i3 Verticals, Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our Annual Report on Form 10-K for the year ended September 30, 2023 (“Form 10-K”), filed with the SEC on November 22, 2023. The terms “i3 Verticals,” “we,” “us” and “our” and similar references refer (1) before the completion of our IPO or the reorganization transactions entered into in connection therewith (the “Reorganization Transactions”), which are described in the notes to the condensed consolidated financial statements, to i3 Verticals, LLC and, where appropriate, its subsidiaries, and (2) after the Reorganization Transactions to i3 Verticals, Inc. and, where appropriate, its subsidiaries. Note Regarding Forward-looking Statements This Quarterly Report on Form 10-Q includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, “forward-looking statements” within the meaning of the federal securities laws. All statements other than statements of historical facts contained in this report may be forward-looking statements. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “pro forma,” “continues,” “anticipates,” “expects,” “seeks,” “projects,” “intends,” “plans,” “may,” “will,” “would” or “should” or, in each case, their negative or other variations or comparable terminology. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. 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 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; • our ability to generate revenues sufficient to maintain profitability and positive cash flow; • competition in our industry and our ability to compete effectively; • consolidation in the banking and financial services industry; • risk of shortages, price increases, changes, delays or discontinuations of hardware due to supply chain disruptions with respect to our limited number of suppliers; • impact of inflation and fluctuations in interest rates (including current elevated interest rate levels) and the potential effect of such fluctuations on revenues, expenses and resulting margins; • our dependence on non-exclusive distribution partners to market our products and services; • our ability to keep pace with rapid developments and changes in our industry and provide new products and services; • reliance on third parties for significant services; • exposure to economic conditions and political risks affecting consumer and commercial spending, including the use of credit cards; 41 • our ability to increase our existing vertical markets, expand into new vertical markets and execute our growth strategy; • our ability to successfully identify acquisition targets, complete those acquisitions and effectively integrate those acquisitions into our services; • potential degradation of the quality of our products, services and support; • our ability to retain customers; • our ability to attract, recruit, retain and develop key personnel and qualified employees; • risk of significant chargeback liability if our customers refuse or cannot reimburse chargebacks resolved in favor of their customers; • risks related to laws, regulations and industry standards, including our ability to comply with complex laws and regulations applicable to the healthcare industry or to adjust our operations in response to changing laws and regulations; • the impact of government investigations, claims, and litigation; • the effects of health reform initiatives; • 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"); • our ability to raise the funds necessary to settle exchanges of the Exchangeable Notes or to repurchase the Exchangeable Notes upon a fundamental change; • 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. We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q. Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and industry developments may differ materially from statements made in or suggested by the forward-looking statements contained in this Quarterly Report on Form 10-Q. The matters summarized in “Risk Factors” in our Form 10-K, and in subsequent filings could cause our actual results to differ significantly from those contained in our forward-looking statements. In addition, even if our results of operations, financial condition and liquidity, and industry developments are consistent with the forward-looking statements contained in this filing, those results or developments may not be indicative of results or developments in subsequent periods. In light of these risks and uncertainties, we caution you not to place undue reliance on these forward-looking statements. Any forward-looking statement that we make in this filing speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statement or to publicly announce the results of any revision to any of those statements to reflect future events or developments, except as required by applicable law. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data. Executive Overview The Company delivers seamless integrated software and services to customers in strategic vertical markets. Building on its broad suite of software and services solutions, the Company creates and acquires software products to serve the specific needs of its customers. The Company's primary strategic verticals are Public Sector (including Education) and Healthcare. 42 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. 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 (including the military conflicts in Ukraine and in the Middle East), are causing broad economic uncertainty and could potentially cause new, or exacerbate existing, economic challenges that may impact us. These conditions could worsen as a result of adverse economic developments impacting the U.S. and/or global economies, including as a result of monetary policy designed to curb inflation. As the future magnitude, duration and effects of these conditions are difficult to predict at this time, we are unable to predict the extent of the potential effect on our financial results. Liquidity At 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 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 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. Ltd. in Vadodara, India (collectively "Celtic") to expand the Company’s software offerings in the Public Sector vertical. Total purchase consideration was $85.0 million in cash consideration, funded by the proceeds from our revolving credit facility. During the 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 Revenues We generate revenue from software and related services revenue, including the sale of subscriptions, recurring services, ongoing support, licenses, and installation and implementation services specific to software. We also generate revenue from volume-based payment processing fees (“discount fees”) and POS-related solutions that we provide to our customers directly and through our distribution partners. Volume-based fees represent a percentage of the dollar amount of each credit or debit transaction processed. Revenues are also derived from a variety of fixed transaction or service fees, including authorization fees, convenience fees, statement fees, annual fees and fees for other miscellaneous services, such as handling chargebacks. 