Debt issuance costs The Company incurred $ 3,079 in debt issuance costs during the year ended September 30, 2023 and did no t incur any debt issuance costs during the years ended September 30, 2022 and 2021. The Company's debt issuance costs are being amortized over the related term of the debt using the straight-line method, which is not materially different than the effective interest rate method, and are presented net against long-term debt in the condensed consolidated balance sheets. The amortization of deferred debt issuance costs is included in interest expense and amounted to approximately $ 1,514 , $ 1,046 and $ 968 during the years ended September 30, 2023, 2022 and 2021, respectively. In connection with the replacement of the Prior Senior Secured Credit Facility, the Company recorded a debt extinguishment charge of $ 203 for the write-off of deferred financing costs, which was recorded in interest expense in the consolidated statements of operations. 11. INCOME TAXES i3 Verticals, Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from i3 Verticals, LLC based on i3 Verticals, Inc.'s economic interest in i3 Verticals, LLC. i3 Verticals, LLC's members, including the Company, are liable for federal, state and local income taxes based on their share of i3 Verticals, LLC's pass-through taxable income. i3 Verticals, LLC is not a taxable entity for federal income tax purposes, but is subject to and reports entity level tax in both Tennessee and Texas. In addition, certain subsidiaries of i3 Verticals, LLC are corporations that are subject to state and federal income taxes. Year ended September 30, 2023 2022 2021 Current: Federal tax expense (benefit) $ 3,076 $ 1,098 $ ( 35 ) State tax expense 1,656 1,321 945 Deferred: Federal tax benefit ( 7,296 ) ( 4,151 ) ( 285 ) State tax expense (benefit) 1,361 6,739 ( 2 ) Income tax (benefit) expense $ ( 1,203 ) $ 5,007 $ 623 102 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) A reconciliation of income tax expense (benefit) from operations computed at the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows: Year ended September 30, 2023 2022 2021 Expected U.S. federal income taxes at statutory rate $ ( 809 ) 21.0 % $ ( 3,824 ) 21.0 % $ ( 1,519 ) 21.1 % Partnership income not taxed at federal level 865 ( 22.4 ) % 1,035 ( 5.7 ) % 29 ( 0.4 ) % Valuation allowance ( 3,964 ) 102.8 % 7,101 ( 39.0 ) % 712 ( 9.9 ) % State and local income taxes, net of federal benefit 2,451 ( 63.6 ) % ( 641 ) 3.5 % 552 ( 7.6 ) % Nondeductible expenses and other permanent items 189 ( 4.9 ) % 83 ( 0.5 ) % 85 ( 1.2 ) % Revaluation of debt and other debt transaction differences 536 ( 13.9 ) % 1,434 ( 7.9 ) % 609 ( 8.4 ) % Change in liability for uncertain tax positions 155 ( 4.0 ) % ( 25 ) 0.1 % ( 83 ) 1.2 % Federal tax credits ( 636 ) 16.5 % — — % 240 ( 3.3 ) % Other 10 ( 0.3 ) % ( 156 ) 0.9 % ( 2 ) — % Income tax (benefit) expense $ ( 1,203 ) 31.2 % $ 5,007 ( 27.5 ) % $ 623 ( 8.6 ) % 103 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) Deferred income taxes are provided for the temporary differences between the financial reporting basis and tax basis of the Company’s assets and liabilities. Net deferred taxes spanning multiple jurisdictions as of September 30, 2023 and 2022 were as follows: September 30, 2023 2022 Deferred tax assets: Investment in partnership $ 52,432 $ 56,388 Stock-based compensation 13,144 2,421 Deferred revenue 318 448 Accrued expenses 328 269 Net operating loss carryforwards 17,132 15,992 Section 163j carryforward 5,064 1,685 Federal tax credits 698 359 Operating lease liabilities 611 677 Other 108 75 Gross deferred tax assets 89,835 78,314 Valuation allowance ( 28,944 ) ( 27,555 ) Deferred tax liabilities: Intangible assets ( 26,313 ) ( 14,270 ) Operating lease right of use assets ( 565 ) ( 641 ) Other ( 1,145 ) ( 285 ) Net deferred tax asset $ 32,868 $ 35,563 Federal net operating loss carryforwards as of September 30, 2023 and 2022 were $ 44,098 and $ 43,233 , respectively. Federal tax credits were $ 698 , resulting in a deferred tax asset of $ 9,959 as of September 30, 2023 compared to $ 359 of federal tax credits, resulting in a deferred tax asset of $ 9,438 as of September 30, 2022. The federal net operating loss carryforwards will begin to expire in 2037 and the federal tax credits will begin to expire in 2039. The use of federal net operating losses and credits are limited to the future taxable income of separate legal entities. As a result, a valuation allowance of $ 387 has been provided for certain federal deferred tax assets, a decrease of $ 421 during the year ended September 30, 2023. State net operating loss carryforwards as of September 30, 2023 totaled $ 124,656 , resulting in a deferred tax asset of $ 7,871 . The state net operating loss carryforwards will begin to expire in 2026. The use of certain state net operating losses are limited to future taxable earnings of separate legal entities. As a result, a valuation allowance of $ 8,511 has been provided for state loss carryforwards and other state tax attributes, an increase of $ 3,602 during the year ended September 30, 2023. The Company also considered a valuation allowance on its $ 52,432 outside basis of investment in i3 Verticals, LLC deferred tax asset as of September 30, 2023. The Company has recorded a valuation allowance of $ 20,046 against the portion of the deferred tax benefit that is capital in nature and against the amount not expected to be realized, resulting in a decrease in valuation allowance of $ 1,792 during the year ended September 30, 2023. Management believes that it is more likely than not that the results of operations will generate sufficient taxable income to realize the deferred tax assets after giving consideration to the valuation allowance. 