What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-10 compared with 2024-02-09 · 141 added, 80 removed, 270 unchanged (45% of the section changed)

54 unchanged sentences

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.

This process is ongoing.

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.

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

At December 31, 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.

At March 31, 2024, we had $3.1 million of cash and cash equivalents and $103.8 million of available capacity under our 2023 Senior Secured Credit Facility subject to our financial covenants.

As of March 31, 2024, we were in compliance with these covenants with a consolidated interest coverage ratio and total leverage ratio 4.1x, and 3.5x, 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.

Acquisitions during the six months ended March 31, 2024

During the six months ended March 31, 2024, 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.

Acquisitions during the six months ended March 31, 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 six months ended March 31, 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.

Our Revenue and Expenses

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Interest expense, net.

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

How We Assess Our Business

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

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

ARR for the three months ended March 31, 2024 and 2023 was $322.5 million and $305.7 million, respectively, representing a period-to-period growth rate of 5.5%.

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 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%.

Software and related services revenue as a percentage of total revenue for the three months ended March 31, 2024 and 2023 was 48.3% and 50.4%.

Our payment volume for the three months ended March 31, 2024 and 2023 was $6.3 billion and $6.0 billion, respectively, representing a period-to-period growth rate of 5.5%.

Our payment volume for the six months ended March 31, 2024 and 2023 was $12.5 billion and $11.9 billion, respectively, representing a period-to-period growth rate of 5.5%.

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

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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.

For additional information regarding processing margin, including the amount of our processing margin for our business segments for the three months ended March 31, 2024 and 2023, see Note 15 to our condensed consolidated financial statements.

Results of Operations

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

Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023

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

Three months ended December 31, Change

Three Months Ended March 31, Change

(in thousands) 2024 2023 Amount %

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Income from operations 9,421 5,444 3,977 73.1 %

Other expenses

Other expenses (income)

Interest expense, net 7,750 6,199 1,551 25.0 %

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 %

Other income (2,257) — (2,257) n/m

Total other expenses (income) 5,493 6,199 (706) (11.4) %

Income (loss) before income taxes 3,928 (755) 4,683 n/m

Provision for (benefit from) income taxes 580 (563) 1,143 n/m

Net income (loss) 3,348 (192) 3,540 n/m

Net income (loss) attributable to non-controlling interest 1,470 (228) 1,698 n/m

Net income attributable to i3 Verticals, Inc.

$ 1,878 $ 36 $ 1,842 5116.7 %

n/m = not meaningful

Revenue increased $0.7 million, or 0.7%, to $94.5 million for the three months ended March 31, 2024 from $93.9 million for the three months ended March 31, 2023.

This increase was primarily driven by an increase in payment volume as well as higher recurring software revenue, partially offset by a decrease in non-recurring revenues.

Revenue within Software and Services decreased $1.3 million, or 2.2%, to $59.5 million for the three months ended March 31, 2024 from $60.8 million for the three months ended March 31, 2023.

The decrease was primarily driven by a decrease in software license revenue and professional services revenue, partially offset by an increase in recurring revenues in our Public Sector and Healthcare verticals.

Revenue within Merchant Services increased $2.0 million, or 6.0%, to $35.1 million for the three months ended March 31, 2024 from $33.1 million for the three months ended March 31, 2023.

Payment volume from new and existing customers increased $0.2 billion, or 3.7%, to $5.4 billion for the three months ended March 31, 2024 from $5.2 billion for the three months ended March 31, 2023.

Other Costs of Services

Other costs of services increased $1.3 million, or 6.3%, to $21.2 million for the three months ended March 31, 2024 from $19.9 million for the three months ended March 31, 2023.

This increase was primarily driven by an increase in software 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 16.1%, to $4.9 million for the three months ended March 31, 2024 from $4.2 million for the three months ended March 31, 2023, driven primarily by the increase in software cost of services.

Other costs of services within Merchant Services increased $0.6 million, or 3.6%, to $16.3 million for the three months ended March 31, 2024 from $15.7 million for the three months ended March 31, 2023, driven primarily by the growth in payment volume.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $3.0 million, or 5.3%, to $54.2 million for the three months ended March 31, 2024 from $57.2 million for the three months ended March 31, 2023.

