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Item 2. Management’s Discussion and Analysis

2024-02-09 compared with 2023-08-09 · 132 added, 165 removed, 218 unchanged (58% of the section changed)

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

• our indebtedness and our ability to maintain compliance with the financial covenants in our 2023 Credit Agreement (as defined below);

• our indebtedness and our ability to maintain compliance with the financial covenants in our 2023 Senior Secured Credit Facility (as defined below);

• our ability to meet our liquidity needs;

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

• our ability to protect our systems and data from continually evolving cybersecurity risks or other technological risks, including the impact of any cybersecurity incidents or security breaches;

• liability and reputation damage from unauthorized disclosure, destruction or modification of data or disruption of our services;

• technical, operational and regulatory risks related to our information technology systems and third-party providers’ systems;

• our ability to successfully manage our intellectual property;

• the triggering of impairment testing of our fair-valued assets, including goodwill and intangible assets, in the event of a decline in the price of our Class A common stock or otherwise;

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• our ability to keep pace with rapid developments and changes in our industry and provide new products and services;

• liability and reputation damage from unauthorized disclosure, destruction or modification of data or disruption of our services;

• technical, operational and regulatory risks related to our information technology systems and third-party providers’ systems;

• reliance on third parties for significant services;

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• our ability to increase our existing vertical markets, expand into new vertical markets and execute our growth strategy;

• our ability to protect our systems and data from continually evolving cybersecurity risks or other technological risks, including the impact of any cybersecurity incidents or security breaches;

• our ability to successfully identify acquisition targets, complete those acquisitions and effectively integrate those acquisitions into our services;

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• our ability to retain customers;

• our ability to successfully manage our intellectual property;

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

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• the effects of health reform initiatives;

• operating and financial restrictions imposed by our 2023 Credit Agreement;

• risks related to our international operations;

• operating and financial restrictions imposed by our 2023 Senior Secured Credit Facility;

• risks related to the accounting method for i3 Verticals, LLC's 1.0% Exchangeable Notes due February 15, 2025 (the "Exchangeable Notes");

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

• risks related to the potential sale of certain assets related to our Merchant Services business;

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

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Executive Overview

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

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

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

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

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

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

On February 8, 2024, we announced that our Board of Directors had initiated a process to explore a potential sale of certain assets related to our Merchant Services business.

There is no assurance that the process to explore a sale of the Merchant Services business will result in any transaction, or if the transaction is completed, the timing or terms of any such transaction.

Our Board of Directors may determine to suspend or terminate the exploration of a potential sale of our Merchant Services business at any time due to various factors.

Any potential transaction is also dependent upon a number of factors that may be beyond our control, including, among other factors, market conditions, industry trends, regulatory limitations and the interest of third parties in our business.

We do not intend to make any further disclosure concerning these matters unless and until any definitive transaction agreement is reached or we otherwise deem further disclosure is appropriate.

Economic Trends

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

These conditions could worsen, or other adverse economic developments could arise, if the U.S.

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

Inflationary pressures, elevated interest rate levels, monetary policy, and the current geopolitical situation (including the military conflicts in Ukraine and in the Middle East), are causing broad economic uncertainty and could potentially cause new, or exacerbate existing, economic challenges that may impact us.

These conditions could worsen as a result of adverse economic developments impacting the U.S.

and/or global economies, including as a result of monetary policy designed to curb inflation.

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

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

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

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

Acquisitions during the nine months ended June 30, 2023

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

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

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

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

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

Acquisitions during the nine months ended June 30, 2022

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

At December 31, 2023, we had $4.2 million of cash and cash equivalents and $184.5 million of available capacity under our 2023 Senior Secured Credit Facility subject to our financial covenants.

As of December 31, 2023, we were in compliance with these covenants with a consolidated interest coverage ratio and total leverage ratio 4.40x, and 3.60x, respectively.

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

Acquisitions during the three months ended December 31, 2023

During the three months ended December 31, 2023, we completed the acquisition of one business to expand our software offerings.