104 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) The components of the Company’s liability for uncertain tax benefits are as follows: Gross unrecognized tax benefits as of September 30, 2021 $ 108 Increase in current year tax positions — Increase in prior year tax positions — Settlements and other reductions 25 Gross unrecognized tax benefits as of September 30, 2022 83 Increase in current year tax positions 108 Increase in prior year tax positions 73 Settlements and other reductions 26 Gross unrecognized tax benefits as of September 30, 2023 $ 238 As of September 30, 2023 and 2022, the Company had no accrued interest and no accrued penalties in either period related to uncertain tax positions. It is the Company’s policy to recognize interest and/or penalties related to income tax matters in income tax expense. The Company is no longer subject to U.S. federal, state, or local examinations by tax authorities for years before 2019. As of September 30, 2023 and 2022, there were unrecognized tax benefits of $ 238 and $ 83 that if recognized would affect the annual effective tax rate. Tax Receivable Agreement On June 25, 2018, the Company entered into a Tax Receivable Agreement with i3 Verticals, LLC and each of the Continuing Equity Owners (the “Tax Receivable Agreement”) that provides for the payment by the Company to the Continuing Equity Owners of 85 % of the amount of certain tax benefits, if any, that it actually realizes, or in some circumstances, is deemed to realize in its tax reporting, as a result of (i) future redemptions funded by the Company or exchanges, or deemed exchanges in certain circumstances, of Common Units of i3 Verticals, LLC for Class A common stock of i3 Verticals, Inc. or cash, and (ii) certain additional tax benefits attributable to payments made under the Tax Receivable Agreement. These tax benefit payments are not conditioned upon one or more of the Continuing Equity Owners maintaining a continued ownership interest in i3 Verticals, LLC. If a Continuing Equity Owner transfers Common Units but does not assign to the transferee of such units its rights under the Tax Receivable Agreement, such Continuing Equity Owner generally will continue to be entitled to receive payments under the Tax Receivable Agreement arising in respect of a subsequent exchange of such Common Units. In general, the Continuing Equity Owners’ rights under the Tax Receivable Agreement may not be assigned, sold, pledged or otherwise alienated to any person, other than certain permitted transferees, without (a) the Company's prior written consent, which should not be unreasonably withheld, conditioned or delayed, and (b) such persons becoming a party to the Tax Receivable Agreement and agreeing to succeed to the applicable Continuing Equity Owner’s interest therein. The Company expects to benefit from the remaining 15 % of the tax benefits, if any, that the Company may realize. When Class B common stock is exchanged for Class A common stock, this triggers an increase in the tax basis of the Company's Common Units in i3 Verticals, LLC subject to the provisions of the Tax Receivable Agreement. During the year ended September 30, 2021, the Company acquired an aggregate of 1,671,479 common units of i3 Verticals, LLC in connection with the redemption of common units, which resulted in an increase in the tax basis of our investment in i3 Verticals, LLC subject to the provisions of the Tax Receivable Agreement. As a result of these exchanges, during the year ended September 30, 2021, the Company recognized an increase to its net deferred tax assets in the amount of $ 13,990 , and corresponding Tax Receivable Agreement liabilities of $ 11,892 , representing 85 % of the tax benefits due to the Continuing Equity Owners. During the year ended September 30, 2022, the Company acquired an aggregate of 111,000 common units of i3 Verticals, LLC in connection with the redemption of common units, which resulted in an increase in the tax basis of our investment in i3 Verticals, LLC subject to the provisions of the Tax Receivable Agreement. As a result of these exchanges, during the year ended September 30, 2022, the Company recognized an increase to its net 105 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) deferred tax assets in the amount of $ 898 , and corresponding Tax Receivable Agreement liabilities of $ 763 , representing 85 % of the tax benefits due to the Continuing Equity Owners. During the year ended September 30, 2023, the Company acquired an aggregate of 24,748 common units of i3 Verticals, LLC in connection with the redemption of common units, which resulted in an increase in the tax basis of our investment in i3 Verticals, LLC subject to the provisions of the Tax Receivable Agreement. As a result of these exchanges, during the year ended September 30, 2023, the Company recognized an increase to its net deferred tax assets in the amount of $ 206 , and corresponding Tax Receivable Agreement liabilities of $ 175 , representing 85 % of the tax benefits due to the Continuing Equity Owners. The deferred tax asset and corresponding Tax Receivable Agreement liability balances were $ 37,723 and $ 40,079 , respectively, as of September 30, 2023. Payments to the Continuing Equity Owners related to exchanges through September 30, 2023 will range from $ 0 to $ 3,235 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. 