43 Interchange and network fees. Interchange and network fees consist primarily of pass-through fees that make up a portion of discount fee revenue. These include assessment fees payable to card associations, which are a percentage of the processing volume we generate from Visa and Mastercard. These fees are presented net of revenue. Expenses Other costs of services . Other costs of services include costs directly attributable to processing and bank sponsorship costs. These also include related costs such as residual payments to our distribution partners, which are based on a percentage of the net revenues (revenue less interchange and network fees) generated from customer referrals. Losses resulting from excessive chargebacks against a customer are included in other cost of services. The cost of equipment sold is also included in cost of services. Other costs of services are recognized at the time the customer’s transactions are processed. Selling, general and administrative . Selling, general and administrative expenses include salaries and other employment costs, professional services, rent and utilities and other operating costs. Depreciation and amortization . Depreciation expense consists of depreciation on our investments in property, equipment and computer hardware and software. Depreciation expense is recognized on a straight-line basis over the estimated useful life of the asset. Amortization expense for acquired intangible assets and internally developed software is recognized using a proportional cash flow method. Amortization expense for internally developed software is recognized over the estimated useful life of the asset. The useful lives of contract-based intangible assets are equal to the terms of the agreement. Interest expense, net. Our interest expense consists of interest on our outstanding indebtedness under our 2023 Senior Secured Credit Facility, our Prior Senior Secured Credit Facility and Exchangeable Notes, and amortization of debt issuance costs. How We Assess Our Business Software and Services Our Software and Services segment delivers vertical market software solutions to customers across all of our strategic vertical markets. These solutions often include embedded payments or other recurring services. Merchant Services Our Merchant Services segment provides comprehensive payment solutions to businesses and organizations. Our Merchant Services segment includes third-party integrated payment solutions as well as traditional merchant processing services across our strategic vertical markets. 44 Other Our Other category includes corporate overhead expenses, when presenting reportable segment information. For additional information on our segments, see Note 14 to our condensed consolidated financial statements. Key Performance Indicators We evaluate our performance through key performance indicators, including: • annualized recurring revenue ("ARR"); • software and related services as a percentage of total revenue; • the dollar volume of payments our customers process through us (“payment volume”); and • processing margin. ARR is the annualized revenue derived from software-as-a-service (“SaaS”) arrangements, transaction-based software-revenue, software maintenance, recurring software-based services, payments revenue and other recurring revenue sources within the quarter. This excludes contracts that are not recurring or are one-time in nature. We focus on ARR because it helps us to assess the health and trajectory of our business. ARR does not have a standardized definition and is therefore unlikely to be comparable to similarly titled measures presented by other companies. It should be reviewed independently of revenue and it is not a forecast. Additionally, ARR does not take into account seasonality. The active contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our customers. ARR for the three months ended 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. We focus on software and related services revenue as a percentage of total revenue because it is a strategic goal to expand the software services we provide our customers. Software and related services typically result in long-term partnerships with strong recurring revenues. Software and related services revenue as a percentage of total revenue for the three months ended March 31, 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. 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 March 31, 2024 and 2023, see Note 15 to our condensed consolidated financial statements. 45 Results of Operations 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 March 31, Change (in thousands) 2024 2023 Amount % Revenue $ 94,542 $ 93,872 $ 670 0.7 % Operating expenses Other costs of services 21,180 19,930 1,250 6.3 % Selling, general and administrative 54,162 57,204 (3,042) (5.3) % Depreciation and amortization 10,069 9,015 1,054 11.7 % Change in fair value of contingent consideration (290) 2,279 (2,569) n/m Total operating expenses 85,121 88,428 (3,307) (3.7) % Income from operations 9,421 5,444 3,977 73.1 % Other expenses (income) Interest expense, net 7,750 6,199 1,551 25.0 % 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 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. 46 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 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 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. 