This decrease was primarily driven by a decrease in employment expenses, advertising and promotion expenses, non-income tax expense, partially offset by an increase in technology services.

Depreciation and Amortization

Depreciation and amortization increased $1.1 million, or 11.7%, to $10.1 million for the three months ended March 31, 2024 from $9.0 million for the three months ended March 31, 2023.

Amortization expense increased $0.9 million to $9.1 million for the three months ended March 31, 2024 from $8.2 million for the three months ended March 31, 2023 primarily due to an increase in capitalized software project releases.

Depreciation expense increased $0.1 million to $1.0 million for the three months ended March 31, 2024 from $0.8 million for the three months ended March 31, 2023.

Change in Fair Value of Contingent Consideration

Change in fair value of contingent consideration to be paid in connection with acquisitions was a benefit of $0.3 million for the three months ended March 31, 2024 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 March 31, 2023 was a charge of $2.3 million.

Interest Expense, net

Interest expense, net, increased $1.6 million, or 25.0%, to $7.8 million for the three months ended March 31, 2024 from $6.2 million for the three months ended March 31, 2023.

The increase reflects a higher average interest rate and a higher average outstanding debt balance for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023.

Other income of $2.3 million during the three months ended March 31, 2024, reflects the gain on the Exchangeable Note Repurchases and gain on Warrant Unwinds, net of the loss on Note Hedge Unwinds.

There was no other income during the three months ended March 31, 2023.

Provision for Income Taxes

Net income 1,536 169 1,367 808.9 %

The provision for income taxes increased to a provision for $0.6 million for the three months ended March 31, 2024 from a benefit of $0.6 million for three months ended March 31, 2023.

Our effective tax rate was 14.8% for the three months ended March 31, 2024.

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.

Six Months Ended March 31, 2024 Compared to Six Months Ended March 31, 2023

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

Six Months Ended March 31,

(in thousands) 2024 2023 Amount %

Revenue $ 186,532 $ 179,901 $ 6,631 3.7 %

Operating expenses

Other costs of services 41,604 38,999 2,605 6.7 %

Selling, general and administrative 107,694 108,207 (513) (0.5) %

Depreciation and amortization 19,808 17,691 2,117 12.0 %

Change in fair value of contingent consideration (527) 3,722 (4,249) n/m

Total operating expenses 168,579 168,619 (40) — %

Income from operations 17,953 11,282 6,671 59.1 %

Other expenses (income)

Interest expense, net 14,457 11,689 2,768 23.7 %

Other income (2,150) (203) (1,947) 959.1 %

Total other expenses (income) 12,307 11,486 821 7.1 %

Income (loss) before income taxes 5,646 (204) 5,850 n/m

Provision for (benefit from) income taxes 762 (181) 943 n/m

Net income (loss) 4,884 (23) 4,907 n/m

Net income attributable to non-controlling interest 1,908 181 1,727 954.1 %

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n/m = not meaningful

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.

Revenue increased $6.6 million, or 3.7%, to $186.5 million for the six months ended March 31, 2024 from $179.9 million for the six months ended March 31, 2023.

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 $2.6 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.

In addition to our growth through an acquisition, payment volume from new and existing customers and revenue from existing businesses grew, resulting from growth in recurring revenue, partially offset by a decrease in non-recurring revenues.

Revenue within Software and Services increased $2.1 million, or 1.8%, to $116.1 million for the six months ended March 31, 2024 from $114.0 million for the six months ended March 31, 2023.

The increase was primarily driven by an increase in recurring revenues, partially offset by a decrease in software license revenue and professional services revenue in our Public Sector and Healthcare verticals.

Revenue within Merchant Services increased $4.6 million, or 6.9%, to $70.5 million for the six months ended March 31, 2024 from $65.9 million for the six months ended March 31, 2023.

Payment volume from new and existing customers increased $0.4 billion, or 3.6%, to $10.9 billion for the six months ended March 31, 2024 from $10.5 billion for the six months ended March 31, 2023.

Other Costs of Services

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 $0.8 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.