12. LEASES The Company’s leases consist primarily of real estate leases throughout the markets in which the Company operates. At contract inception, the Company determines whether an arrangement is or contains a lease, and for each identified lease, evaluates the classification as operating or financing. The Company had no finance leases as of September 30, 2023. Leased assets and obligations are recognized at the lease commencement date based on the present value of fixed lease payments to be made over the term of the lease. Renewal and termination options are factored into determination of the lease term only if the option is reasonably certain to be exercised. The weighted-average remaining lease term at September 30, 2023 was two years . The Company had no significant short-term leases during the year ended September 30, 2023. The Company’s leases do not provide a readily determinable implicit interest rate and the Company uses its incremental borrowing rate to measure the lease liability and corresponding right-of-use asset. The incremental borrowing rates were determined based on a portfolio approach considering the Company’s current secured borrowing rate adjusted for market conditions and the length of the lease term. The weighted-average discount rate used in the measurement of our lease liabilities was 7.7 % as of September 30, 2023. Operating lease cost is recognized on a straight-line basis over the lease term. Operating lease costs for the years ended September 30, 2023, 2022 and 2021, were $ 5,671 , $ 5,815 and $ 4,096 , respectively, which are included in selling, general and administrative expenses in the condensed consolidated statements of operations. Total operating lease costs for the years ended September 30, 2023, 2022 and 2021, include variable lease costs of approximately $ 78 , $ 59 and $ 6 , respectively, which are primarily comprised of costs of maintenance and utilities and changes in rates, and are determined based on the actual costs incurred during the period. Variable payments are expensed in the period incurred and not included in the measurement of lease assets and liabilities. Short-term rent expense for the years ended September 30, 2023, 2022 and 2021, was $ 210 , $ 177 and $ 304 , respectively, and are included in selling, general and administrative expenses in the condensed consolidated statements of operations. 106 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) As of September 30, 2023, maturities of lease liabilities are as follows: Years ending September 30: 2024 $ 5,055 2025 4,439 2026 3,454 2027 1,597 2028 755 Thereafter 1,262 Total future minimum lease payments (undiscounted) (1) 16,562 Less: present value discount ( 1,620 ) Present value of lease liability $ 14,942 _________________________ 1. Total future minimum lease payments excludes payments of $ 52 for leases designated as short-term leases, which are excluded from the Company's right-of-use assets. These payments will be made within the next twelve months. 13. FAIR VALUE MEASUREMENTS The Company applies the provisions of ASC 820, Fair Value Measurement , which defines fair value, establishes a framework for its measurement and expands disclosures about fair value measurements. Fair value is the price that would be received to sell an asset or the price paid to transfer a liability as of the measurement date. A three-tier, fair-value reporting hierarchy exists for disclosure of fair value measurements based on the observability of the inputs to the valuation of financial assets and liabilities. The three levels are: Level 1 — Quoted prices for identical instruments in active markets. Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable in active exchange markets. The carrying value of the Company’s financial instruments, including cash and cash equivalents, restricted cash, settlement assets and obligations, accounts receivable, other assets, accounts payable, and accrued expenses, approximated their fair values as of September 30, 2023 and 2022, because of the relatively short maturity dates on these instruments. The carrying amount of debt approximates fair value as of September 30, 2023 and 2022, because interest rates on these instruments approximate market interest rates. 107 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) The Company has no Level 1 or Level 2 financial instruments measured at fair value on a recurring basis. The following tables present the changes in the Company's Level 3 financial instruments that are measured at fair value on a recurring basis. Accrued Contingent Consideration Balance at September 30, 2021 $ 36,229 Contingent consideration accrued at time of business combination 6,281 Change in fair value of contingent consideration included in Operating expenses 23,725 Contingent consideration paid ( 43,402 ) Balance at September 30, 2022 $ 22,833 Contingent consideration accrued at time of business combination 760 Change in fair value of contingent consideration included in Operating expenses 10,781 Contingent consideration paid ( 26,135 ) Balance at September 30, 2023 $ 8,239 The fair value of contingent consideration obligations includes inputs not observable in the market and thus represents a Level 3 measurement. The amount to be paid under these obligations is contingent upon the achievement of certain growth metrics related to the financial performance of the entities subsequent to acquisition. 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. The Company develops the projected future financial results based on an analysis of historical results, market conditions, and the expected impact of anticipated changes in the Company's overall business and/or product strategies. Approximately $ 6,825 and $ 21,385 of contingent consideration was recorded in accrued expenses and other current liabilities as of September 30, 2023 and 2022, respectively. Approximately $ 1,414 and $ 1,448 of contingent consideration was recorded in other long-term liabilities as of September 30, 2023 and 2022, respectively. Disclosure of Fair Values The Company's financial instruments that are not remeasured at fair value include the Exchangeable Notes (see Note 10). The Company estimates the fair value of the Exchangeable Notes through consideration of quoted market prices of similar instruments, classified as Level 2 as described above. The estimated fair value of the Exchangeable Notes was $ 108,506 as of September 30, 2023. 