47 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, Change (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 % Net income (loss) attributable to i3 Verticals, Inc. $ 2,976 $ (204) $ 3,180 n/m n/m = not meaningful Revenue 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 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. 48 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 $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 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 $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 $0.5 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 $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 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. 49 Provision for Income Taxes 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. 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. Seasonality We have experienced in the past, and may continue to experience, seasonal fluctuations in our revenues as a result of consumer and business spending patterns. Revenues during the first quarter of the calendar year, which is our second fiscal quarter, tend to decrease in comparison to the remaining three quarters of the calendar year on a same store basis. This decrease is due to the relatively higher number and amount of electronic payment transactions related to seasonal retail events, such as holiday and vacation spending in their second, third and fourth quarters of the calendar year. The number of business days in a month or quarter also may affect seasonal fluctuations. Revenue in our Education vertical fluctuates with the school calendar. Revenue for our Education customers is strongest in August, September, October, January and February, at the start of each semester, and generally weakens throughout the semester, with little revenue in the summer months of June and July. Operating expenses show less seasonal fluctuation, with the result that net income is subject to the same seasonal factors as our revenues. The growth in our business may have partially overshadowed seasonal trends to date, and seasonal impacts on our business may be more pronounced in the future. Liquidity and Capital Resources We have historically financed our operations and working capital through net cash from operating activities. As of 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 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. Our primary cash needs are to fund working capital requirements, invest in our technology infrastructure, fund acquisitions and related contingent consideration, make scheduled principal and interest payments on our outstanding indebtedness and pay tax distributions to members. We consistently have positive cash flow provided by operations and expect that our cash flow from operations, current cash and cash equivalents and available borrowing capacity under the 2023 Senior Secured Credit Facility will be sufficient to fund our operations and planned capital expenditures and to service our debt obligations for at least the next twelve months and foreseeable future. Our growth strategy includes acquisitions. We expect to fund acquisitions through a combination of net cash from operating activities, borrowings under our 2023 Senior Secured Credit Facility and through the issuance of equity and debt securities. As a holding company, we depend on distributions or loans from i3 Verticals, LLC to access funds earned by our operations. The covenants contained in the 2023 Senior Secured Credit Facility may restrict i3 Verticals, LLC’s ability to provide funds to i3 Verticals, Inc. 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. 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. Any such debt repurchases will depend upon prevailing market conditions, our liquidity requirements, contractual restrictions, applicable securities law and other factors. 50 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 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. Cash Flows The following table presents a summary of cash flows from operating, investing and financing activities for the following comparative periods. Six Months Ended March 31, 2024 and 2023 Six months ended March 31, 2024 2023 (in thousands) Net cash provided by operating activities $ 25,147 $ 25,884 Net cash used in investing activities $ (12,369) $ (111,130) Net cash (used in) provided by financing activities $ (17,885) $ 83,814 Cash Flow from Operating Activities 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 $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 $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. 51 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. 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 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. 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 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 March 31, 2024). The base rate shall not be less than 1% in any event. The applicable margin is based upon the Borrower’s consolidated total net leverage ratio (as defined in the 2023 Senior Secured Credit Facility), as reflected in the schedule below: Consolidated Total Net Leverage Ratio Commitment Fee Letter of Credit Fee Term Benchmark Loans Base Rate Loans > 3.0 to 1.0 0.30 % 3.00 % 3.00 % 2.00 % > 2.5 to 1.0 but < 3.0 to 1.0 0.25 % 2.50 % 2.50 % 1.50 % > 2.0 to 1.0 but < 2.5 to 1.0 0.20 % 2.25 % 2.25 % 1.25 % < 2.0 to 1.0 0.15 % 2.00 % 2.00 % 1.00 % 52 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. The 2023 Senior Secured Credit Facility places certain restrictions on the ability of the Borrower, the Company and their subsidiaries to, among other things, incur debt and liens; merge, consolidate or liquidate; dispose of assets; enter into hedging arrangements; make certain restricted payments; undertake transactions with affiliates; enter into sale-leaseback transactions; make certain investments; prepay or modify the terms of certain indebtedness; and modify the terms of certain organizational agreements. The 2023 Senior Secured Credit Facility contains customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, certain events of bankruptcy and insolvency, material judgments, certain events with respect to