Total purchase consideration was $1.3 million, including $1.1 million in cash funded by the proceeds from our revolving credit facility and $0.2 million in contingent consideration.

Acquisitions during the three months ended December 31, 2022

During the three months ended December 31, 2023, we completed the acquisition of two businesses to expand our software offerings in the Public Sector vertical.

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

Our Revenue and Expenses

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The cost of equipment sold is also included in cost of services.

Interchange and other costs of services are recognized at the time the customer’s transactions are processed.

Other costs of services are recognized at the time the customer’s transactions are processed.

Selling, general and administrative .

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Interest expense, net.

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

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

How We Assess Our Business

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

• processing margin.

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

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

It does not take into account seasonality.

Additionally, ARR does not take into account seasonality.

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

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

ARR for the three months ended December 31, 2023 and 2022 was $316.9 million and $290.2 million, respectively, representing a period-to-period growth rate of 9.2%.

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

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

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

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

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

Software and related services revenue as a percentage of total revenue for the three months ended December 31, 2023 and 2022 was 47.4% and 47.8%.

Our payment volume for the three months ended December 31, 2023 and 2022 was $6.2 billion and $5.9 billion, respectively, representing a period-to-period growth rate of 5.4%.

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

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

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

We focus on processing margin because it represents the profitability of the operating segments, exclusive of sales efforts and overhead.

Processing margin is a measure reported to our management for purposes of assessing the operating performance of our business segments, and is presented in our financial statement footnotes in accordance with ASC 280.

For additional information regarding processing margin, including the amount of our processing margin for our business segments for the three months ended December 31, 2023 and 2022, see Note 15 to our condensed consolidated financial statements.

Results of Operations

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

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

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

Three months ended June 30, Change

Three months ended December 31, Change

(in thousands) 2023 2022 Amount %

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Depreciation and amortization 9,739 8,676 1,063 12.3 %

Change in fair value of contingent consideration 6,183 8,254 (2,071) (25.1) %

Change in fair value of contingent consideration (237) 1,443 (1,680) n/m

Total operating expenses 83,458 80,191 3,267 4.1 %

Income (loss) from operations 2,632 (2,731) 5,363 n/m

Income from operations 8,532 5,838 2,694 46.1 %

Other expenses

Interest expense, net 6,707 5,490 1,217 22.2 %

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

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

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

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

Net loss attributable to i3 Verticals, Inc.

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

Other expense (income) 107 (203) 310 n/m

Total other expenses 6,814 5,287 1,527 28.9 %

Income before income taxes 1,718 551 1,167 211.8 %

Provision for income taxes 182 382 (200) (52.4) %

Net income 1,536 169 1,367 808.9 %

Net income attributable to non-controlling interest 438 409 29 7.1 %

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

$ 1,098 $ (240) $ 1,338 n/m

n/m = not meaningful

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

This increase was partially driven by incremental revenue from acquisitions of $5.0 million, net of intercompany eliminations, all of which were within the Software and Services segment.

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

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

Revenue increased $6.0 million, or 6.9%, to $92.0 million for the three months ended December 31, 2023 from $86.0 million for the three months ended December 31, 2022.

This increase was partially driven by incremental revenue from an acquisition of $1.5 million, net of intercompany eliminations, which was within the Software and Services segment.

In addition to our growth through an acquisition, payment volume from new and existing customers increased primarily in our Merchant Services segment and revenue from existing businesses grew, resulting from growth in software and related services revenues, primarily in our Healthcare vertical.

Revenue within Software and Services increased $3.4 million, or 6.3%, to $56.6 million for the three months ended December 31, 2023 from $53.2 million for the three months ended December 31, 2022.

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

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

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

Revenue within Merchant Services increased $2.6 million, or 7.9%, to $35.4 million for the three months ended December 31, 2023 from $32.8 million for the three months ended December 31, 2022.

Payment volume from new and existing customers increased $0.2 billion, or 3.6%, to $5.5 billion for the three months ended December 31, 2023 from $5.3 billion for the three months ended December 31, 2022.