108 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) 14. EQUITY-BASED COMPENSATION A summary of equity-based compensation expense recognized during the years ended September 30, 2023, 2022 and 2021 is as follows: Year ended September 30, 2023 2022 2021 Stock options $ 24,276 $ 25,163 $ 20,860 Restricted stock units 3,602 1,067 — Equity-based compensation expense $ 27,878 $ 26,230 $ 20,860 Amounts are included in general and administrative expense on the consolidated statements of operations. Income tax benefits of $ 785 , $ 468 and $ 1,083 were recognized related to equity-based compensation during the years ended September 30, 2023, 2022, and 2021, respectively. Stock Options In May 2018, the Company adopted the 2018 Equity Incentive Plan (the “2018 Plan”) under which the Company may grant up to 3,500,000 stock options and other equity-based awards to employees, directors and officers. The number of shares of Class A common stock available for issuance under the 2018 Plan includes an annual increase on the first day of each year, beginning with the 2019 calendar year, equal to 4.0 % of the outstanding shares of all classes of the Company's common stock as of the last day of the immediately preceding calendar year, unless the Company’s board of directors determines prior to the last trading day of December of the immediately preceding calendar year that the increase shall be less than 4 %. As of September 30, 2023, there were 1,075,549 shares of equity awards available to grant under the 2018 Plan. In September 2020, the Company adopted the 2020 Acquisition Equity Incentive Plan (the “2020 Inducement Plan”) under which the Company may grant up to 1,500,000 stock options and other equity-based awards to individuals that were not previously employees of the Company or its subsidiaries in connection with acquisitions, as a material inducement to the individual's entry into employment with the Company or its subsidiaries within the meaning of Rule 5635(c)(4) of the Nasdaq Listing Rules. In May 2021, the Company amended the 2020 Inducement Plan to increase the number of shares of the Company's Class A common stock available for issuance from 1,500,000 to 3,000,000 shares. As of September 30, 2023, there were 1,154,571 shares of equity awards available for grant under the 2020 Inducement Plan. Share-based compensation expense includes the estimated effects of forfeitures, which will be adjusted over the requisite service period to the extent actual forfeitures differ or are expected to differ from such estimates. The Company has issued stock option awards under the 2018 Plan and the 2020 Inducement Plan. The fair value of the stock option awards during the years ended September 30, 2023 and 2022 was determined on the grant date using the Black-Scholes valuation model based on the following weighted-average assumptions: September 30, 2023 September 30, 2022 Expected volatility (1) 54.9 % 55.7 % Expected dividend yield (2) — % — % Expected term (3) 6 years 6 years Risk-free interest rate (4) 3.9 % 1.6 % _________________ 1. For the year ended September 30, 2023, expected volatility is based on the volatility of the Company's own share price. For the year ended September 30, 2022, expected volatility is based on the historical volatility of a selected peer group over a period equivalent to the expected term. 2. The Company has assumed a dividend yield of zero as management has no plans to declare dividends in the foreseeable future. 3. Expected term represents the estimated period of time until an award is exercised and was determined using the simplified method as details of employee exercise behavior are limited due to limited historical data. 4. The risk-free rate is an interpolation of yields on U.S. Treasury securities with maturities equivalent to the expected term. 109 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) A summary of stock option activity for the year ended September 30, 2023 is as follows: Stock Options Weighted Average Exercise Price Outstanding at September 30, 2022 8,222,322 $ 25.07 Granted 1,286,629 24.13 Exercised ( 460,760 ) 18.14 Forfeited ( 471,521 ) 27.69 Outstanding at September 30, 2023 8,576,670 $ 25.16 Exercisable at September 30, 2023 5,586,736 $ 24.79 The weighted-average grant date fair value of stock options granted during the year ended September 30, 2023 was $ 13.68 . As of September 30, 2023, there were 8,576,670 stock options outstanding, of which 5,586,736 were exercisable. As of September 30, 2023, total unrecognized compensation expense related to unvested stock options, including an estimate for pre-vesting forfeitures, was $ 23,395 , which is expected to be recognized over a weighted-average period of 2.1 years. The Company's policy is to account for forfeitures of stock-based compensation awards as they occur. The total fair value of stock options that vested during the year ended September 30, 2023 was $ 24,652 . Restricted Stock Units The Company has issued Class A common stock in the form of restricted stock units ("RSUs") under the 2018 Plan. A summary of activity related to restricted stock units as of September 30, 2023 is as follows: Restricted Stock Units Weighted Average Exercise Price Outstanding at September 30, 2022 486,652 $ 24.93 Granted 536,882 25.28 Vested ( 67,854 ) 26.34 Forfeited ( 81,656 ) 24.09 Outstanding at September 30, 2023 874,024 $ 24.95 The weighted-average grant date fair value of RSUs granted during the year ended September 30, 2023 was $ 25.28 . As of September 30, 2023, total unrecognized compensation expense related to unvested RSUs, including an estimate for pre-vesting forfeitures, was $ 12,126 , which is expected to be recognized over a weighted average period of 3.1 years. 