employee benefit plans, invalidity of loan documents and certain changes in control. Exchangeable Notes On February 18, 2020, i3 Verticals, LLC issued $138.0 million aggregate principal amount of its 1.0% Exchangeable Notes due February 15, 2025. The Exchangeable Notes bear interest at a fixed rate of 1.0% per year, payable semiannually in arrears on February 15 and August 15 of each year, beginning on August 15, 2020. The Exchangeable Notes are exchangeable into cash, shares of the Company's Class A common stock, or a combination thereof, at i3 Verticals, LLC's election. The Exchangeable Notes mature on February 15, 2025, unless earlier exchanged, redeemed or repurchased. The net proceeds from the sale of the Exchangeable Notes were approximately $132.8 million, after deducting discounts and commissions to the certain initial purchasers and other estimated fees and expenses. i3 Verticals, LLC used a portion of the net proceeds of the Exchangeable Notes offering to pay down outstanding borrowings under the 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 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 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 Note 7 to our condensed consolidated financial statements. 53 At-the-Market Program On August 20, 2021, we, together with i3 Verticals, LLC, entered into an at-the-market offering sales agreement with Raymond James & Associates, Inc., Morgan Stanley & Co. LLC and BTIG, LLC (each a “Sales Agent”), under which we may issue and sell, from time to time and through the Sales Agents, shares of our Class A common stock having an aggregate offering price of up to $125.0 million (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 March 31, 2024 related to leases and borrowings: Payments Due by Period Contractual Obligations Total Less than 1 year 1 to 3 years 3 to 5 years More than 5 years (in thousands) Processing minimums (1) $ 3,205 $ 2,785 $ 420 $ — $ — Facility leases 15,140 5,144 7,327 1,752 917 2023 Senior Secured Credit Facility and related interest (2) 470,698 29,290 58,581 382,827 — Exchangeable Notes and related interest (3) 26,452 26,452 — — — Contingent consideration (4) 3,969 3,868 101 — — Total $ 519,464 $ 67,539 $ 66,429 $ 384,579 $ 917 __________________________ 1. We have non-exclusive agreements with several processors to provide us services related to transaction processing and transmittal, transaction authorization and data capture, and access to various reporting tools. Certain of these agreements require us to submit a minimum monthly number of transactions for processing. If we submit a number of transactions that is lower than the minimum, we are required to pay to the processor the fees it would have received if we had submitted the required minimum number of transactions. 2. 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. 3. 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. 4. In connection with certain of our acquisitions, we may be obligated to pay the seller of the acquired entity certain amounts of contingent consideration as set forth in the relevant purchasing documents, whereby additional consideration may be due upon the achievement of certain specified financial performance targets. i3 Verticals, Inc. accounts for the fair values of such contingent payments in accordance with the Level 3 financial instrument fair value hierarchy at the close of each subsequent reporting period. The acquisition-date fair value of contingent consideration is valued using a Monte Carlo simulation. i3 Verticals, Inc. subsequently reassesses such fair value based on probability estimates with respect to the acquired entity’s likelihood of achieving the respective financial performance targets. Potential payments under the Tax Receivable Agreement are not reflected in this table. See “—Tax Receivable Agreement” below. 54 Tax Receivable Agreement We are a party to a Tax Receivable Agreement with i3 Verticals, LLC and each of the Continuing Equity Owners, as described in Note 8 of our condensed consolidated financial statements. As a result of the Tax Receivable Agreement, we have been required to establish a liability in our condensed consolidated financial statements. That liability, which will increase upon the redemptions or exchanges of Common Units for our Class A common stock, generally represents 85% of the estimated future tax benefits, if any, relating to the increase in tax basis associated with the Common Units we received as a result of the Reorganization Transactions and other redemptions or exchanges by holders of Common Units. If this election is made, the accelerated payment will be based on the present value of 100% of the estimated future tax benefits and, as a result, the associated liability reported on our condensed consolidated financial statements may be increased. We expect that the payments required under the Tax Receivable Agreement will be substantial. The actual increase in tax basis, as well as the amount and timing of any payments under the Tax Receivable Agreement, will vary depending upon a number of factors, including the timing of redemptions or exchanges by the holders of Common Units, the price of our Class A common stock at the time of the redemption or exchange, whether such redemptions or exchanges are taxable, the amount and timing of the taxable income we generate in the future and the tax rate then applicable as well as the portion of our payments under the Tax Receivable Agreement constituting imputed interest. We intend to fund the payment of the amounts due under the Tax Receivable Agreement out of the cash savings that we actually realize in respect of the attributes to which Tax Receivable Agreement relates. 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. Future payments under the Tax Receivable Agreement with respect to subsequent exchanges would be in addition to these amounts. Critical Accounting Estimates Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, goodwill and intangible assets, contingent consideration, and equity-based compensation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are those that we consider the most critical to understanding our financial condition and results of operations. 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.