Other Costs of Services

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

Other costs of services increased $1.4 million, or 7.1%, to $20.4 million for the three months ended December 31, 2023 from $19.1 million for the three months ended December 31, 2022.

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

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

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

Selling, General and Administrative Expenses

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

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

Depreciation and Amortization

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

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

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

Change in Fair Value of Contingent Consideration

Change in fair value of contingent consideration to be paid in connection with acquisitions was a charge of $6.2 million for the three months ended June 30, 2023 primarily due to the performance of some of our acquisitions exceeding our expectations.

The change in fair value of contingent consideration for the three months ended June 30, 2022 was a charge of $8.3 million.

Interest Expense, net

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

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

Provision for (Benefit from) Income Taxes

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

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

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

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

i3 Verticals, Inc.

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

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

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

Nine months ended June 30, Change

(in thousands) 2023 2022 Amount %

Revenue $ 273,832 $ 232,612 $ 41,220 17.7 %

Operating expenses

Other costs of services 59,531 52,890 6,641 12.6 %

Selling, general and administrative 163,633 142,878 20,755 14.5 %

Depreciation and amortization 26,849 21,823 5,026 23.0 %

Change in fair value of contingent consideration 9,905 24,684 (14,779) (59.9) %

Total operating expenses 259,918 242,275 17,643 7.3 %

Income (loss) from operations 13,914 (9,663) 23,577 n/m

Other expenses

Interest expense, net 18,414 10,298 8,116 78.8 %

Other income (295) — (295) n/m

Total other expenses 18,119 10,298 7,821 75.9 %

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

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

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

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

Net loss attributable to i3 Verticals, Inc.

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

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

This increase was partially driven by revenue from acquisitions of $17.1 million, net of intercompany eliminations, all of which were within the Software and Services segment.

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

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

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

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

Other Costs of Services

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

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

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

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

Other costs of services within Software and Services increased $0.8 million, or 22.3%, to $4.3 million for the three months ended December 31, 2023 from $3.5 million for the three months ended December 31, 2022, driven primarily by the growth in payment volume and an acquisition.

Other costs of services within Merchant Services increased $0.6 million, or 3.6%, to $16.1 million for the three months ended December 31, 2023 from $15.6 million for the three months ended December 31, 2022, driven primarily by the growth in payment volume.

Selling, General and Administrative Expenses

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

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

Selling, general and administrative expenses increased $2.5 million, or 5.0%, to $53.5 million for the three months ended December 31, 2023 from $51.0 million for the three months ended December 31, 2022.

This increase was primarily driven by a $1.3 million increase in employment expenses and a $1.2 million increase in technology services.

Depreciation and Amortization

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

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

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

Depreciation and amortization increased $1.1 million, or 12.3%, to $9.7 million for the three months ended December 31, 2023 from $8.7 million for the three months ended December 31, 2022.

Amortization expense increased $0.9 million to $8.8 million for the three months ended December 31, 2023 from $7.9 million for the three months ended December 31, 2022 primarily due to acquisitions completed during the 2023 fiscal year.

Depreciation expense increased $0.2 million to $0.9 million for the three months ended December 31, 2023 from $0.8 million for the three months ended December 31, 2022.

Change in Fair Value of Contingent Consideration

Change in fair value of contingent consideration to be paid in connection with acquisitions was a charge of $9.9 million for the nine months ended June 30, 2023 primarily due to the performance of some of our acquisitions exceeding our expectations.

The change in fair value of contingent consideration for the nine months ended June 30, 2022 was a charge of $24.7 million.

Change in fair value of contingent consideration to be paid in connection with acquisitions was a benefit of $0.2 million for the three months ended December 31, 2023 related to adjustments to the expected present value of consideration to be paid for earnouts.

The change in fair value of contingent consideration for the three months ended December 31, 2022 was a charge of $1.4 million.

Interest Expense, net

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

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

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

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

Provision for (Benefit from) Income Taxes

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

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

Interest expense, net, increased $1.2 million, or 22.2%, to $6.7 million for the three months ended December 31, 2023 from $5.5 million for the three months ended December 31, 2022.