15. COMMITMENTS AND CONTINGENCIES Leases The Company utilizes office space and equipment under operating leases. Rent expense under these leases amounted to $ 5,881 , $ 5,992 and $ 4,400 during the years ended September 30, 2023, 2022 and 2021, 110 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) respectively. Refer to Note 12 for further discussion and a table of the future minimum payments under these leases. Minimum Processing Commitments The Company has non-exclusive agreements with several processors to provide The Company services related to transaction processing and transmittal, transaction authorization and data capture, and access to various reporting tools. Certain of these agreements require the Company to submit a minimum monthly number of transactions for processing. If the Company submits a number of transactions that is lower than the minimum, it is required to pay to the processor the fees it would have received if the Company had submitted the required minimum number of transactions. As of September 30, 2023, such minimum fee commitments were as follows: Years ending September 30: 2024 $ 4,582 2025 488 2026 — 2027 — 2028 — Thereafter — Total $ 5,070 Litigation With respect to all legal, regulatory and governmental proceedings, and in accordance with ASC 450-20, Contingencies—Loss Contingencies , the Company considers the likelihood of a negative outcome. If the Company determines the likelihood of a negative outcome with respect to any such matter is probable and the amount of the loss can be reasonably estimated, the Company records an accrual for the estimated amount of loss for the expected outcome of the matter. If the likelihood of a negative outcome with respect to material matters is reasonably possible and the Company is able to determine an estimate of the amount of possible loss or a range of loss, whether in excess of a related accrued liability or where there is no accrued liability, the Company discloses the estimate of the amount of possible loss or range of loss. However, the Company in some instances may be unable to estimate an amount of possible loss or range of loss based on the significant uncertainties involved in, or the preliminary nature of, any such material matter, and in these instances the Company will disclose the nature of the contingency and describe why the Company is unable to determine an estimate of possible loss or range of loss. The Company is involved in ordinary course legal proceedings, which include all claims, lawsuits, investigations and proceedings, including unasserted claims, which are probable of being asserted, arising in the ordinary course of business. The Company has considered all such ordinary course legal proceedings in formulating its disclosures and assessments. After taking into consideration the evaluation of such legal matters by the Company's legal counsel, the Company's management believes at this time such matters will not have a material impact on the Company's consolidated balance sheet, results of operations or cash flows. 111 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) S&S Litigation On June 2, 2021, the State of Louisiana, Division of Administration (the “State”) and a putative class of Louisiana law enforcement districts (collectively "Plaintiffs") filed a Petition (as amended on October 4, 2021, the “Petition”), in the 19 th Judicial District Court for the Parish of East Baton Rouge against i3-Software & Services, LLC (“S&S”), a subsidiary of the Company located in Shreveport, Louisiana, the Company, i3 Verticals, LLC, the current leader of the S&S business, the former leader of the S&S business, and 1120 South Pointe Properties, LLC (“South Pointe”), the former owner of the assets of the S&S business (collectively "Defendants") . See State of Louisiana, by and through its Division of Administration, East Baton Rouge Parish Law Enforcement District, by and through the duly elected East Baton Rouge Parish Sheriff, Sid J. Gautreaux, III, et. al., individually and as class representatives vs. i3-Software & Services, LLC; 1120 South Pointe Properties, LLC, formerly known as Software and Services of Louisiana, L.L.C.; i3 Verticals, Inc.; i3 Verticals, LLC; Gregory R. Teeters; and Scott Carrington . The Petition was amended on October 4, 2021 to add a putative class of Louisiana sheriffs (the “Sheriffs”) and subsequently removed to the United States District Court for the Middle District of Louisiana. The Petition seeks monetary damages for the cost of network remediation of $ 15,000 purportedly spent by the State and $ 7,000 purportedly spent by the Sheriffs, return of purchase prices, potential additional expenses related to remediation and any obligation to notify parties of an alleged data breach as and if required by applicable law, and reasonable attorneys’ fees. The claimed damages relate to a third-party remote access software product used in connection with services provided by S&S to certain Louisiana Parish law enforcement districts and alleged inadequacies in the Company’s cybersecurity practices. Plaintiffs moved to remand the action to state court on November 5, 2021, and the motion was referred to a magistrate to make a report and recommendation to the district court judge. On July 5, 2022, the magistrate recommended that the matter be remanded to state court. On July 19, 2022, the Company and all other defendants filed objections to the recommendation. On August 3, 2022, the Plaintiffs filed a response to those objections. On August 16, 2022, the