Other costs of services increased $2.6 million, or 6.7%, to $41.6 million for the six months ended March 31, 2024 from $39.0 million for the six months ended March 31, 2023.

This increase was primarily driven by an increase in software cost of services within the Software and Services.

Other costs of services within Software and Services increased $1.5 million, or 18.9%, to $9.2 million for the six months ended March 31, 2024 from $7.8 million for the six months ended March 31, 2023, driven primarily by the increase in software cost of services and an increase in payment volume.

Other costs of services within Merchant Services increased $1.1 million, or 3.6%, to $32.4 million for the six months ended March 31, 2024 from $31.3 million for the six months ended March 31, 2023, driven primarily by the growth in payment volume.

Selling, General and Administrative Expenses

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.

Selling, general and administrative expenses decreased $0.5 million, or 0.5%, to $107.7 million for the six months ended March 31, 2024 from $108.2 million for the six months ended March 31, 2023.

This decrease was primarily driven by a decrease in advertising and promotion expenses, employment costs, bad debt expenses, and travel expenses, partially offset by an increase in technology services.

Depreciation and Amortization

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.

Depreciation and amortization increased $2.1 million, or 12.0%, to $19.8 million for the six months ended March 31, 2024 from $17.7 million for the six months ended March 31, 2023.

Amortization expense increased $1.8 million to $17.9 million for the six months ended March 31, 2024 from $16.1 million for the six months ended March 31, 2023 primarily due to an increase in capitalized software project releases and acquisitions completed during the 2023 fiscal year.

Depreciation expense increased $0.3 million to $1.9 million for the six months ended March 31, 2024 from $1.6 million for the six months ended March 31, 2023.

Change in Fair Value of Contingent Consideration

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.

Change in fair value of contingent consideration to be paid in connection with acquisitions was a benefit of $0.5 million for the six months ended March 31, 2024 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 six months ended March 31, 2023 was a charge of $3.7 million.

Interest Expense, net

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.

Interest expense, net, increased $2.8 million, or 23.7%, to $14.5 million for the six months ended March 31, 2024 from $11.7 million for the six months ended March 31, 2023.

The increase reflects a higher average interest rate and a higher average outstanding debt balance for the six months ended March 31, 2024, as compared to the six months ended March 31, 2023.

Other income increased $1.9 million to $2.2 million expense for the six months ended March 31, 2024 from other income of $0.2 million for the six months ended March 31, 2023.

Other income during the six months ended March 31, 2024, reflects the gain on the Exchangeable Note Repurchases and gain on Warrant Unwinds, net of the loss on Note Hedge Unwinds and loss on the sale of a building purchased through acquisition.

Other income during the six months ended March 31, 2023, reflects continent consideration received for an investment that was sold in a prior year.

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.

The provision for income taxes increased to a provision of $0.8 million for the six months ended March 31, 2024 from a benefit of $0.2 million for six months ended March 31, 2023.

Our effective tax rate was 13% for the six months ended March 31, 2024.

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 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.

As of March 31, 2024, we had $3.1 million of cash and cash equivalents and available borrowing capacity of $103.8 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 December 31, 2023, we had borrowings outstanding of $265.5 million under the 2023 Senior Secured Credit Facility.

As of March 31, 2024, we had borrowings outstanding of $346.2 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.

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

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.

After giving effect to the repurchase of $90.8 million in aggregate principal amount of the 1.0% Exchangeable Senior Notes on January 18, 2024 as described below as well as the repurchase of $21.0 million in aggregate principal amount of Exchangeable Senior Notes in open market purchases in 2020, the aggregate principal amount of the Exchangeable Notes that is currently outstanding is $26.2 million.

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

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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.

As of March 31, 2024, we were in compliance with these covenants with a consolidated interest coverage ratio and total leverage ratio of 4.1x and 3.5x, 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.

Three Months Ended December 31, 2023 and 2022

Three months ended December 31,

Six Months Ended March 31, 2024 and 2023

Six months ended March 31,

(in thousands)

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Cash Flow from Operating Activities

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.

Net cash provided by operating activities decreased $0.7 million to $25.1 million for the six months ended March 31, 2024 from $25.9 million for the six months ended March 31, 2023.

Our net income increased from a net loss of $23 thousand for the six months ended March 31, 2023 to net income of $4.9 million for the six months ended March 31, 2024.

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

The primary drivers of the decrease in cash provided by operating activities, despite the increase in net income, were a decrease in non-cash contingent consideration of $4.2 million for the six months ended March 31, 2024 compared to the six months ended March 31, 2023;

an increase in changes in net operating assets and liabilities of $1.4 million, which are impacted by the timing of collections and payments, for the six months ended March 31, 2024 compared to the six months ended March 31, 2023;

a gain on the repurchase of exchangeable notes of $2.4 million in the six months ended March 31, 2024;

and a decrease in equity-based compensation expense of $1.4 million for the six months ended March 31, 2024 compared to the six months ended March 31, 2023.

These changes were partially offset by an increase in depreciation and amortization of $2.1 million for the six months ended March 31, 2024 compared to the six months ended March 31, 2023.

Cash Flow from Investing Activities

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.

Net cash used in investing activities decreased $98.8 million to $12.4 million for the six months ended March 31, 2024 from $111.1 million for the six months ended March 31, 2023.

The largest driver of the decrease in cash used in investing activities was a decrease of $100.9 million in cash used in acquisitions, net of cash acquired, during the six months ended March 31, 2024 compared to the six months ended March 31, 2023.

This change was partially offset by an increase of $3.8 million in purchases of merchant portfolios and residual buyouts during the six months ended March 31, 2024 compared to the six months ended March 31, 2023.

Cash Flow from Financing Activities

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.

Net cash flow from financing activities changed $101.7 million to $17.9 million net cash used in financing activities for the six months ended March 31, 2024 from $83.8 million net cash provided by financing activities for the six months ended March 31, 2023.

The change in net cash flow from financing activities was primarily related to the $87.2 million payments for the repurchases of exchangeable notes and warrants, offset by the proceeds from the sale of the exchangeable senior note hedges.

The remaining factors were the result of a decrease in proceeds from the revolving credit facility of $59.4 million, partially offset by a decrease in payments on the revolving credit facility of $47.2 million during the six months ended March 31, 2024 compared to the six months ended March 31, 2023.

2023 Senior Secured Revolving 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 replaces the Prior Senior Secured Credit Facility.

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”).

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 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 March 31, 2024, the Borrower's consolidated interest coverage ratio was 4.1x and total leverage ratio was 3.5x.

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

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The 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 December 31, 2023).

plus an applicable margin of 2.00% to 3.00% (3.00% at March 31, 2024).

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 December 31, 2023).

plus an applicable margin of 1.00% to 2.00% (2.00% at March 31, 2024).

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

7 unchanged sentences

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 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.

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 March 31, 2024) 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.

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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.

As of March 31, 2024, $26.2 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.

The Exchangeable Note Repurchases were completed on January 18, 2024, and the Company paid $87.4 million 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.

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.

For additional information, see Note 7 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 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.

During the quarter ended March 31, 2024, we did not sell any Class A common stock under the ATM Program.

As of March 31, 2024, 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 December 31, 2023 related to leases and borrowings:

The following table summarizes our material cash requirements as of March 31, 2024 related to leases and borrowings:

Payments Due by Period

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

We estimated interest payments through the maturity of our 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.

We estimated interest payments through the maturity of our 2023 Senior Secured Credit Facility by applying the interest rate of 8.55% in effect on the outstanding balance as of March 31, 2024, plus the unused fee rate of 0.30% in effect as of March 31, 2024.

The chart set forth above calculates interest payments through the maturity of our Exchangeable Notes by applying the coupon interest rate of 1.0% on the principal balance as of March 31, 2024 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 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.

As of March 31, 2024, the total amount due under the Tax Receivable Agreement was $40.3 million, and payments to the Continuing Equity Owners related to exchanges through March 31, 2024 will range from $0 to $3.3 million per year and are expected to be paid over the next 24 years.

The amounts recorded as of March 31, 2024, 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 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.

As of March 31, 2024, 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