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

Other expense (income)

Other expense increased $0.3 million to $0.1 million expense for the three months ended December 31, 2023 from other income of $0.2 million for the three months ended December 31, 2022.

Other expense during the three months ended December 31, 2023, reflects the loss on the sale of a building purchased through acquisition.

Other income during the three months ended December 31, 2022, reflects continent consideration received for an investment that was sold.

Provision for Income Taxes

The provision for income taxes decreased to a provision for $0.2 million for the three months ended December 31, 2023 from a provision for $0.4 million for three months ended December 31, 2022.

Our effective tax rate was 10.6% for the three months ended December 31, 2023.

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

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

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

As of December 31, 2023, we had $4.2 million of cash and cash equivalents and available borrowing capacity of $184.5 million under our 2023 Senior Secured Credit Facility, subject to the financial covenants.

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

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

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

As of December 31, 2023, we had borrowings outstanding of $265.5 million under the 2023 Senior Secured Credit Facility.

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

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

We consistently have positive cash flow provided by operations and expect that our cash flow from operations, current cash and cash equivalents and available borrowing capacity under the 2023 Credit Agreement will be sufficient to fund our operations and planned capital expenditures and to service our debt obligations for at least the next twelve months and foreseeable future.

We consistently have positive cash flow provided by operations and expect that our cash flow from operations, current cash and cash equivalents and available borrowing capacity under the 2023 Senior Secured Credit Facility will be sufficient to fund our operations and planned capital expenditures and to service our debt obligations for at least the next twelve months and foreseeable future.

Our growth strategy includes acquisitions.

We expect to fund acquisitions through a combination of net cash from operating activities, borrowings under our 2023 Credit Agreement and through the issuance of equity and debt securities.

We expect to fund acquisitions through a combination of net cash from operating activities, borrowings under our 2023 Senior Secured Credit Facility and through the issuance of equity and debt securities.

As a holding company, we depend on distributions or loans from i3 Verticals, LLC to access funds earned by our operations.

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

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

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

As of June 30, 2023, the aggregate principal amount outstanding of the Exchangeable Notes was $117.0 million.

As of the date hereof, after giving effect to the repurchase of a portion of the 1.0% Exchangeable Senior Notes on January 18, 2024 as described herein, the aggregate principal amount outstanding of the Exchangeable Notes was $26.2 million.

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

Any such debt repurchases will depend upon prevailing market conditions, our liquidity requirements, contractual restrictions, applicable securities law and other factors.

Our 2023 Senior Secured Credit Facility, as amended, requires us to maintain a consolidated interest coverage ratio not less than 3.0 to 1.0 and total leverage ratio not exceeding 5.0 to 1.0.

As of December 31, 2023, we were in compliance with these covenants with a consolidated interest coverage ratio and total leverage ratio of 4.40x and 3.60x, respectively.

Although we believe our liquidity position remains strong, there can be no assurance that we will be able to raise additional funds, in the form of debt or equity, or to amend our 2023 Senior Secured Credit Facility on terms acceptable to us, if at all, even if we determined such actions were necessary in the future.

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

Nine Months Ended June 30, 2023 and 2022

Nine months ended June 30,

Three Months Ended December 31, 2023 and 2022

Three months ended December 31,

(in thousands)

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Net cash used in investing activities $ (7,171) $ (94,530)

Net cash provided by financing activities $ 82,229 $ 85,695

Net cash (used in) provided by financing activities $ (7,195) $ 76,925

Cash Flow from Operating Activities

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

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

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

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

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

Net cash provided by operating activities decreased $5.1 million to $13.1 million for the three months ended December 31, 2023 from $18.2 million for the three months ended December 31, 2022.

Our net income increased from net income of $0.2 million for the three months ended December 31, 2022 to net income of $1.5 million for the three months ended December 31, 2023.