district court granted the Plaintiffs’ motion to remand, and all Defendants appealed. Oral argument on this motion in front of the United States Fifth Circuit Court of Appeals took place on April 4, 2023, and on September 1, 2023, the Fifth Circuit panel affirmed the District Court order to remand the case back to state court. On September 29, 2023, all Defendants-Appellants filed a Petition for Rehearing En Banc, which the Plaintiffs-Appellees opposed on October 12, 2023. The parties await a decision on that motion. The assets of the S&S business were acquired from South Pointe by the Company in 2018 for $ 17,000 , including upfront cash consideration and contingent consideration, and provides software and payments services within the Company’s Public Sector vertical to local government agencies almost exclusively in Louisiana. The Company is unable to predict the outcome of this litigation. While we do not believe that this matter will have a material adverse effect on our business or financial condition, we cannot give assurance that this matter will not have a material effect on our results of operations or cash flows for the period in which it is resolved. Other The Company's subsidiary CP-PS, LLC has certain indemnification obligations in favor of FDS Holdings, Inc. related to the acquisition of certain assets of Merchant Processing Solutions, LLC in February 2014. The Company has incurred expenses related to these indemnification obligations in prior periods and may have additional expenses in the future. However, after taking into consideration the evaluation of such matters by the Company’s legal counsel, the Company’s management believes at this time that the anticipated outcome of any existing or potential indemnification liabilities related to this matter will not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. 112 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) 16. RELATED PARTY TRANSACTIONS In connection with the Company's IPO, the Company and i3 Verticals, LLC entered into a Tax Receivable Agreement with the Continuing Equity Owners that provides for the payment by the Company to the Continuing Equity Owners of 85 % of the amount of certain tax benefits, if any, that it actually realizes, or in some circumstances, is deemed to realize in its tax reporting, as a result of (i) future redemptions funded by the Company or exchanges, or deemed exchanges in certain circumstances, of Common Units of i3 Verticals, LLC for Class A common stock of i3 Verticals, Inc. or cash, and (ii) certain additional tax benefits attributable to payments made under the Tax Receivable Agreement. See Note 11 for further information. As of September 30, 2023, the total amount due under the Tax Receivable Agreement was $ 40,079 . In April 2016, the Company entered into a purchase agreement to purchase certain assets of Axia, LLC. On April 29, 2016, the Company entered into a Processing Services Agreement (the “AxiaMed Agreement”) with Axia Technologies, LLC (which has since been incorporated as Axia Technologies, Inc., doing business as AxiaMed (“AxiaMed”)), an entity controlled by the previous owner of Axia, LLC. Under the AxiaMed Agreement, the Company agreed to provide processing services for certain merchants as designated by AxiaMed from time to time. In accordance with ASC 606-10-55, revenue from the processing services is recognized net of interchange, residual expense and other fees. In March 2021, the Company became aware of an observable price change in the AxiaMed equity investment, due to a planned third party acquisition of AxiaMed. This resulted in an increase of $ 2,353 to the fair value of the AxiaMed investment at March 31, 2021, which the Company recognized in other income. On April 1, 2021, AxiaMed was sold to a third party and the Company received $ 2,453 for its investment in AxiaMed. Greg Daily, the Company’s chief executive officer; Clay Whitson, the Company’s chief financial officer; and the Company no longer have ownership interest in AxiaMed following the sale. The Company earned net revenues related to the AxiaMed Agreement of $ 117 during the year ended September 30, 2021. 17. SEGMENTS The Company determines its operating segments based on ASC 280, Segment Reporting , in alignment with how the chief operating decision making group monitors and manages the performance of the business as well as the level at which financial information is reviewed. The Company’s operating segments are strategic business units that offer different products and services. The Company's core business is delivering seamlessly integrated payment and software solutions to customers in strategic vertical markets. This is accomplished through the Software and Services and Merchant Services segments. The Software and Services segment delivers vertical market software solutions to customers across all of the Company's strategic vertical markets. These solutions often include embedded payments or other recurring services. The Merchant Services segment provides comprehensive payment solutions to businesses and organizations. The Merchant Services segment includes third-party integrated payment solutions as well as traditional merchant processing services across the Company's strategic vertical markets. The Other category includes corporate overhead expenses, when presenting reportable segment information. 113 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) The Company primarily uses processing margin to measure operating performance. Processing margin is equal to revenue less other cost of services plus residuals expense, which is a component of other cost of services. The following is a summary of reportable segment operating performance for the years ended September 30, 2023, 2022 and 2021. As of and for the Year ended September 30, 2023 Software and Services Merchant Services Other Total Revenue $ 232,967 $ 137,342 $ ( 70 ) $ 370,239 Other costs of services ( 16,102 ) ( 64,521 ) 71 ( 80,552 ) Residuals 2,214 41,460 ( 32 ) 43,642 Processing margin $ 219,079 $ 114,281 $ ( 31 ) $ 333,329 Residuals 43,642 Selling general and administrative 219,736 Depreciation and amortization 36,461 Change in fair value of contingent consideration 10,781 Income from operations $ 22,709 Total assets $ 611,515 $ 210,705 $ 59,273 $ 881,493 Goodwill $ 287,613 $ 121,950 $ — $ 409,563 As of and for the Year ended September 30, 2022 Software and Services Merchant Services Other Total Revenue $ 193,402 $ 124,481 $ ( 21 ) $ 317,862 Other costs of services ( 13,778 ) ( 59,647 ) 58 ( 73,367 ) Residuals 1,602 36,666 ( 33 ) 38,235 Processing margin $ 181,226 $ 101,500 $ 4 $ 282,730 Residuals 38,235 Selling general and administrative 193,790 Depreciation and amortization 29,424 Change in fair value of contingent consideration 23,725 Loss from operations $ ( 2,444 ) Total assets $ 512,792 $ 203,485 $ 54,035 $ 770,312 Goodwill $ 234,553 $ 119,086 $ — $ 353,639 114 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) As of and for the Year ended September 30, 2021 Software and Services Merchant Services Other Total Revenue $ 114,433 $ 111,870 $ ( 2,179 ) $ 224,124 Other costs of services ( 8,610 ) ( 51,234 ) 2,138 ( 57,706 ) Residuals 1,147 29,842 ( 2,071 ) 28,918 Processing margin $ 106,970 $ 90,478 $ ( 2,112 ) $ 195,336 Residuals 28,918 Selling general and administrative 134,872 Depreciation and amortization 24,418 Change in fair value of contingent consideration 7,140 Loss from operations $ ( 12 ) Total assets $ 382,014 $ 208,560 $ 61,226 $ 651,800 Goodwill $ 173,157 $ 119,086 $ — $ 292,243 The Company has not disclosed expenditures on long-lived assets as such expenditures are not reviewed by or provided to the chief operating decision maker. 18. NON-CONTROLLING INTEREST i3 Verticals, Inc. is the sole managing member of i3 Verticals, LLC and as a result, consolidates the financial results of i3 Verticals, LLC and reports a non-controlling interest representing the Common Units of i3 Verticals, LLC held by the Continuing Equity Owners. Changes in i3 Verticals, Inc.’s ownership interest in i3 Verticals, LLC while i3 Verticals, Inc. retains its controlling interest in i3 Verticals, LLC will be accounted for as equity transactions. As such, future redemptions or direct exchanges of Common Units of i3 Verticals, LLC by the Continuing Equity Owners will result in a change in ownership and reduce or increase the amount recorded as non-controlling interest and increase or decrease additional paid-in capital when i3 Verticals, LLC has positive or negative net assets, respectively. As of September 30, 2023, and 2022, respectively, i3 Verticals, Inc. owned 23,253,272 and 22,986,448 of i3 Verticals, LLC's Common Units, representing a 69.7 % and 69.4 % economic ownership interest in i3 Verticals, LLC. 115 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) The following table summarizes the impact on equity due to changes in the Company's ownership interest in i3 Verticals, LLC: Year ended September 30, 2023 2022 2021 Net loss attributable to non-controlling interest $ ( 1,841 ) $ ( 6,115 ) $ ( 3,382 ) Transfers to (from) non-controlling interests: Redemption of common units in i3 Verticals, LLC ( 224 ) ( 918 ) ( 11,714 ) Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis 4,305 11,511 15,337 Net transfers to non-controlling interests 4,081 10,593 3,623 Change from net income attributable to non-controlling interests and transfers to non-controlling interests $ 2,240 $ 4,478 $ 241 19. EARNINGS PER SHARE Basic earnings per share of Class A common stock is computed by dividing net income available to i3 Verticals, Inc. by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted earnings per share of Class A common stock is computed by dividing net income available to i3 Verticals, Inc. by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities. 116 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per share of Class A common stock: Year ended September 30, 2023 2022 2021 Basic net loss per share: Numerator Net loss $ ( 2,652 ) $ ( 23,217 ) $ ( 7,839 ) Less: Net loss attributable to non-controlling interests ( 1,841 ) ( 6,115 ) ( 3,382 ) Net loss attributable to Class A common stockholders $ ( 811 ) $ ( 17,102 ) $ ( 4,457 ) Denominator Weighted average shares of Class A common stock outstanding (1) 23,137,586 22,249,656 20,994,598 Basic net loss per share (2) $ ( 0.04 ) $ ( 0.77 ) $ ( 0.21 ) Dilutive net loss per share (4) : Numerator Net loss attributable to Class A common stockholders $ ( 811 ) $ ( 4,457 ) Reallocation of net loss assuming conversion of common units (5) ( 1,391 ) ( 2,556 ) Net loss attributable to Class A common stockholders - diluted $ ( 2,202 ) $ ( 7,013 ) Denominator Weighted average shares of Class A common stock outstanding (1) 23,137,586 20,994,598 Weighted average effect of dilutive securities (2)(3)(4) 10,109,247 10,719,593 Weighted average shares of Class A common stock outstanding - diluted 33,246,833 31,714,191 Diluted net loss per share $ ( 0.07 ) $ ( 0.22 ) ____________________ 1. Excludes 6,706 shares of restricted Class A common stock for the year ended September 30, 2021. 2. For the year ended September 30, 2021, the following securities were excluded from the weighted average effect of dilutive securities in the computation of diluted earnings per share of Class A common stock: a. 2,495,922 options to purchase shares of Class A common stock for the year ended September 30, 2021, were excluded because the exercise price of these options exceeded the average market price of our Class A common stock during the period (“out-of-the-money”) and the effect of including them would have been anti-dilutive, and b. 1,471,027 shares of Class A common stock for the year ended September 30, 2021, resulting from estimated stock option exercises as calculated by the treasury stock method, and 6,706 shares of restricted Class A common stock for the year ended September 30, 2021 were excluded because the effect of including them would have been anti-dilutive. 3. For the year ended September 30, 2022, all potentially dilutive securities were anti-dilutive, so diluted net loss per share was equivalent to basic net loss per share. The following securities were excluded from the weighted average effect of dilutive securities in the computation of diluted earnings per share of Class A common stock: a. 10,170,668 shares of weighted average Class A common stock for the year ended September 30, 2022, along with the reallocation of net income assuming conversion of these shares, were excluded because the effect would have been anti-dilutive, b. 4,580,844 options to purchase shares of Class A common stock for the year ended September 30, 2022, were excluded because the exercise price of these options exceeded the average market price of our Class A common stock during the period (“out-of-the-money”) and the effect of including them would have been anti-dilutive, and c. 679,858 shares of Class A common stock for the year ended September 30, 2022, resulting from estimated stock option exercises as calculated by the treasury stock method were excluded because the effect of including them would have been anti-dilutive. 4. For the year ended September 30, 2023, the following securities were excluded from the weighted average effect of dilutive securities in the computation of diluted earnings per share of Class A common stock: a. 5,580,144 options to purchase shares of Class A common stock for the year ended September 30, 2023, were excluded because the exercise price of these options exceeded the average market price of our Class A common stock during the period (“out-of-the-money”) and the effect of including them would have been anti-dilutive. 117 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) b. 723,898 shares of Class A common stock for the year ended September 30, 2023, resulting from estimated stock option exercises and restricted stock units vesting as calculated by the treasury stock method were excluded because of the effect of including them would have been anti-dilutive. 5. The reallocation of net income assuming conversion of common units represents the tax effected net income attributable to non-controlling interest using the effective income tax rates described in Note 11 above and assuming all common units of i3 Verticals, LLC were exchanged for Class A common stock at the beginning of the year. The common units of i3 Verticals, LLC held by the Continuing Equity Owners are potentially dilutive securities, and the computations of pro forma diluted net income per share assume that all common units of i3 Verticals, LLC were exchanged for shares of Class A common stock at the beginning of the year. Since in September 2022 the Company made the irrevocable election to settle the principal portion of its Exchangeable Notes only in cash, the Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will have a dilutive impact on diluted net income per share of common stock when the average market price of the Company's Class A common stock for a given period exceeds the exchange price of $ 40.87 per share for the Exchangeable Notes. The Warrants sold in connection with the issuance of the Exchangeable Notes are considered to be dilutive when the average price of the Company's Class A common stock during the period exceeds the Warrants' stock price of $ 62.88 per share. The effect of the additional shares that may be issued upon exercise of the Warrants will be included in the weighted average shares of Class A common stock outstanding—diluted using the treasury stock method. The Note Hedge Transactions purchased in connection with the issuance of the Exchangeable Notes are considered to be anti-dilutive and therefore do not impact our calculation of diluted net income per share. Refer to Note 10 for further discussion regarding the Exchangeable Notes. Shares of the Company's Class B common stock do not participate in the earnings or losses of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented. 20. SIGNIFICANT NON-CASH TRANSACTIONS The Company engaged in the following significant non-cash investing and financing activities during the years ended September 30, 2023, 2022, and 2021: Year ended September 30, 2023 2022 2021 Restricted Class A common stock issued as part of acquisition purchase consideration (Note 4) $ 2,000 $ — $ 35,245 Acquisition date fair value of contingent consideration in connection with business combinations $ 760 $ 6,281 $ 22,577 Residual buyouts financed through principal and interest forgiveness of a loan $ 5,860 $ — $ — Replacement of the Prior Senior Secured Credit Facility with the 2023 Senior Secured Credit Facility $ 284,000 $ — $ — Debt issuance costs financed with proceeds from the 2023 Senior Secured Credit Facility $ 2,386 $ — $ — Accrued interest financed with proceeds from the 2023 Senior Secured Credit Facility $ 1,617 $ — $ — Right-of-use assets obtained in exchange for operating lease obligations $ 927 $ 7,846 $ 16,879 21. SUBSEQUENT EVENTS The Company has evaluated subsequent events through the filing of this Annual Report on Form 10-K, and determined that there have been no events that have occurred that would require adjustments to our disclosures in the consolidated financial statements. 118 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None.