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

The primary drivers of the decrease in cash provided by operating activities, despite the increase in net income, were a decrease in net operating assets and liabilities of $5.6 million, which are impacted by the timing of collections and payments, for the three months ended December 31, 2023 compared to the three months ended December 31, 2022, and a decrease in non-cash contingent consideration of $1.7 million.

These changes were partially offset by an increase in depreciation and amortization of $1.1 million for the three months ended December 31, 2023 compared to the three months ended December 31, 2022.

Cash Flow from Investing Activities

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

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

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

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

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

Net cash used in investing activities decreased $87.4 million to $7.2 million for the three months ended December 31, 2023 from $94.5 million for the three months ended December 31, 2022.

The largest driver of the decrease in cash used in investing activities was a decrease of $88.4 million in cash used in acquisitions, net of cash acquired, during the three months ended December 31, 2023 from the three months ended December 31, 2022.

This change was partially offset by an increase of $2.6 million in purchases of merchant portfolios and residual buyouts during the three months ended December 31, 2023 compared to the three months ended December 31, 2022.

Cash Flow from Financing Activities

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

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

Net cash flow from financing activities changed $84.1 million to $7.2 million net cash used in financing activities for the three months ended December 31, 2023 from $76.9 million net cash provided by financing activities for the three months ended December 31, 2022.

The change in net cash flow from financing activities was primarily the result of a decrease in proceeds from the revolving credit facility of $92.3 million partially offset by a decrease in payments on the revolving credit facility of $7.4 million and a decrease in cash paid for contingent consideration of $1.0 million for the three months ended December 31, 2023 from the three months ended December 31, 2022.

2023 Senior Secured Revolving Credit Facility

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

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

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

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

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

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

The 2023 Senior Secured Credit Facility replaces the Prior Senior Secured Credit Facility (as defined below).

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

The 2023 Senior Secured Credit Facility provides that the Borrower has the right to seek additional commitments to provide additional term loan facilities or additional revolving credit commitments in an aggregate principal amount up to, as of any date of determination, the sum of (i) the greater of $100 million and 100% of the Borrower’s consolidated EBITDA (as defined in the 2023 Senior Secured Credit Facility) for the most recently

completed four quarter period, plus (ii) the amount of certain prepayments of certain indebtedness, so long as, among other things, after giving pro forma effect to the incurrence of such additional borrowings and any related transactions, the Borrower’s consolidated interest coverage ratio (as defined in the 2023 Senior Secured Credit Facility) would not be less than 3.0 to 1.0 and the Borrower’s consolidated total net leverage ratio (as defined in the 2023 Senior Secured Credit Facility) would not exceed 5.0 to 1.0.

As of December 31, 2023, the Borrower's consolidated interest coverage ratio was 4.40x and total leverage ratio was 3.60x.

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 Credit Agreement 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 Credit Agreement) and (iii) to refinance certain existing indebtedness.

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.

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 June 30, 2023).

plus an applicable margin of 2.00% to 3.00% (3.00% at December 31, 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 June 30, 2023).

plus an applicable margin of 1.00% to 2.00% (2.00% at December 31, 2023).

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

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

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

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0.15 % 2.00 % 2.00 % 1.00 %

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

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

In addition, if the total amount borrowed under the Revolver exceeds $450 million at any time, the 2023 Credit Agreement requires the Borrower to prepay such excess outstanding amounts.

All obligations under the 2023 Credit Agreement 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.

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 December 31, 2023) times the actual daily amount by which $450 million exceeds the total amount outstanding under the Revolver and available to be drawn under all outstanding letters of credit.

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

In addition, if the total amount borrowed under the Revolver exceeds $450 million at any time, the 2023 Senior Secured Credit Facility requires the Borrower to prepay such excess outstanding amounts.

All obligations under the 2023 Senior Secured Credit Facility are unconditionally guaranteed by the Company, and each of the Company’s existing and future direct and indirect material, wholly owned domestic

subsidiaries, subject to certain exceptions.

The obligations are secured by first-priority security interests in substantially all tangible and intangible assets of the Borrower, the Company and each subsidiary guarantor, in each case whether owned on the date of the initial borrowings or thereafter acquired.

The 2023 Credit Agreement places certain restrictions on the ability of the Borrower, the Company and their subsidiaries to, among other things, incur debt and liens;

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;

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and modify the terms of certain organizational agreements.

The 2023 Credit Agreement contains customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, certain events

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

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.

Exchangeable Notes

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

As of December 31, 2023, $117.0 million of the original aggregate principal amount of $138.0 million was outstanding.

On December 21, 2023, i3 Verticals, LLC entered into agreements to repurchase a portion of its Exchangeable Notes pursuant to privately negotiated transactions with a limited number of holders of the Exchangeable Notes (the "Exchangeable Note Repurchases").

The Exchangeable Note Repurchases were completed on January 18, 2024, and the purchase price paid by the Company to such holders for the principal amount in connection with the Exchangeable Note Repurchases on such closing date was approximately $87.0 million.

Following the closing of the Exchangeable Note Repurchases, approximately $26.2 million in aggregate principal amount of the Exchangeable Notes remained outstanding, with terms unchanged.

For additional information, see Notes 7 and 18 to our condensed consolidated financial statements.

At-the-Market Program

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LLC and BTIG, LLC (each a “Sales Agent”), under which we may issue and sell, from time to time and through the Sales Agents, shares of our Class A common stock having an aggregate offering price of up to $125.0 million (the “ATM Program”).

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

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

During the quarter ended December 31, 2023, we did not sell any Class A common stock under the ATM Program.

As of December 31, 2023, we had a remaining capacity to sell up to $107.1 million of our Class A common stock under the ATM Program.

Material Cash Requirements

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

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

Payments Due by Period

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Facility leases 15,953 5,059 7,788 2,029 1,077

2023 Credit Agreement and related interest (2)

2023 Senior Secured Credit Facility and related interest (2)

367,680 22,671 45,412 299,597 —

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

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

We calculated interest payments through the maturity of our Exchangeable Notes by applying the coupon interest rate of 1.0% on the principal balance as of June 30, 2023 of $117.0 million.

We estimated interest payments through the maturity of our 2023 Senior Secured Credit Facility by applying the interest rate of 8.59% in effect on the outstanding balance as of December 31, 2023, plus the unused fee rate of 0.30% in effect as of December 31, 2023.

The chart set forth above includes $87.4 million of principal and accrued interest related to the Exchangeable Note Repurchases in payments due in less than one year, which represents the amount paid by the Company on January 18, 2024, to repurchase $90.8 million in aggregate principal amount of its Exchangeable Notes and to repay approximately $0.4 million in accrued interest on the repurchased portion of the Exchangeable Notes as described above.

We calculated interest payments through the maturity of the remaining balance of our Exchangeable Notes by applying the coupon interest rate of 1.0% on the principal balance less balance of Exchangeable Note Repurchases as of December 31, 2023 of $26.2 million.

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

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

As of June 30, 2023, the total amount due under the Tax Receivable Agreement was $40.9 million, and payments to the Continuing Equity Owners related to exchanges through June 30, 2023 will range from $0 to $3.3 million per year and are expected to be paid over the next 24 years.

The amounts recorded as of June 30, 2023, approximate the current estimate of expected tax savings and are subject to change after the filing of the Company’s U.S.

As of December 31, 2023, the total amount due under the Tax Receivable Agreement was $40.1 million, and payments to the Continuing Equity Owners related to exchanges through December 31, 2023 will range from $0 to $3.2 million per year and are expected to be paid over the next 23 years.

The amounts recorded as of December 31, 2023, approximate the current estimate of expected tax savings and are subject to change after the filing of the Company’s U.S.

federal and state income tax returns.

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

As of June 30, 2023, there have been no significant changes to our critical accounting estimates disclosed in the Form 10-K filed with the SEC on November 18, 2022.

As of December 31, 2023, there have been no significant changes to our critical accounting estimates disclosed in the Form 10-K filed with the SEC on November 22, 2023.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis