i3 Verticals, Inc. 10-K

Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements Page i3 Verticals, Inc. and its Subsidiaries Report of Independent Registered Public Accounting Firm (PCAOB ID 34 ) 76 Consolidated Balance Sheets as of September 30, 2024 and September 30, 2023 79 Consolidated Statements of Operations for the Years Ended September 30, 2024, 2023 and 2022 80 Consolidated Statements of Changes in Equity for the Years Ended September 30, 2024, 2023 and 2022 81 Consolidated Statements of Cash Flows for the Years Ended September 30, 2024, 2023 and 2022 83 Notes to Consolidated Financial Statements 85 75 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of i3 Verticals, Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of i3 Verticals, Inc. and subsidiaries (the “Company”) as of September 30, 2024 and 2023, the related consolidated statements of operations, changes in equity, and cash flows, for each of the three years in the period ended September 30, 2024, and the related notes to the consolidated financial statements (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2024, in conformity with accounting principles generally accepted in the United States of America . We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of September 30, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 25, 2024, expressed an unqualified opinion on the Company’s internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. 76 Revenue Recognition for Software and Related Services Contracts – Refer to Note 3 to the Financial Statements Critical Audit Matter Description The Company offers software and related services to customers, and arrangements related to such revenue may contain multiple performance obligations such as software as a service, transaction-based fees, ongoing software maintenance and support, software licenses and other professional services related to the software offerings. The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The revenue recognition accounting conclusions for software and related services contracts require significant judgment in the areas of: • For agreements that include multiple performance obligations, assessing whether performance obligations are distinct or should be combined. • Evaluating whether performance obligations will be satisfied at a point-in-time versus over-time. • Allocation of the transaction price at inception of the arrangement to multiple performance obligations. We identified revenue recognition for significant software and related services contracts entered into during fiscal year 2024 as a critical audit matter because of these significant judgments applied by management. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate whether revenue was recognized to depict the transfer of promised goods or services to customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the Company’s revenue recognition for significant software and related services contracts entered into during fiscal year 2024 include the following, among others: • We tested the operating effectiveness of controls related to the identification of distinct performance obligations, determination of whether such performance obligations are satisfied over time or at a point in time, and allocation of the standalone selling prices. • We evaluated management’s significant accounting policies related to revenue recognition for reasonableness. • We selected a sample of contracts and performed the following procedures: ◦ Obtained and examined customer source documents and the contract for each selection, including master agreements and related amendments to evaluate if relevant contractual terms have been considered by management. ◦ Sent confirmations to customers regarding key contract terms that impact revenue recognition. ◦ Evaluated management’s application of their accounting policy and testing revenue recognition for specific performance obligations by comparing management’s conclusions to the underlying contract, master agreement, and any related amendments, if applicable. ◦ Evaluated management’s conclusions related to whether performance obligations are satisfied at a point in time or over time. ◦ Tested the mathematical accuracy of management’s calculations of revenue recognized in the financial statements. 77 ◦ Evaluated the reasonableness of management’s estimate of standalone selling prices for products and services that are not sold separately by performing the following: ▪ Assessing the appropriateness of the Company’s methodology and mathematical accuracy of the determined standalone selling prices. ▪ Testing the completeness and accuracy of the source data utilized in management’s calculations. /s/ Deloitte & Touche LLP Nashville, Tennessee November 25, 2024 We have served as the Company's auditor since 2020. 78 i3 Verticals, Inc. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) September 30, 2024 2023 Assets Current assets Cash and cash equivalents $ 86,541 $ 3,105 Accounts receivable, net 55,988 50,785 Settlement assets 632 4,873 Prepaid expenses and other current assets 10,232 9,512 Current assets held for sale — 17,269 Total current assets 153,393 85,544 Property and equipment, net 8,677 10,059 Restricted cash 2,424 4,215 Capitalized software, net 58,592 58,057 Goodwill 280,678 267,983 Intangible assets, net 162,816 163,149 Deferred tax asset 48,445 52,514 Operating lease right-of-use assets 8,954 11,815 Other assets (1) 6,696 11,727 Long-term assets held for sale — 219,354 Total assets $ 730,675 $ 884,417 Liabilities and equity Liabilities Current liabilities Accounts payable $ 5,370 $ 6,369 Current portion of long-term debt 26,223 — Accrued expenses and other current liabilities 89,972 33,580 Settlement obligations 632 4,873 Deferred revenue 39,029 32,785 Current portion of operating lease liabilities 3,505 3,657 Current liabilities held for sale — 12,197 Total current liabilities 164,731 93,461 Long-term debt, less current portion and debt issuance costs, net (1) — 388,005 Long-term tax receivable agreement obligations 29,347 40,079 Operating lease liabilities, less current portion 6,317 8,968 Other long-term liabilities 14,921 23,078 Long-term liabilities held for sale — 2,530 Total liabilities 215,316 556,121 Commitments and contingencies (see Note 16) Stockholders' equity Preferred stock, par value $ 0.0001 per share, 10,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2024 and 2023 — — Class A common stock, par value $ 0.0001 per share, 150,000,000 shares authorized; 23,882,035 and 23,253,272 shares issued and outstanding as of September 30, 2024 and 2023, respectively 2 2 Class B common stock, par value $ 0.0001 per share, 40,000,000 shares authorized; 10,032,676 and 10,093,394 shares issued and outstanding as of September 30, 2024 and 2023, respectively 1 1 Additional paid-in-capital 279,335 249,688 Accumulated earnings (deficit) 100,397 ( 12,944 ) Total stockholders' equity 379,735 236,747 Non-controlling interest 135,624 91,549 Total equity 515,359 328,296 Total liabilities and equity $ 730,675 $ 884,417 _________________________________________ 1. Refer to Note 3 for discussion of the change in the current period presentation. See Notes to the Consolidated Financial Statements 79 i3 Verticals, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share amounts) Year ended September 30, 2024 2023 2022 Revenue $ 229,923 $ 226,722 $ 187,752 Operating expenses Other costs of services 18,573 15,355 12,834 Selling, general and administrative 176,390 177,731 156,666 Depreciation and amortization 28,796 26,438 19,330 Change in fair value of contingent consideration ( 690 ) 10,767 22,063 Total operating expenses 223,069 230,291 210,893 Income (loss) from operations 6,854 ( 3,569 ) ( 23,141 ) Other expenses Interest expense, net 29,263 25,128 14,775 Other (income) expense ( 3,395 ) ( 1,224 ) 991 Total other expenses 25,868 23,904 15,766 Loss before income taxes ( 19,014 ) ( 27,473 ) ( 38,907 ) (Benefit from) provision for income taxes ( 5,668 ) ( 3,788 ) 152 Net loss from continuing operations ( 13,346 ) ( 23,685 ) ( 39,059 ) Net income from discontinued operations, net of income taxes 188,476 21,033 15,842 Net income (loss) 175,130 ( 2,652 ) ( 23,217 ) Net loss from continuing operations attributable to non-controlling interest ( 4,424 ) ( 7,863 ) ( 11,828 ) Net income from discontinued operations attributable to non-controlling interest 66,213 6,022 5,713 Net income (loss) attributable to non-controlling interest 61,789 ( 1,841 ) ( 6,115 ) Net loss from continuing operations attributable to i3 Verticals, Inc. ( 8,922 ) ( 15,822 ) ( 27,231 ) Net income from discontinued operations attributable to i3 Verticals, Inc. 122,263 15,011 10,129 Net income (loss) attributable to i3 Verticals, Inc. $ 113,341 $ ( 811 ) $ ( 17,102 ) Net loss per share attributable to Class A common stockholders from continuing operations: Basic $ ( 0.38 ) $ ( 0.68 ) $ ( 1.22 ) Diluted $ ( 0.38 ) $ ( 0.68 ) $ ( 1.22 ) Net income per share attributable to Class A common stockholders from discontinued operations: Basic $ 5.22 $ 0.65 $ 0.46 Diluted $ 5.09 $ 0.58 $ 0.44 Weighted average shares of Class A common stock outstanding: Basic for continuing operations 23,419,421 23,137,586 22,249,656 Diluted for continuing operations 23,419,421 23,137,586 22,249,656 Basic, for discontinued operations 23,419,421 23,137,586 22,249,656 Diluted, for discontinued operations 33,879,163 33,970,731 33,100,182 See Notes to the Consolidated Financial Statements 80 i3 Verticals, Inc. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (In thousands, except share amounts) Class A Common Stock Class B Common Stock Additional Paid-In Capital Retained Earnings (Deficit) Non-Controlling Interest Total Equity Shares Amount Shares Amount Balance at September 30, 2021 22,026,098 $ 2 10,229,142 $ 1 $ 211,237 $ ( 6,480 ) $ 84,831 $ 289,591 Equity-based compensation — — — — 26,230 — — 26,230 Net loss — — — — — ( 17,102 ) ( 6,115 ) ( 23,217 ) Redemption of common units in i3 Verticals, LLC 111,000 — ( 111,000 ) — 918 — ( 918 ) — Sale of Class A common stock, net 722,000 — — — 17,869 — — 17,869 Capitalization of public offering costs — — — — ( 440 ) — — ( 440 ) Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis — — — — ( 2,554 ) — — ( 2,554 ) Exercise of equity-based awards 127,350 — — — 209 — — 209 Allocation of equity to non-controlling interests — — — — ( 11,511 ) — 11,511 — Balance at September 30, 2022 22,986,448 2 10,118,142 1 241,958 ( 23,582 ) 89,309 307,688 Adoption of ASU 2020-06 — — — — ( 23,382 ) 11,449 ( 11,933 ) Equity-based compensation — — — — 27,878 — — 27,878 Net loss — — — — — ( 811 ) ( 1,841 ) ( 2,652 ) Redemption of common units in i3 Verticals, LLC 24,748 — ( 24,748 ) — 224 — ( 224 ) — Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis — — — — 6,407 — — 6,407 Exercise or release of equity-based awards 159,906 — — — ( 1,092 ) — — ( 1,092 ) Allocation of equity to non-controlling interests — — — — ( 4,305 ) — 4,305 — Issuance of Class A common stock under the 2020 Inducement Plan 82,170 — — — 2,000 — — 2,000 Balance at September 30, 2023 23,253,272 $ 2 10,093,394 $ 1 $ 249,688 $ ( 12,944 ) $ 91,549 $ 328,296 See Notes to the Consolidated Financial Statements 81 i3 Verticals, Inc. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (In thousands, except share amounts) Class A Common Stock Class B Common Stock Additional Paid-In Capital Retained Earnings (Deficit) Non-Controlling Interest Total Equity Shares Amount Shares Amount Balance at September 30, 2023 23,253,272 $ 2 10,093,394 $ 1 $ 249,688 $ ( 12,944 ) $ 91,549 $ 328,296 Equity-based compensation — — — — 26,338 — — 26,338 Net income — — — — — 113,341 61,789 175,130 Distributions to non-controlling interest holders — — — — — — ( 25,608 ) ( 25,608 ) Redemption of common units in i3 Verticals, LLC 60,718 — ( 60,718 ) — 576 — ( 576 ) — Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis — — — — 3,543 — — 3,543 Exercise or release of equity-based awards 256,411 — — — ( 683 ) — — ( 683 ) Sale of exchangeable note hedges — — — — 1,483 — — 1,483 Repurchases of warrants — — — — ( 657 ) — — ( 657 ) Allocation of equity to non-controlling interests — — — — ( 8,470 ) — 8,470 — Issuance of Class A common stock under the 2020 Inducement Plan 311,634 — — — 7,517 — — 7,517 Balance at September 30, 2024 23,882,035 $ 2 10,032,676 $ 1 $ 279,335 $ 100,397 $ 135,624 $ 515,359 See Notes to the Consolidated Financial Statements 82 i3 Verticals, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year ended September 30, 2024 2023 2022 Cash flows from operating activities: Net income (loss) $ 175,130 $ ( 2,652 ) $ ( 23,217 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 37,445 36,461 29,424 Equity-based compensation 26,338 27,878 26,230 Amortization of debt discount and issuance costs 1,175 1,514 5,795 Gain on repurchase of exchangeable notes ( 2,397 ) — — Loss on sale of exchangeable senior note hedges 245 — — Gain on repurchases of warrants ( 105 ) — — Net gain on sale of investments — ( 295 ) — Gain on sale of Merchant Services Business ( 205,576 ) — — Write down of intangible asset — 2,660 — Provision for (Benefit from) deferred income taxes 434 ( 5,935 ) 2,588 Non-cash lease expense 4,471 4,683 4,922 Other non-cash adjustments to net income 1,346 1,546 1,131 (Decrease) Increase in non-cash contingent consideration expense from original estimate ( 690 ) 10,781 23,725 Changes in operating assets: Accounts receivable 9,581 ( 7,657 ) ( 15,771 ) Prepaid expenses and other current assets ( 603 ) 1,530 ( 3,629 ) Other assets ( 1,673 ) ( 1,865 ) ( 1,197 ) Changes in operating liabilities: Accounts payable ( 3,237 ) 1,674 1,537 Accrued expenses and other current liabilities 27,974 318 9,812 Acquisition escrow obligations ( 1,791 ) ( 8,319 ) 3,218 Deferred revenue 2,026 ( 1,319 ) 2,041 Operating lease liabilities ( 4,603 ) ( 4,530 ) ( 4,753 ) Other long-term liabilities ( 10,515 ) — ( 25 ) Contingent consideration paid in excess of original estimates ( 6,567 ) ( 19,303 ) ( 18,072 ) Net cash provided by operating activities 48,409 37,170 43,759 Cash flows from investing activities: Expenditures for property and equipment ( 2,964 ) ( 4,204 ) ( 2,268 ) Proceeds from sale of property and equipment 618 — — Expenditures for capitalized software ( 11,996 ) ( 12,171 ) ( 10,167 ) Purchases of merchant portfolios and residual buyouts ( 5,372 ) ( 2,191 ) ( 52 ) Acquisitions of businesses, net of cash acquired ( 19,100 ) ( 101,998 ) ( 100,715 ) Proceeds from sale of Merchant Services Business, net of cash sold 435,058 — — Payments for other investing activities ( 94 ) ( 1,251 ) ( 443 ) Proceeds from investments — 295 600 Net cash provided by (used in) investing activities 396,150 ( 121,520 ) ( 113,045 ) See Notes to the Consolidated Financial Statements 83 i3 Verticals, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (In thousands) Year ended September 30, 2024 2023 2022 Cash flows from financing activities: Proceeds from revolving credit facility 386,952 365,022 335,720 Payments on revolving credit facility ( 659,458 ) ( 281,534 ) ( 255,100 ) Payments for repurchase of exchangeable notes ( 87,840 ) — — Proceeds from sale of exchangeable senior note hedges 1,238 — — Payments for repurchases of warrants ( 552 ) — — Payments of debt issuance costs ( 930 ) ( 694 ) — Proceeds from issuance of Class A common stock, net of underwriting discounts and offering costs — — 17,692 Net payments for settlement obligations (1) ( 4,241 ) ( 2,667 ) 2,087 Cash paid for contingent consideration ( 760 ) ( 6,832 ) ( 25,330 ) Payments for required distributions to members for tax obligations ( 1,088 ) — — Proceeds from stock option exercises 25 180 694 Payments for employee's tax withholdings from net settled stock option exercises ( 708 ) ( 490 ) ( 643 ) Net cash (used in) provided by financing activities ( 367,362 ) 72,985 75,120 Net increase (decrease) in cash, cash equivalents, and restricted cash 77,197 ( 11,365 ) 5,834 Cash, cash equivalents, and restricted cash at beginning of period 12,400 23,765 17,931 Cash, cash equivalents, and restricted cash at end of period $ 89,597 $ 12,400 $ 23,765 Supplemental disclosure of cash flow information: Cash paid for interest $ 29,492 $ 21,476 $ 8,985 Cash paid for income taxes $ 7,330 $ 3,236 $ 1,079 _________________________________________ 1. Refer to Note 3 for discussion of the change in the current period presentation. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets to that shown in the Consolidated Statements of Cash Flows: Year ended September 30, 2024 2023 2022 Beginning balance Cash and cash equivalents $ 3,112 $ 3,490 $ 3,641 Settlement assets 4,873 7,540 4,768 Restricted cash 4,415 12,735 9,522 Total cash, cash equivalents, and restricted cash $ 12,400 $ 23,765 $ 17,931 Ending balance Cash and cash equivalents $ 86,541 $ 3,112 $ 3,490 Settlement assets 632 4,873 7,540 Restricted cash 2,424 4,415 12,735 Total cash, cash equivalents, and restricted cash $ 89,597 $ 12,400 $ 23,765 See Notes to the Consolidated Financial Statements 84 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) 1. ORGANIZATION AND OPERATIONS i3 Verticals, Inc. (the “Company”) was formed as a Delaware corporation on January 17, 2018. The Company was formed for the purpose of completing an initial public offering (“IPO”) of its Class A common stock and other related transactions in order to carry on the business of i3 Verticals, LLC and its subsidiaries. i3 Verticals, LLC was founded in 2012 and delivers seamlessly software solutions integrated with our proprietary payment facilitator platform to customers in strategic vertical markets. The Company’s headquarters are in located Nashville, Tennessee, with operations throughout the United States. Unless the context otherwise requires, references to “we,” “us,” “our,” “i3 Verticals” and the “Company” refer to i3 Verticals, Inc. and its subsidiaries, including i3 Verticals, LLC. In connection with the IPO, the Company completed certain reorganization transactions, which among other things, resulted in i3 Verticals, Inc. being the sole managing member of i3 Verticals, LLC (the "Reorganization Transactions"). Following the completion of the IPO and Reorganization Transactions, the Company is a holding company and the principal asset that it owns are the common units in i3 Verticals, LLC. i3 Verticals, Inc. operates and controls all of i3 Verticals, LLC's operations and, through i3 Verticals, LLC and its subsidiaries, conducts i3 Verticals, LLC's business. i3 Verticals, Inc. has a majority economic interest in i3 Verticals, LLC. As the sole managing member of i3 Verticals, LLC, i3 Verticals, Inc. consolidates the financial results of i3 Verticals, LLC and reports a non-controlling interest representing the Common Units of i3 Verticals, LLC held by other owners other (the “Continuing Equity Owners”). i3 Verticals, Inc. is the sole managing member of i3 Verticals, LLC and as a result, consolidates the financial results of i3 Verticals, LLC and reports a non-controlling interest representing the Common Units of i3 Verticals, LLC held by the Continuing Equity Owners. As the Reorganization Transactions are considered transactions between entities under common control, the financial statements retroactively reflect the accounts of i3 Verticals, LLC for periods prior to the IPO and Reorganization Transactions. The Continuing Equity Owners who own Common Units in i3 Verticals, LLC may redeem at each of their options their Common Units for, at the election of i3 Verticals, LLC, cash or newly-issued shares of the Company's Class A common stock. As of September 30, 2024, i3 Verticals, Inc. owned 70.4 % of the economic interest in i3 Verticals, LLC. As of September 30, 2024, the Continuing Equity Owners owned Common Units in i3 Verticals, LLC representing approximately 29.6 % of the economic interest in i3 Verticals, LLC, shares of Class A common stock in the Company representing approximately 0.7 % of the economic interest and voting power in the Company, and shares of Class B common stock in i3 Verticals, Inc., representing approximately 29.6 % of the voting power in the Company. Combining the Class A common stock and Class B common stock, the Continuing Equity Holders hold approximately 30.3 % of the economic interest and voting power in i3 Verticals, Inc. At-the-Market Program On August 20, 2021, the Company, together with i3 Verticals, LLC, entered into an at-the-market offering sales agreement (the "Sales Agreement") with Raymond James & Associates, Inc., Morgan Stanley & Co. LLC and BTIG, LLC (each a “Sales Agent”), under which the Company could issue and sell, from time to time and through the Sales Agents, shares of the Company's Class A common stock having an aggregate offering price of up to $ 125,000 (the “ATM Program”). During the quarter and year ended September 30, 2024, the Company did no t sell any Class A common stock under the ATM Program. During the quarter and year ended September 30, 2023, the Company sold 722,000 shares of Class A common stock, raising $ 17,869 in net proceeds under the ATM Program. The aggregate compensation paid by the Company to the Sales Agents with respect to such sales 85 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) was $ 440 . During the three months ended September 30, 2024, the Company terminated the Sales Agreement pursuant to which the ATM Program had been operated. 2. DISCONTINUED OPERATIONS During the year ended September 30, 2024, the Company made the strategic decision to discontinue a significant segment of its operations constituting its Merchant Services Business (as defined below). In this regard, on September 20, 2024, i3 Verticals, LLC, and i3 Holdings Sub, Inc., a wholly-owned subsidiary of i3 Verticals, LLC (“Corporation Seller,” and collectively with i3 Verticals, LLC, the “Sellers”) completed the transactions (such closing, the “Closing”) contemplated by that certain Securities Purchase Agreement dated as of June 26, 2024 (the “Purchase Agreement”), by and among i3 Verticals, LLC, Corporation Seller, the Company (solely for the purpose of providing a guaranty of the obligations of Sellers as set forth in the Purchase Agreement), Payroc Buyer, LLC (“Buyer”), and Payroc WorldAccess, LLC (solely for the purpose of providing a guaranty of the obligations of Buyer as set forth in the Purchase Agreement). Pursuant to the terms of the Purchase Agreement, the Sellers sold to Buyer the equity interests of certain direct and indirect wholly-owned subsidiaries of Sellers (the “Acquired Entities”) primarily comprising the Company’s merchant services business, including its associated proprietary technology (the “Merchant Services Business”), after giving effect to the contribution of certain assets and the assignment of certain liabilities associated with the Business from i3 Verticals, LLC and certain affiliates to the Acquired Entities pursuant to a contribution agreement which was entered into immediately prior to the Closing (collectively, the "Transactions"). Pursuant to the terms of the Purchase Agreement, Buyer paid to Sellers an aggregate purchase price of approximately $ 438 million (after giving effect to estimated net working capital, indebtedness and cash adjustments), payable in cash at the Closing, subject to post-closing purchase price adjustments. The Merchant Services Business comprised the Company's entire former Merchant Services segment and a small portion of the Company's former Software and Services segment. In connection with the closing of the Transactions, the Company entered into a Transition Services Agreement, pursuant to which, among other things, the Company or affiliates thereof will provide certain information technology and operational transition services to Payroc for a period of time after the closing, and a Processing Services Agreement with Payroc, pursuant to which the parties provide certain payment processing services to customers of each party following the closing in accordance with the terms thereof. Aggregate costs incurred related to the Transactions during the year ended September 30, 2024 that were not considered incremental direct costs to transact the sale, were approximately $ 2,626 and were expensed as incurred. These costs include fees for third-party advisory, consulting, legal and professional services, as well as other items associated with the Transactions. The expenses are reflected within selling, general and administrative expenses within the Company's consolidated statements of operations. 86 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) The following table presents the aggregate carrying amounts of the classes of assets and liabilities of discontinued operations of the Merchant Services Business: September 30, 2023 Assets Current assets Cash and cash equivalents $ 7 Accounts receivable, net 14,325 Prepaid expenses and other current assets 2,937 Current assets held for sale 17,269 Property and equipment, net 2,249 Restricted cash 200 Capitalized software, net 4,520 Goodwill 141,580 Intangible assets, net 63,803 Operating lease right-of-use assets 2,107 Other assets 4,895 Long-term assets held for sale 219,354 Total assets $ 236,623 Liabilities and equity Liabilities Current liabilities Accounts payable $ 4,695 Accrued expenses and other current liabilities 4,160 Deferred revenue 2,490 Current portion of operating lease liabilities 852 Current liabilities held for sale 12,197 Operating lease liabilities, less current portion 1,465 Other long-term liabilities 1,065 Long-term liabilities held for sale 2,530 Total liabilities $ 14,727 The financial results of the Merchant Services Business are presented as income from discontinued operations, net of income taxes on the Company’s consolidated statements of operations. The following table presents financial results of Merchant Services Business for the years ended September 30, 2024, 2023 and 2022: 87 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) Year ended September 30, 2024 2023 2022 Revenue $ 145,907 $ 143,517 $ 130,110 Operating expenses Other costs of services 67,122 65,197 60,533 Selling, general and administrative 45,880 42,005 37,124 Depreciation and amortization 8,649 10,023 10,094 Change in fair value of contingent consideration — 14 1,662 Total operating expenses 121,651 117,239 109,413 Income from operations 24,256 26,278 20,697 Other (income) expenses Interest expense, net 43 — — Other (income) expense (including gain on disposal of $ 205,576 in the year ended September 30, 2024) ( 205,576 ) 2,660 — Total other (income) expenses ( 205,533 ) 2,660 — Income become income taxes from discontinued operations 229,789 23,618 20,697 Provision for income taxes 41,313 2,585 4,855 Net income from discontinued operations 188,476 21,033 15,842 Net income from discontinued operations attributable to non-controlling interest 66,213 6,022 5,713 Net income from discontinued operations attributable to i3 Verticals, Inc. $ 122,263 $ 15,011 $ 10,129 88 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) The Company has elected to not separately disclose discontinued operations on its consolidated statement of cash flows. The following table presents cash flows from discontinued operations for major captions on the consolidated financial statements: Year ended September 30, 2024 2023 2022 Depreciation and amortization $ 8,649 $ 10,023 $ 10,094 Equity-based compensation 8,160 4,155 3,575 Provision for doubtful accounts 26 ( 19 ) 276 Amortization of capitalized customer acquisition costs 873 746 674 Write down of intangible asset — 2,660 — Provision for deferred income taxes 32 378 564 Non-cash lease expense 802 1,032 1,038 Contingent consideration paid in excess of original estimates — ( 3,211 ) ( 962 ) Expenditures for property and equipment ( 705 ) ( 1,540 ) ( 838 ) Expenditures for capitalized software ( 957 ) ( 1,612 ) ( 1,776 ) Purchases of merchant portfolios and residual buyouts ( 5,372 ) ( 2,191 ) ( 52 ) Acquisitions of businesses, net of cash and restricted cash acquired — ( 4,497 ) — Acquisition of other intangibles ( 11 ) ( 420 ) — Proceeds from sale of Merchant Services Business, net of cash sold 435,058 — — Cash paid for contingent consideration — — ( 4,790 ) The following table presents significant non-cash investing and financing activities for major captions on the consolidated financial statements: Year ended September 30, 2024 2023 2022 Residual buyouts financed through principal and interest forgiveness of a loan — 5,860 — Right-of-use assets obtained in exchange for operating lease obligations 1,741 785 935 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the reporting and disclosure rules and regulations of the Securities and Exchange Commission (“SEC”). Reclassifications Certain prior period amounts have been reclassified to conform to the current period presentation within the consolidated statements of cash flows. Discontinued operations The results of operations for the Company's Merchant Services Business have been reclassified as discontinued operations for all periods presented in the consolidated statements of operations. Assets and liabilities subject to the sale of the Merchant Services Business have been reclassified as held for sale for all periods presented in the consolidated balance sheets. Refer to Note 2 for additional information. 89 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) Change in presentation of cash flows associated with "Settlement obligations" During the second quarter of 2024, the Company elected to change its presentation of cash flows associated with "Settlement obligations" from operating activities to financing actives within the Consolidated Statements of Cash Flows. Comparative amounts have been reclassified to conform to the current period presentation. This change has no impact on the Consolidated Balance Sheet, Consolidated Statements of Operations or Consolidated Statement of Changes in Equity. The following tables present the effects of the change in presentation within the Consolidated Statements of Cash Flows: For the year ended September 30, 2023 As Previously Reported Adjustment As Adjusted Cash flows from operating activities: Settlement obligations ( 2,667 ) 2,667 — Net cash provided by operating activities 34,503 2,667 37,170 Cash flows from financing activities: Net payments for settlement obligations — ( 2,667 ) ( 2,667 ) Net cash provided by financing activities 75,652 ( 2,667 ) 72,985 For the year ended September 30, 2022 As Previously Reported Adjustment As Adjusted Cash flows from operating activities: Settlement obligations 2,087 ( 2,087 ) — Net cash provided by operating activities 45,846 ( 2,087 ) 43,759 Cash flows from financing activities: Net proceeds from settlement obligations — 2,087 2,087 Net cash provided by financing activities 73,033 2,087 75,120 Change in presentation of debt issuance costs related to the 2023 Senior Secured Credit Facility During the fourth quarter of 2024, the Company elected to change its presentation of debt issuance costs associated with the revolver pursuant to the 2023 Senior Secured Credit Facility to an asset rather than a reduction in the related liability as the previously drawn amounts on the 2023 Senior Secured Credit Facility were repaid upon the closing of the sale of the Merchant Services Business. Comparative amounts have been reclassified to conform to the current period presentation. This change has no impact on the Consolidated 90 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) Statements of Operations, Consolidated Statement of Changes in Equity or Consolidated Statements of Cash Flows. The following tables present the effects of the change in presentation within the Consolidated Balance Sheets: September 30, 2023 As Previously Reported Adjustment As Adjusted Assets Other assets 8,803 2,924 11,727 Total assets 881,493 2,924 884,417 Liabilities Long-term debt, less current portion and debt issuance costs, net 385,081 2,924 388,005 Total liabilities 553,197 2,924 556,121 Total liabilities and equity 881,493 2,924 884,417 Principles of Consolidation These consolidated financial statements include the accounts of the Company and its subsidiary companies. All significant intercompany accounts and transactions have been eliminated in consolidation . Cash and Cash Equivalents For purposes of reporting cash flows, the Company considers cash on hand, checking accounts, and savings accounts to be cash and cash equivalents. At times, the balance in these accounts may exceed federal insured limits. Cash equivalents are defined as financial instruments readily transferable into cash with an original maturity less than 90 days. Restricted Cash Restricted cash represents funds held in escrow related to acquisitions or held-on-deposit with our processing bank pursuant to agreements to cover potential merchant losses. It is presented as long-term assets on the accompanying consolidated balance sheets since the related agreements extend beyond the next twelve months. Following the adoption of Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows: Restricted Cash (Topic 230), the Company includes restricted cash along with the cash and cash equivalents balance for presentation in the consolidated statements of cash flows. Settlement Assets and Obligations Settlement assets and obligations result when funds are temporarily held or owed by the Company on behalf of merchants, consumers, schools, and other institutions. Timing differences, interchange expenses, merchant reserves and exceptional items cause differences between the amount received from the card networks and the amount funded to counterparties. These balances arising in the settlement process are reflected as settlement assets and obligations on the accompanying consolidated balance sheets. With the exception of merchant reserves, settlement assets or settlement obligations are generally collected and paid within one to four days . Settlement assets and settlement obligations were both $ 632 as of September 30, 2024 and $ 4,873 as of September 30, 2023, respectively. Accounts Receivable and Credit Policies Accounts receivable include amounts due from the sales of the Company’s technology solutions to its customers. The carrying amount of accounts receivable is reduced by an allowance for doubtful accounts, if 91 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) necessary, which reflects management’s best estimate of the amounts that will not be collected. The allowance is estimated based on management’s knowledge of its customers, historical loss experience and existing economic conditions. Accounts receivable and the allowance are written-off when, in management’s opinion, all collection efforts have been exhausted. The Company’s allowance for doubtful accounts was $ 664 and $ 544 as of September 30, 2024 and 2023, respectively; however, actual write-offs may exceed estimated amounts. In connection with the sale of the Merchant Services Business, $ 200 at September 30, 2023 of the Company's allowance for doubtful were classified as "Current assets held for sale" in the accompanying consolidated balance sheets and were not included in these amounts. Settlement Assets and Obligations Settlement assets and obligations result when funds are temporarily held or owed by the Company on behalf of merchants, consumers, schools, and other institutions. Timing differences, interchange expenses, merchant reserves and exceptional items cause differences between the amount received from the card networks and the amount funded to counterparties. These balances arising in the settlement process are reflected as settlement assets and obligations on the accompanying consolidated balance sheets. With the exception of merchant reserves, settlement assets or settlement obligations are generally collected and paid within one to four days . Settlement assets and settlement obligations were $ 632 as of September 30, 2024 and $ 4,873 as of September 30, 2023. Inventories Inventories consist of point-of-sale equipment to be sold to customers and are stated at the lower of cost, determined on a weighted average or specific basis, or net realizable value. Inventories were $ 2,423 and $ 2,038 at September 30, 2024 and 2023, respectively, and are included within prepaid expenses and other current assets on the accompanying consolidated balance sheets. In connection with the sale of the Merchant Services Business, $ 2,100 at September 30, 2023 of the Company's inventories were classified as "Current assets held for sale" in the accompanying consolidated balance sheets and were not included in these amounts. Property and Equipment Property and equipment are stated at cost or, if acquired through a business combination or an asset acquisition, fair value at the date of acquisition. Depreciation and amortization are provided over the assets’ estimated useful lives (or, if obtained in connection with a business acquisition, over their estimated remaining useful lives) using the straight-line method, except for leasehold improvements, which are depreciated over the shorter of the estimated useful lives of the assets or the lease term. Expenditures for maintenance and repairs are expensed when incurred. Expenditures for renewals or betterments are capitalized. Management reviews long-lived assets for impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The Company recognizes impairment when the sum of undiscounted estimated future cash flows expected to result from the use of the asset is less than the carrying value of the asset. There were no impairment charges from continuing operations during the years ended September 30, 2024, 2023 and 2022. Capitalized Software Development costs for software to be sold or leased to customers are capitalized once technological feasibility of the software product has been established. Costs incurred prior to establishing technological feasibility are expensed as incurred. Technological feasibility is established when the Company has completed a detailed program design and has determined that a product can be produced to meet its design specifications, including functions, features and technical performance requirements. Capitalization of costs ceases when the product is generally available to customers. Software development costs are amortized using the greater of the straight-line method or the usage method over its estimated useful life, which is generally estimated to be three years . 92 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) Additionally, development costs for software to be used internally is capitalized under similar guidance as discussed above. Once the software product is in the application development stage, costs are required to be capitalized. Costs incurred during the preliminary product phase or post implementation stage are expensed as incurred. Overhead, general and administrative, and training costs are not capitalized. Software development costs may become impaired in situations where development efforts are abandoned due to the viability of a planned project becoming doubtful or due to technological obsolescence of a planned software product. Management evaluates the remaining useful lives and carrying values of capitalized software at least annually or when events and circumstances warrant such a review, to determine whether significant events or changes in circumstances indicate that impairment in value may have occurred. To the extent estimated net realizable values, which are estimated to equal future undiscounted cash flows, exceed the carrying value, no impairment is necessary. If estimated net realizable values are less than the carrying values, an impairment charge is recorded. There were no impairment charges from continuing operations during the years ended September 30, 2024, 2023 and 2022. Identifiable software technology intangible assets resulting from acquisitions are amortized using the straight-line method over periods not exceeding their remaining estimated useful lives. GAAP requires that intangible assets with estimated useful lives be amortized over their respective estimated useful lives to their residual values, and reviewed for impairment. Acquisition technology intangibles’ net book values are included in capitalized software, net in the accompanying consolidated balance sheets. Notes Receivable Notes receivable consist of loans made to unrelated entities. Notes receivable were $ 195 and $ 199 at September 30, 2024 and 2023, respectively, and are included within prepaid expenses and other current assets and other assets on the accompanying consolidated balance sheets. Acquisitions Business acquisitions have been recorded using the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”), and, accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair value as of the date of acquisition. Where relevant, the fair value of contingent consideration included in an acquisition is calculated using a Monte Carlo simulation as well as a discounted cash flows analysis. The fair value of customer relationships and non-compete assets acquired is identified using the Income Approach. The fair values of trade names and internally-developed software acquired are identified using the Relief from Royalty Method. After the purchase price has been allocated, goodwill is recorded to the extent the total consideration paid for the acquisition, including the acquisition date fair value of contingent consideration, if any, exceeds the sum of the fair values of the separately identifiable acquired assets and assumed liabilities. Acquisition costs for business combinations are expensed when incurred and recorded in selling general and administrative expenses in the accompanying consolidated statements of operations. Acquisitions not meeting the accounting criteria to be accounted for as a business combination are accounted for as an asset acquisition. An asset acquisition is recorded at its purchase price, inclusive of acquisition costs, which is allocated among the acquired assets and assumed liabilities based upon their relative fair values at the date of acquisition. The operating results of an acquisition are included in the consolidated statements of operations from the date of such acquisition. Acquisitions completed during the year ended September 30, 2024 contributed $ 884 and $ 61 of revenue and net loss, respectively, to the results in the Company's consolidated statements of operations for the year then ended. 93 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) Goodwill In accordance with ASC 350, Intangibles—Goodwill and Other, the Company tests goodwill for impairment for each reporting unit on an annual basis in the fourth quarter, or when events or circumstances indicate the fair value of a reporting unit is below its carrying value. The Company’s goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in business combinations. The goodwill generated from the business combinations is primarily related to the value placed on the employee workforce and expected synergies. Judgment is involved in determining if an indicator or change in circumstances relating to impairment has occurred. Such changes may include, among others, a significant decline in expected future cash flows, a significant adverse change in the business climate, and unforeseen competition. The Company has the option of performing a qualitative assessment of impairment to determine whether any further quantitative testing for impairment is necessary. The option of whether or not to perform a qualitative assessment is made annually and may vary by reporting unit. Factors the Company considers in the qualitative assessment include general macroeconomic conditions, industry and market conditions, cost factors, overall financial performance of the Company’s reporting units, events or changes affecting the composition or carrying amount of the net assets of its reporting units, sustained decrease in its share price, and other relevant entity specific events. If the Company determines not to perform the qualitative assessment or if it determines, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying value, then the Company performs a quantitative test for that reporting unit. The fair value of each reporting unit is compared to the reporting unit’s carrying value, including goodwill. If the fair value of a reporting unit is less than its carrying value, the Company recognizes an impairment equal to the excess carrying value, not to exceed the total amount of goodwill allocated to that reporting unit. For a discussion of the estimation methodology, the qualitative factors considered when performing a qualitative assessment and the significance of various inputs, please see the subheading below titled “Use of Estimates.” The Company has determined that it has five reporting units as of the date of the most recent annual goodwill impairment test on July 1, 2024. Two of these five reporting units were part of the Merchant Service Business, for which a definitive agreement to sell was signed on June 26, 2024. For the two reporting units within the Merchant Services Business, the Company performed a qualitative assessment. For the remaining three reporting units, the Company performed a quantitative assessment. For each of the years ended September 30, 2024, 2023 and 2022 the Company determined that none of its reporting units were impaired. Intangible Assets Intangible assets include acquired customer relationships, referral agreements, trademarks, trade names, website development costs and non-compete agreements. Customer relationships represent the fair value of customer relationships purchased by the Company. Referral agreements represent the right to exclusively obtain referrals from a partner for their customers' credit card processing services. The Company amortizes definite lived identifiable intangible assets using a method that reflects the pattern in which the economic benefits of the intangible asset are expected to be consumed or otherwise utilized. The estimated useful lives of the Company’s customer-related intangible assets approximate the expected distribution of cash flows, whether straight-line or accelerated, generated from each asset. The useful lives of contract-based intangible assets are equal to the terms of the agreement. Management evaluates the remaining useful lives and carrying values of long-lived assets, including definite lived intangible assets, at least annually, or when events and circumstances warrant such a review, to determine whether significant events or changes in circumstances indicate that a change in the useful life or impairment in 94 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) value may have occurred. There were no impairment charges during the years ended September 30, 2024, 2023 and 2022. Income Taxes i3 Verticals, Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from i3 Verticals, LLC based on i3 Verticals, Inc.'s economic interest in i3 Verticals, LLC. i3 Verticals, LLC's members, including the Company, are liable for federal, state and local income taxes based on their share of i3 Verticals, LLC's pass-through taxable income. i3 Verticals, LLC is not a taxable entity for federal income tax purposes, but is subject to and reports entity level tax in both Tennessee and Texas. In addition, certain subsidiaries of i3 Verticals, LLC are corporations that are subject to state and federal income taxes. The amount provided for state income taxes is based upon the amounts of current and deferred taxes payable or refundable at the date of the consolidated financial statements as a result of all events recognized in the financial statements as measured by the provisions of enacted tax laws. Under GAAP, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company reports a liability for unrecognized tax positions taken or expected to be taken in a tax return. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as part of income tax expense. See additional discussion in Note 12. Valuation of Contingent Consideration On occasion, the Company may have acquisitions which include contingent consideration. Accounting for business combinations requires the Company to estimate the fair value of any contingent purchase consideration at the acquisition date. For a discussion of the estimate methodology and the significance of various inputs, please see the subheading below titled “Use of Estimates.” Changes in estimates regarding the fair value contingent purchase consideration are reflected as adjustments to the related liability and recognized within operating expenses in the consolidated statements of operations. Short and long-term contingent liabilities are presented within accrued expenses and other current liabilities and other long-term liabilities on the Company's consolidated balance sheets, respectively. Classification of Financial Instruments The Company classifies certain financial instruments issued as either equity or as liabilities. Determination of classification is based upon the underlying properties of the instrument. See specific discussion regarding the nature of instruments issued, the presentation on the consolidated financial statements and the related valuation method applied in Notes 11, 14, and 15. Revenue Recognition and Deferred Revenue Revenue is recognized as each performance obligation is satisfied, in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). The Company accrues for rights of refund, processing errors or penalties, or other related allowances based on historical experience. The Company utilized the portfolio approach practical expedient within ASC 606-10-10-4 Revenue from Contracts with Customers—Objectives and the significant financing component practical expedient within ASC 606-10-32-18 Revenue from Contracts with Customers—The Existence of a Significant Financing Component in the Contract in performing the analysis. The Company's revenue from continuing operations for the years ended September 30, 2024, 2023 and 2022 is derived from the following sources: 95 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) • Software and related services — Includes software as a service ("SaaS"), transaction-based fees, ongoing software maintenance and support, software licenses and other professional services related to our software offerings • Proprietary payments — Includes volume-based payment processing fees (“discount fees”) and other related fixed transaction or service fees • Other — Includes sales of equipment, non-software related professional services and other revenues Revenues from the Company’s software are recognized when the related performance obligations are satisfied. Sales of software licenses are categorized into one of two categories of intellectual property in accordance with ASC 606, functional or symbolic. The key distinction is whether the license represents a right to use (functional) or a right to access (symbolic) intellectual property. The Company generates sales of one-time software licenses, which is functional intellectual property. Revenue from functional intellectual property is recognized at a point in time, when control of the software license transfers to the customer. The Company also generates revenue from maintenance services related to these software licenses, which is recognized over the term of the agreement.The Company also offers access to its software under software-as-a-service (“SaaS”) arrangements, which represent services arrangements, and under which customers do not have the right to take possession of the software. Revenue from SaaS arrangements is recognized over time, over the term of the agreement. Contracts with professional services, such as training or installation, are evaluated to determine if the customer can benefit from these services independently, whether they can be provided by other available resources, or whether they are separately identifiable from other contract promises. Discount fees represent a percentage of the dollar amount of each credit or debit transaction processed or a specified per transaction amount, depending on the card type. The Company frequently enters into agreements with customers under which the customer engages the Company to provide both payment authorization services and transaction settlement services for all of the cardholder transactions of the customer, regardless of which issuing bank and card network to which the transaction relates. The Company’s core performance obligations are to stand ready to provide continuous access to the Company’s payment authorization services and transaction settlement services in order to be able to process as many transactions as its customers require on a daily basis over the contract term. These services are stand ready obligations, as the nature of the promise is to stand ready to process an undetermined quantiy of transactions. Under a stand-ready obligation, the Company’s performance obligation is defined by each time increment rather than by the underlying activities satisfied over time based on days elapsed. Because the service of standing ready is substantially the same each day and has the same pattern of transfer to the customer, the Company has determined that its stand-ready performance obligation comprises a series of distinct days of service. Discount fees are recognized each day based on the volume or transaction count at the time the merchants’ transactions are processed. The Company follows the requirements of ASC 606-10-55 Revenue from Contracts with Customers—Principal versus Agent Considerations , which states that the determination of whether a company should recognize revenue based on the gross amount billed to a customer or the net amount retained is a matter of judgment that depends on the facts and circumstances of the arrangement. The determination of gross versus net recognition of revenue requires judgment that depends on whether the Company controls the good or service before it is transferred to the merchant or whether the Company is acting as an agent of a third party. The assessment is provided separately for each performance obligation identified. Under its agreements, the Company incurs interchange and network pass-through charges from the third-party card issuers and card networks, respectively, related to the provision of payment authorization services. The Company has determined that it is acting as an agent with respect to these payment authorization services, based on the following factors: (1) the Company has no discretion over which card issuing bank will be used to process a transaction and is unable to direct the activity of the merchant to another card issuing bank, and (2) interchange and card network rates are pre-established by the card issuers or card networks, and the Company has no latitude in determining these fees. Therefore, revenue allocated to the payment authorization performance obligation is presented net of interchange and card network fees paid to the card issuing bank and card network, respectively, for the years ended September 30, 2024, 2023 and 2022. 96 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) With regards to the Company's discount fees, generally, where the Company has control over merchant pricing, merchant portability, credit risk and ultimate responsibility for the merchant relationship, revenues are reported at the time of sale equal to the full amount of the discount charged to the merchant, less interchange and network fees. Revenues are also derived from a variety of transaction fees, which are charged for transacting on our proprietary payment facilitator platform and software solutions, and fees for other miscellaneous services. Revenues derived from such fees are recognized in the time the transactions occur and when there are no further performance obligations. Revenue from the sale of equipment, is recognized upon transfer of ownership to the customer, after which there are no further performance obligations. Arrangements may contain multiple performance obligations, such as payment authorization services, transaction settlement services, hardware, software products, SaaS, maintenance, and professional installation and training services. Revenues are allocated to each performance obligation based on the standalone selling price of each good or service. The selling price for a deliverable is based on standalone selling price, if available, the adjusted market assessment approach, estimated cost plus margin approach, or residual approach. The Company establishes estimated selling price, based on the judgment of the Company's management, considering internal factors such as margin objectives, pricing practices and controls, customer segment pricing strategies and the product life cycle. In arrangements with multiple performance obligations, the Company applies significant judgement in determining the allocation of the transaction price at inception of the arrangement and uses the standalone selling prices for the majority of the Company's revenue recognition. Revenues from sales of the Company ’ s hardware and software elements are recognized when each performance obligation has been satisfied which has been determined to be upon the delivery of the product. Revenues derived from service fees are recognized over time in accordance with our satisfaction of our performance obligations. The Company’s professional services, including training, installation, and repair services are recognized as revenue as these services are performed. ASC 606 provides various optional practical expedients. The Company elected the use of the practical expedient relating to the disclosure of remaining performance obligations within a contract and will not disclose remaining performance obligations for contracts (i) with an original expected duration of one year or less or (ii) in which revenue from the satisfaction of the performance obligations is recognized in the amounts invoiced in accordance with ASC 606-10-55-18. The Company also has additional contracts with an original expected duration of greater than one year for which revenue had not yet been recognized. These contracts do not allow for termination for convenience, which reduces the risks related to future revenue recognition. The transaction price allocated to the remaining performance obligations related to these contracts is not considered useful to the users of the financial statements due to the exclusion of certain revenue based on the aforementioned practical expedients. The tables below present a disaggregation of the Company's revenue from contracts with customers for continuing operations by product by segment. The Company's products are defined as follows: • Software and related services — Includes SaaS, transaction-based fees, ongoing software maintenance and support, software licenses, and other professional services related to our software offerings • Proprietary payments — Includes discount fees and other related fixed transaction or service fees • Other — Includes sales of equipment, non-software related professional services and other revenues 97 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) For the year ended September 30, 2024 Public Sector Healthcare Other Total Software and related services revenue $ 125,592 $ 43,902 $ ( 436 ) $ 169,058 Proprietary payments revenue 50,089 267 ( 15 ) 50,341 Other revenue 9,160 1,397 ( 33 ) 10,524 Total revenue $ 184,841 $ 45,566 $ ( 484 ) $ 229,923 For the year ended September 30, 2023 Public Sector Healthcare Other Total Software and related services revenue $ 127,118 $ 42,795 $ ( 45 ) $ 169,868 Proprietary payments revenue 46,551 95 ( 30 ) 46,616 Other revenue 8,545 1,693 — 10,238 Total revenue $ 182,214 $ 44,583 $ ( 75 ) $ 226,722 For the year ended September 30, 2022 Public Sector Healthcare Other Total Software and related services revenue $ 99,281 $ 42,181 $ 14 $ 141,476 Proprietary payments revenue 36,027 35 ( 57 ) 36,005 Other revenue 8,643 1,607 21 10,271 Total revenue $ 143,951 $ 43,823 $ ( 22 ) $ 187,752 The tables below present a disaggregation of the Company's revenue from contracts with customers from continuing operations by timing of transfer of goods or services by segment. The Company's revenue included in each category are defined as follows: • Revenue earned over time — Includes SaaS, professional services, ongoing support, discount fees, or other stand-ready obligations; and • Revenue earned at a point in time — Includes software licenses sold as functional intellectual property, equipment, or point in time service fees that are not stand-ready obligations. For the year ended September 30, 2024 Public Sector Healthcare Other Total Revenue earned over time $ 170,522 $ 45,288 $ ( 436 ) $ 215,374 Revenue earned at a point in time 14,319 278 ( 48 ) 14,549 Total revenue $ 184,841 $ 45,566 $ ( 484 ) $ 229,923 For the year ended September 30, 2023 Public Sector Healthcare Other Total Revenue earned over time $ 163,331 $ 44,164 $ ( 46 ) $ 207,449 Revenue earned at a point in time 18,883 419 ( 29 ) 19,273 Total revenue $ 182,214 $ 44,583 $ ( 75 ) $ 226,722 98 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) For the year ended September 30, 2022 Public Sector Healthcare Other Total Revenue earned over time $ 125,552 $ 42,273 $ ( 37 ) $ 167,788 Revenue earned at a point in time 18,399 1,550 15 19,964 Total revenue $ 143,951 $ 43,823 $ ( 22 ) $ 187,752 Contract Assets The Company bills for certain software and related services sales and fixed fee professional services upon pre-determined milestones in the contracts. Therefore, the Company may have contract assets other than trade accounts receivable for performance obligations that are partially completed, which would typically represent consulting services provided before a milestone is completed in a contract. Additionally, contract assets also include software licenses sold as a right to use license but paid for under a subscription model. Under this structure, the license revenue is recognized upfront while a portion of the revenue is unbilled. Unbilled amounts associated with these professional services and software licenses sold under the subscription model are presented as accounts receivable as the Company has an unconditional right to payment for services performed. As of September 30, 2024 and September 30, 2023, the Company’s contract assets from contracts with customers was $ 8,680 and $ 15,131 , respectively. Contract Liabilities Deferred revenue represents amounts billed to customers by the Company for services contracts. Payment is typically collected at the start of the contract term. The initial prepaid contract agreement balance is deferred. The balance is then recognized as the services are provided over the contract term. Deferred revenue that is expected to be recognized as revenue within one year is recorded as short-term deferred revenue and the remaining portion is recorded as other long-term liabilities in the consolidated balance sheets. The terms for most of the Company's contracts with a deferred revenue component are one year. Substantially all of the Company's deferred revenue is anticipated to be recognized within the next year. The following table presents the changes in deferred revenue as of and for the years ended September 30, 2024 and 2023: Balance at September 30, 2022 $ 29,228 Deferral of revenue 32,830 Recognition of unearned revenue ( 29,135 ) Balance at September 30, 2023 $ 32,985 Deferral of revenue 39,686 Recognition of unearned revenue ( 32,847 ) Balance at September 30, 2024 $ 39,824 Costs to Obtain and Fulfill a Contract The Company capitalizes incremental costs to obtain new contracts and contract renewals and amortizes these costs on a straight-line basis as an expense over the benefit period, which is generally the expected customer life, unless a commensurate payment is not expected at renewal. As of September 30, 2024, the Company had $ 857 of capitalized contract costs, compared to $ 632 of capitalized contract costs as of September 30, 2023. The contract costs relate to commissions paid to employees and agents as well as other incentives given to customers to obtain new sales, included within “Other assets" on the consolidated balance sheets. In connection with the sale of the Merchant Services Business, $ 4,334 at September 30, 2023 of the Company's capitalized contract costs were classified as "Long-term assets held for sale" in the accompanying consolidated 99 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) balance sheets and were not included in these amounts. The Company recorded commissions expense from continuing operations related to these costs for the years ended September 30, 2024, 2023 and 2022 of $ 92 , $ 46 and $ 33 respectively. The Company expenses sales commissions as incurred for the Company's sales commission plans that are paid on recurring monthly revenues, portfolios of existing customers, or have a substantive stay requirement prior to payment. Other Cost of Services Other costs of services from continuing operations include costs directly related to the Company's software and related services, such as hosting expenses. Additionally, other costs of services include costs directly attributable related to payment processing services such as processing and bank sponsorships. Losses resulting from chargebacks against a customer are included in other cost of services. Residual payments to our distribution partners and the cost of equipment sold is also included in cost of services. Other costs of services are recognized at the time the related revenue is recognized. The Company accounts for all governmental taxes associated with revenue transactions on a net basis. Selling, General and Administrative Selling general and administrative expenses from continuing operations include all personnel costs such as salaries, benefits, bonuses, stock based compensation and commissions, as well as marketing and advertising costs, contractor services, legal and other professional services fees, software and technological services, rental expenses and other general expenses. Advertising and promotion costs are expensed as incurred. Advertising expense from continuing operations was $ 2,537 , $ 3,242 and $ 3,328 for the years ended September 30, 2024, 2023 and 2022, respectively, and is included in selling, general and administrative expenses in the Consolidated Statements of Operations. Equity-based Compensation The Company accounts for grants of equity awards to employees in accordance with ASC 718, Compensation—Stock Compensation. This standard requires compensation expense to be measured based on the estimated fair value of the share-based awards on the date of grant and recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. Equity-based compensation from continuing operations was $ 18,178 , $ 23,723 and $ 22,655 for the years ended September 30, 2024, 2023 and 2022, respectively. Use of Estimates The preparation of consolidated financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include, but are not limited to, the value of purchase consideration paid and identifiable assets acquired and assumed in acquisitions, goodwill and intangible asset impairment review, determination of performance obligations for revenue recognition, loss reserves, assumptions used in the calculation of equity-based compensation and in the calculation of income taxes, and certain tax assets and liabilities as well as the related valuation allowances. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. 100 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) Recently Issued Accounting Pronouncements Recently Issued Accounting Pronouncements Not Yet Adopted In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740)—Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 will provide improvements to the income tax disclosures primarily related to the income taxes paid and rate reconciliation, and how legislation changes may affect future capital allocation and cash flow forecasts. The amendment will improve the consistency in which companies provide tax information, and will further increase the transparency of related tax risks and operational opportunities. The amendments in ASU 2023-09 are effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company will not be required to adopt ASU 2023-09 until October 1, 2025. The Company is currently evaluating the impact of the adoption of ASU 2023-09 on the Company’s financial statement disclosures. In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280)—Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 improves interim disclosure requirements for segment reporting, including clarifications regarding the measure of profit and loss used to assess segment performance and the allocation of resources. Further, it enhances the disclosures for reporting segment expenses and will require the Company to report significant expenses regularly provided by the chief operating decision maker. The amendment will require companies to disclose a more granular level of information with regards to segment reporting to further enhance the transparency of what specified amounts are included within each segment. The amendments in ASU 2023-07 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company will not be required to adopt ASU 2023-07 until October 1, 2024. The Company is currently evaluating the impact of the adoption of ASU 2023-07 on the Company’s financial statement disclosures. In November 2024, the FASB issued ASU No. 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40) ("ASU 2024-03"). ASU 2024-03 will require companies to disaggregate, within the notes to the financial statements, certain expenses presented on the face of the financial statements to enhance transparency and help investors better understand an entity's performance. The amendment will specifically require that an entity disclose the amounts related to purchases of inventory, employee compensation, depreciation and intangible asset amortization. Entities will also be required to provide a qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively, disclose the total amount of selling expenses and, in annual reporting periods, provide a definition of what constitutes selling expenses. The amendments in ASU 2024-03 are effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027, with early adoption permitted. The Company will not be required to adopt ASU 2024-03 until October 1, 2027. The Company is currently evaluating the impact of the adoption of ASU 2024-03 on the Company’s financial statement disclosures. 4. CREDIT RISK AND OTHER CONCENTRATIONS The Company places its cash with high credit quality financial institutions which provide Federal Deposit Insurance Corporation insurance. The Company performs periodic evaluations of the relative credit standing of these institutions and does not expect any losses related to such concentrations. No single customer accounted for more than 10% of the Company's revenue from continuing operations during the years ended September 30, 2024, 2023 and 2022. The Company believes that the loss of any single customer would not have a material adverse effect on the Company's financial condition or results of operations. The Company uses a third party payment processor, which facilitates substantially all of our proprietary payments revenues from continuing operations for the years ended September 30, 2024, 2023, and 2022. 101 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) 5. ACQUISITIONS During the years ended September 30, 2024, 2023 and 2022 the Company acquired the following intangible assets and businesses: 2024 Business Combinations Purchase of Eduloka, Ltd. On August 1, 2024, the Company completed the acquisition of substantially all of the assets of Eduloka Ltd. ("inLumon") to expand the Company's permitting and licensing software offerings in the Public Sector segment. Total purchase consideration was $ 27,477 , including $ 18,000 in cash funded by proceeds from the Company's revolving credit facility, the issuance of 311,634 shares of the Company's Class A common stock (valued at $ 7,517 ) and $ 1,960 in contingent consideration. The goodwill associated with the inLumon acquisition is deductible for tax purposes. The acquired customer relationships intangible asset has an estimated amortization period of eighteen years . The acquired trade name has an amortization period of two years . The acquired capitalized software has an amortization period of seven years . Acquisition-related costs for this acquisition amounted to approximately $ 258 and were included in selling, general and administrative on our consolidated statement of operations and were expensed as incurred. Certain provisions in the purchase agreement provides for additional consideration of up to $ 22,000 , in the aggregate, to be paid based upon the achievement of specified financial performance targets, as defined in the purchase agreement, through no later than July 2027. The Company determined the acquisition date fair value of the liability for the contingent consideration using a Monte Carlo simulation as well as a discounted cash flow analysis. In each subsequent reporting period, the Company will reassess its current estimates of performance relative to the targets and adjust the contingent liabilities to their fair values through earnings. See additional disclosures in Note 14. Summary of inLumon The preliminary fair values assigned to certain assets and liabilities assumed, as of the acquisition date, were as follows: Accounts receivable $ 2,936 Prepaid expenses and other current assets 5 Property and equipment 20 Capitalized software 3,000 Acquired customer relationships 11,800 Trade name 100 Goodwill 11,486 Total assets acquired 29,347 Accrued expenses and other current liabilities 1,573 Deferred revenue, current 297 Net assets acquired $ 27,477 102 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) Other Business Combinations during the year ended September 30, 2024 During the year ended September 30, 2024 the Company completed the acquisition of substantially all of the assets of a business to expand the Company’s software offerings within the Public Sector segment. Total purchase consideration was $ 1,270 , including $ 1,100 in cash consideration, funded by proceeds from the Company's revolving credit facility, and $ 170 of contingent consideration. In connection with this acquisition, the Company allocated approximately $ 5 to property and equipment, approximately $ 40 to capitalized software, approximately $ 220 to customer relationships and the remainder, approximately $ 1,005 , to goodwill, all of which is deductible for tax purposes. Certain of the purchase price allocations assigned for this acquisition is considered preliminary as of September 30, 2024. The acquired customer relationships intangible asset has an estimated amortization period of ten years . The acquired capitalized software has an amortization period of seven years . Acquisition-related costs for this acquisition amounted to approximately $ 8 and were expensed as incurred. Pro Forma Results of Operations for 2024 Business Combinations The following unaudited supplemental pro forma results of operations have been prepared as though each of the acquired businesses in the year ended September 30, 2024 had occurred on October 1, 2023. Pro forma adjustments were made to reflect the impact of depreciation and amortization, changes to executive compensation and the revised debt load, all in accordance with ASC 805. This supplemental pro forma information does not purport to be indicative of the results of operations that would have been attained had the acquisitions been made on these dates, or of results of operations that may occur in the future. Year ended September 30, 2024 2023 Revenue $ 235,875 $ 232,750 Net loss $ ( 13,382 ) $ ( 24,680 ) 2023 Business Combinations Purchase of Celtic Cross Holdings, Inc. and Celtic Systems Pvt. Ltd. On October 1, 2022, the Company completed the acquisition of substantially all of the assets of Celtic Cross Holdings, Inc., in Scottsdale, Arizona and Celtic Systems Pvt. Ltd. in Vadodara, India (collectively "Celtic") to expand the Company’s software offerings in the Public Sector vertical. Celtic is within the Public Sector segment. Total purchase consideration consisted of $ 85,000 in cash consideration, funded by proceeds from the Company's revolving credit facility. The goodwill associated with the Celtic acquisition is deductible for tax purposes. The acquired customer relationships intangible assets has an estimated amortization period of eighteen years . The trade name and non-compete agreements associated with the acquisition have amortization periods of five and three years , respectively. The weighted-average amortization period for all intangibles acquired is eighteen years . The acquired capitalized software has a weighted-average amortization period of ten years . Acquisition-related costs for this acquisition amounted to approximately $ 1,782 and were expensed as incurred. 103 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) Summary of Celtic Cross Holdings, Inc. and Celtic Systems Pvt. Ltd. The fair values assigned to certain assets and liabilities assumed, as of the acquisition date, were as follows: Accounts receivable $ 7,660 Prepaid expenses and other current assets 103 Property and equipment 5,233 Capitalized software 12,600 Customer relationships 33,800 Non-compete agreements 200 Trade name 600 Goodwill 43,899 Total assets acquired 104,095 Accounts payable 9 Accrued expenses and other current liabilities 3,182 Deferred revenue, current 2,741 Other long-term liabilities 13,162 Net assets acquired $ 85,001 Other Business Combinations during the year ended September 30, 2023 The Company completed the acquisition of substantially all of the assets of one other businesses within continuing operations to expand the Company's software offerings. The total purchase consideration was $ 15,260 , including $ 12,500 in cash consideration, funded by proceeds from the Company's revolving credit facility, $ 2,000 of the Company's Class A Common Stock, and $ 760 contingent consideration. In connection with this acquisition, the Company allocated approximately $ 159 of the consideration to net working capital, approximately $ 335 to property and equipment, approximately $ 640 to capitalized software, approximately $ 6,920 to customer relationships, approximately $ 100 to trade names, and the remainder, approximately $ 9,365 , to goodwill, of which $ 2,864 is deductible for tax purposes, and approximately $ 2,178 to other long-term liabilities. Certain of the purchase price allocations assigned for this acquisition is considered preliminary as of September 30, 2023. The acquired capital software and customer relationships intangible assets have an estimated amortization period of seven and fifteen years , respectively. Acquisition-related costs for this business amounted to approximately $ 199 and were included in selling, general and administrative on our consolidated statement of operations and were expensed as incurred. 2022 Business Combinations During the year ended September 30, 2022, the Company completed the acquisitions of substantially all of the assets of three businesses to expand the Company’s software offerings in the Public Sector and Healthcare segments. Total purchase consideration was $ 107,681 , including $ 101,400 in cash consideration, funded by proceeds from the Company's revolving credit facility, and $ 6,281 of contingent consideration. The goodwill associated with two of the three acquisitions is deductible for tax purposes. The acquired customer relationships intangible assets have estimated amortization periods of between ten and nineteen years . The trade names have estimated weighted-average amortization periods of four years . The weighted-average 104 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) amortization period for all intangibles acquired is fifteen years . The acquired capitalized software have amortization periods of seven years . Acquisition-related costs for these businesses amounted to approximately $ 773 and were included in selling, general and administrative on our consolidated statement of operations and were expensed as incurred. Certain provisions in the purchase agreements provide for additional consideration of up to $ 23,000 , in the aggregate, to be paid based upon the achievement of specified financial performance targets, as defined in the purchase agreements, through no later than September 2024. The Company determined the acquisition date fair values of the liabilities for the contingent consideration using a Monte Carlo simulation as well as discounted cash flow analyses. In each subsequent reporting period, the Company will reassess its current estimates of performance relative to the targets and adjust the contingent liabilities to their fair values through earnings. See additional disclosures in Note 14. Summary of 2022 Business Combinations The fair values assigned to certain assets and liabilities assumed, as of the acquisition dates, during the year ended September 30, 2022 were as follows: Accounts receivable $ 651 Settlement assets 685 Prepaid expenses and other current assets 83 Property and equipment 190 Capitalized software 9,790 Acquired customer relationships 41,090 Trade name 1,550 Goodwill 61,347 Operating lease right-of-use assets 263 Other assets 22 Total assets acquired 115,671 Accrued expenses and other current liabilities 287 Settlement obligations 685 Deferred revenue, current 30 Current portion of operating lease liabilities 82 Operating lease liabilities, less current portion 181 Other long-term liabilities 6,725 Net assets acquired $ 107,681 105 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) 6. PREPAID EXPENSES AND OTHER CURRENT ASSETS A summary of the Company's prepaid expenses and other current assets as of September 30, 2024 and 2023 is as follows: 2024 2023 (1) Inventory $ 2,423 $ 2,038 Prepaid licenses 5,148 3,107 Prepaid insurance 129 682 Notes receivable — current portion 195 4 Other current assets 2,337 3,681 Prepaid expenses and other current assets $ 10,232 $ 9,512 __________________________ 1. In connection with the sale of the Merchant Services Business, $ 2,937 of the Company's prepaid expenses and other current assets (as of September 30, 2023) were classified as "Current assets held for sale" in the accompanying consolidated balance sheets and were not included in these amounts. 7. PROPERTY AND EQUIPMENT, NET A summary of the Company's property and equipment as of September 30, 2024 and 2023 is as follows: Estimated Useful Life 2024 2023 (1) Buildings 20 years 3,724 4,711 Computer equipment and software (2) 2 to 7 years 4,690 3,711 Furniture and fixtures 2 to 7 years 2,061 2,042 Terminals 2 to 3 years 171 150 Office equipment 2 to 5 years 1,979 1,504 Automobiles 3 years 198 421 Leasehold improvements 2 to 7 years 2,315 2,320 Accumulated depreciation ( 6,461 ) ( 4,800 ) Property and equipment, net $ 8,677 $ 10,059 ____________________ 1. In connection with the sale of the Merchant Services Business, $ 2,249 of the Company's property and equipment, net (as of September 30, 2023) were classified as "Long-term assets held for sale" in the accompanying consolidated balance sheets and were not included in these amounts. 2. Includes computer software of $ 330 and $ 256 as of September 30, 2024 and 2023, respectively. Depreciation expense for continuing operations for the years ended September 30, 2024, 2023 and 2022 amounted to $ 2,737 , $ 2,353 and $ 1,609 , respectively. 106 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) 8. CAPITALIZED SOFTWARE, NET A summary of the Company's capitalized software as of September 30, 2024 and 2023 is as follows: Estimated Useful Life 2024 2023 (1) Software development costs 3 to 10 years $ 83,500 $ 73,817 Development in progress 9,054 7,310 Accumulated amortization ( 33,962 ) ( 23,070 ) Capitalized software, net $ 58,592 $ 58,057 __________________________ 1. In connection with the sale of the Merchant Services Business, $ 4,520 of the Company's capitalized software, net (as of September 30, 2023) were classified as "Long-term assets held for sale" in the accompanying consolidated balance sheets and were not included in these amounts. The Company capitalized software development costs (including acquisitions) for continuing operations totaling $ 14,079 and $ 23,799 during the years ended September 30, 2024 and 2023, respectively. Amortization expense for continuing operations for capitalized software development costs amounted to $ 13,545 , $ 11,155 and $ 7,854 during the years ended September 30, 2024, 2023 and 2022, respectively. There were no amounts written down to net realizable value for continuing operations during the years ended September 30, 2024, 2023 and 2022, respectively. 9. GOODWILL AND INTANGIBLE ASSETS Changes in the carrying amount of goodwill are as follows: Public Sector Healthcare Other Total Balance at September 30, 2022 (1) $ 168,095 $ 46,828 $ — $ 214,923 Goodwill attributable to preliminary purchase price adjustments and acquisition activity during the year ended September 30, 2023 53,060 — — 53,060 Balance at September 30, 2023 (1) 221,155 46,828 — 267,983 Goodwill attributable to preliminary purchase price adjustments and acquisition activity during the year ended September 30, 2024 12,695 — — 12,695 Balance at September 30, 2024 $ 233,850 $ 46,828 $ — $ 280,678 __________________________ 1. In connection with the sale of the Merchant Services Business, $ 141,580 and $ 138,716 at September 30, 2023 and 2022, respectively, of the Company's goodwill were classified as "Long-term assets held for sale" in the accompanying consolidated balance sheets and were not included in these amounts. 107 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) Intangible assets, net consisted of the following as of September 30, 2024: Cost Accumulated Amortization Carrying Value Amortization Life and Method Finite-lived intangible assets: Customer relationships $ 199,720 $ ( 38,843 ) $ 160,877 9 to 25 years – straight-line Non-compete agreements 358 ( 192 ) 166 3 to 8 years – straight-line Website and brand development costs 6 ( 5 ) 1 3 years – straight-line Trade names 4,741 ( 2,987 ) 1,754 2 to 5 years – straight-line Total finite-lived intangible assets 204,825 ( 42,026 ) 162,799 Indefinite-lived intangible assets: Trademarks 18 — 18 Total identifiable intangible assets $ 204,843 $ ( 42,026 ) $ 162,816 Intangible assets, net consisted of the following as of September 30, 2023 (1) : Cost Accumulated Amortization Carrying Value Amortization Life and Method Finite-lived intangible assets: Customer relationships $ 187,700 $ ( 27,500 ) $ 160,200 9 to 25 years – accelerated or straight-line Non-compete agreements 762 ( 905 ) ( 143 ) 3 to 6 years – straight-line Website development costs 15 ( 13 ) 2 3 to 4 years – straight-line Trade names 5,631 ( 2,950 ) 2,681 3 to 7 years – straight-line Referral and exclusivity agreements 609 ( 217 ) 392 5 years – straight-line Total finite-lived intangible assets 194,717 ( 31,585 ) 163,132 Indefinite-lived intangible assets: Trademarks 17 — 17 Total identifiable intangible assets $ 194,734 $ ( 31,585 ) $ 163,149 __________________________ 1. In connection with the sale of the Merchant Services Business, $ 63,803 of the Company's intangible assets, net (as of September 30, 2023) were classified as "Long-term assets held for sale" in the accompanying consolidated balance sheets and were not included in these amounts. Amortization expense for intangible assets for continuing operations amounted to $ 12,514 , $ 12,930 and $ 9,867 during the years ended September 30, 2024, 2023 and 2022, respectively. 108 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) Based on gross carrying amounts at September 30, 2024, the Company's estimate of future amortization expense for intangible assets are presented in this table as follows for each fiscal year ending September 30: 2025 $ 12,962 2026 12,528 2027 12,069 2028 11,906 2029 11,879 Thereafter 101,455 $ 162,799 10. ACCRUED EXPENSES AND OTHER LIABILITIES A summary of the Company's accrued expenses and other current liabilities as of September 30, 2024 and 2023 is as follows: 2024 2023 (1) Accrued wages, bonuses, commissions and vacation $ 5,737 $ 6,888 Accrued interest 43 1,313 Accrued contingent consideration — current portion 716 6,825 Escrow liabilities 2,174 3,965 Accrued tax distributions 24,276 — Accrued income tax expense 30,520 3,148 Tax receivable agreement liability — current portion 9,850 — Customer deposits 634 380 Employee health self-insurance liability 917 823 Accrued Hyland expenses 1,165 2,369 Accrued interchange 1,946 1,991 Other accrued liabilities related to the Sale of the Merchant Services Business 7,887 — Accrued liabilities owed to sellers 355 1,239 Other accrued expenses 3,752 4,639 Accrued expenses and other current liabilities $ 89,972 $ 33,580 __________________________ 1. In connection with the sale of the Merchant Services Business, $ 4,160 of the Company's accrued expenses and other current liabilities (as of September 30, 2023) were classified as "Current liabilities held for sale" in the accompanying consolidated balance sheets and were not included in these amounts. 109 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) A summary of the Company's long-term liabilities as of September 30, 2024 and 2023 is as follows: 2024 2023 (1) Accrued contingent consideration — long-term portion $ 1,636 $ 1,414 Deferred tax liability — long-term 11,402 18,611 Other long-term liabilities 1,883 3,053 Total other long-term liabilities $ 14,921 $ 23,078 __________________________ 1. In connection with the sale of the Merchant Services Business, $ 1,065 of the Company's other long-term liabilities (as of September 30, 2023) were classified as "Long-term liabilities held for sale" in the accompanying consolidated balance sheets and were not included in these amounts. 11. LONG-TERM DEBT, NET A summary of long-term debt, net as of September 30, 2024 and September 30, 2023 is as follows: Maturity 2024 2023 Revolving lines of credit to banks under the 2023 Senior Secured Credit Facility May 8, 2028 $ — $ 272,505 1.0 % Exchangeable Senior Notes due 2025 February 15, 2025 26,223 117,000 Debt issuance costs, net (1) — ( 1,500 ) Total long-term debt, net of issuance costs $ 26,223 $ 388,005 ____________________ 1. Refer to Note 3 for discussion of the change in the current period presentation. 2020 Exchangeable Notes Offering On February 18, 2020, i3 Verticals, LLC issued $ 138,000 aggregate principal amount of 1.00 % Exchangeable Senior Notes due 2025 (the “Exchangeable Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The Company received approximately $ 132,762 in net proceeds from the sale of the Exchangeable Notes, as determined by deducting estimated offering expenses paid to third-parties from the aggregate principal amount. 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 will mature on February 15, 2025, unless converted or repurchased at an earlier date. i3 Verticals, LLC issued the Exchangeable Notes pursuant to an Indenture, dated as of February 18, 2020 (the “Indenture”), among i3 Verticals, LLC, the Company and U.S. Bank National Association, as trustee. As of August 15, 2024, the Exchangeable Notes became exchangeable at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. The Exchangeable Notes are exchangeable on the terms set forth in the Indenture into cash, shares of Class A common stock, or a combination thereof, at i3 Verticals, LLC’s election, provided that in September 2022, the Company made the irrevocable election to settle the principal portion of its Exchangeable Notes only in cash. The exchange rate is initially 24.4666 shares of Class A common stock per $1,000 principal amount of Exchangeable Notes (equivalent to an initial exchange price of approximately $ 40.87 per share of Class A common stock). The exchange rate is subject to adjustment in certain circumstances. In addition, following certain corporate events that occur prior to the maturity date or i3 Verticals, LLC’s delivery of a notice of redemption, i3 Verticals, LLC will increase, in certain 110 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) circumstances, the exchange rate for a holder who elects to exchange its Exchangeable Notes in connection with such a corporate event or notice of redemption, as the case may be. Prior to the 47th scheduled trading day immediately preceding the maturity date, if the last reported sale price per share of Class A common stock has been at least 130 % of the exchange price for the Exchangeable Notes for at least 20 trading days (whether or not consecutive), i3 Verticals, LLC may redeem all or any portion of the Exchangeable Notes at a cash redemption price equal to 100 % of the principal amount of the Exchangeable Notes to be redeemed plus accrued and unpaid interest on such note to, but not including, the redemption date. The Exchangeable Notes are general senior unsecured obligations of i3 Verticals, LLC and the guarantee is the Company’s senior unsecured obligation and rank senior in right of payment to all of i3 Verticals, LLC’s and the Company’s future indebtedness that is expressly subordinated in right of payment to the Exchangeable Notes or the guarantee, as applicable. The Exchangeable Notes and the guarantee rank equally in right of payment with all of i3 Verticals, LLC’s and the Company’s existing and future unsecured indebtedness that is not so expressly subordinated in the right of payment to the Exchangeable Notes or the guarantee, as applicable. The Exchangeable Notes and the guarantee are effectively subordinated to any of the Companies’ existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness (including obligations under the 2023 Senior Secured Credit Facility, defined below). The Exchangeable Notes and the guarantee will be structurally subordinated to all indebtedness and other liabilities and obligations (including the debt and trade payables) of the Company’s subsidiaries, other than i3 Verticals, LLC. During the fiscal year ended September 30, 2020, we repurchased $ 21,000 in aggregate principal amount of Exchangeable Notes in open market purchases. In addition, on December 21, 2023, i3 Verticals, LLC entered into agreements to repurchase an additional 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 repurchase payments were determined by the Company’s average stock price over the 15 trading-day measurement period ended January 16, 2024. The closing of the Exchangeable Note Repurchases occurred on January 18, 2024, and the Company paid $ 87,391 to repurchase $ 90,777 in aggregate principal amount of its Exchangeable Notes and to repay approximately $ 386 in accrued interest on the repurchased portion of the Exchangeable Notes. The Company wrote off $ 926 of debt issuance costs in connection with the repurchase transactions. These repurchases resulted in a decrease in the Company's total leverage ratio, and following the completion of the repurchases of these Exchangeable Notes, approximately $ 26,223 in aggregate principal amount of the Exchangeable Notes remained outstanding, with terms unchanged. The Company recorded a gain on retirement of debt of $ 2,397 due to the estimated acquisition price exceeding the net carrying amount of the repurchased portion of the Exchangeable Notes, adjusted for unamortized debt issuance costs and costs and third-party fees related to the transaction. As of September 30, 2024, the aggregate principal amount outstanding of the Exchangeable Notes was $ 26,223 . In accounting for the issuance of the Exchangeable Notes, transaction costs were recorded as debt issuance costs in the consolidated balance sheet and are amortized to interest expense using the effective interest method over the term of the Exchangeable Notes. Non-cash interest expense for amortization of debt issuance costs related to the Exchangeable Notes for the years ended September 30, 2024 and 2023 was $ 482 and $ 949 , respectively. The Company also wrote off a portion of the debt issuance costs in connection with the repurchase 111 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) transactions in April and September 2020. Total unamortized debt issuance costs related to the Exchangeable Notes were $ 93 as of September 30, 2024. The estimated fair value of the Exchangeable Notes was $ 25,685 as of September 30, 2024. The estimated fair value of the Exchangeable Notes was determined through consideration of quoted market prices for similar instruments. The fair value is classified as Level 2, as defined in Note 14. Exchangeable Note Hedge Transactions On February 12, 2020, concurrently with the pricing of the Exchangeable Notes, and on February 13, 2020, concurrently with the exercise by the initial purchasers of their right to purchase additional Exchangeable Notes, i3 Verticals, LLC entered into exchangeable note hedge transactions with respect to Class A common stock (the “Note Hedge Transactions”) with certain financial institutions (collectively, the “Counterparties”). The Note Hedge Transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Exchangeable Notes, the same number of shares of Class A common stock that initially underlie the Exchangeable Notes in the aggregate and are exercisable upon exchange of the Exchangeable Notes. The Note Hedge Transactions are intended to reduce potential dilution to the Class A common stock upon any exchange of the Exchangeable Notes. The Note Hedge Transactions will expire upon the maturity of the Exchangeable Notes, if not earlier exercised. The Note Hedge Transactions are separate transactions, entered into by i3 Verticals, LLC with the Counterparties, and are not part of the terms of the Exchangeable Notes. Holders of the Exchangeable Notes will not have any rights with respect to the Note Hedge Transactions. i3 Verticals, LLC used approximately $ 28,676 of the net proceeds from the offering of the Exchangeable Notes (net of the premiums received for the warrant transactions described below) to pay the cost of the Note Hedge Transactions. The Note Hedge Transactions do not require separate accounting as a derivative as they meet a scope exception for certain contracts involving an entity's own equity. The premiums paid for the Note Hedge Transactions have been included as a net reduction to additional paid-in capital within stockholders' equity. In December 2023, i3 Verticals, LLC received $ 250 from the Counterparties to terminate the portion of the Note Hedge Transactions corresponding to the Exchangeable Notes that were repurchased in fiscal year 2020. Also in December 2023, i3 Verticals, LLC entered into agreements with the Counterparties to terminate the portion of the Note Hedge Transactions corresponding to the Exchangeable Note Repurchases. On January 18, 2024, in connection with the Exchangeable Note Repurchases, the Company and i3 Verticals, LLC terminated the corresponding portions of the Note Hedge Transactions ("Note Hedge Unwinds"), and i3 Verticals, LLC received $ 987 for the sale of the Note Hedge Unwinds and recorded a loss on the sale of the Note Hedge Unwinds of $ 245 . Warrant Transactions On February 12, 2020, concurrently with the pricing of the Exchangeable Notes, and on February 13, 2020, concurrently with the exercise by the initial purchasers of their right to purchase additional Exchangeable Notes, the Company entered into warrant transactions to sell to the Counterparties warrants (the “Warrants”) to acquire, subject to customary adjustments, up to initially 3,376,391 shares of Class A common stock in the aggregate at an initial exercise price of $ 62.88 per share. The Company offered and sold the Warrants in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act. The Warrants will expire over a period beginning on May 15, 2025. The Warrants are separate transactions, entered into by the Company with the Counterparties, and are not part of the terms of the Exchangeable Notes. Holders of the Exchangeable Notes will not have any rights with respect to the Warrants. The Company received approximately $ 14,669 from the offering and sale of the Warrants. The Warrants do not require separate accounting as a derivative as they meet a scope exception for certain contracts involving an entity's own equity. The premiums paid for the Warrants have been included as a net increase to additional paid-in capital within stockholders' equity. 112 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) In December 2023, the Company paid $ 119 to the Counterparties to terminate the portion of the Warrants corresponding to the Exchangeable Notes that were repurchased in fiscal year 2020. Also in December 2023, i3 Verticals, LLC entered into agreements with the Counterparties to terminate the portion of the Warrants corresponding to the Exchangeable Note Repurchases. On January 18, 2024, in connection with the Exchangeable Note Repurchases, the Company and i3 Verticals, LLC terminated the corresponding portions of the Warrants ("Warrant Unwinds"), and the Company paid $ 433 for the repurchase of the Warrant Unwinds and recorded a gain on the repurchase of the Warrant Unwinds of $ 105 . 2023 Senior Secured Credit Facility On May 8, 2023, i3 Verticals, LLC (the “Borrower”), entered into that certain Credit Agreement (as amended, the “2023 Senior Secured Credit Facility”) with the guarantors and lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (“JPMorgan”). The 2023 Senior Secured Credit Facility replaces the Prior Senior Secured Credit Facility (as defined below). The 2023 Senior Secured Credit Facility provides for aggregate commitments of $ 450,000 in the form of a senior secured revolving credit facility (the “Revolver”). The 2023 Senior Secured Credit Facility provides that the Borrower has the right to seek additional commitments to provide additional term loan facilities or additional revolving credit commitments in an aggregate principal amount up to, as of any date of determination, the sum of (i) the greater of $ 100,000 and 100 % of the Borrower’s consolidated EBITDA (as defined in the 2023 Senior Secured Credit Facility) for the most recently completed four quarter period, plus (ii) the amount of certain prepayments of certain indebtedness, so long as, among other things, after giving pro forma effect to the incurrence of such additional borrowings and any related transactions, the Borrower’s consolidated interest coverage ratio (as defined in the 2023 Senior Secured Credit Facility) would not be less than 3.0 to 1.0 and the Borrower’s consolidated total net leverage ratio (as defined in the 2023 Senior Secured Credit Facility) would not exceed 5.0 to 1.0. As of September 30, 2024, the Borrower's consolidated interest coverage ratio was 3.30 x and total leverage ratio was 0.06 x. The provision of any such additional amounts under the additional term loan facilities or additional revolving credit commitments are subject to certain additional conditions and the receipt of certain additional commitments by existing or additional lenders. The lenders under the 2023 Senior Secured Credit Facility are not under any obligation to provide any such additional term loan facilities or revolving credit commitments. The proceeds of the Revolver, together with proceeds from any additional amounts under the additional term loan facilities or additional revolving credit commitments, may only be used by the Borrower to (i) finance working capital, capital expenditures and other lawful corporate purposes, (ii) finance permitted acquisitions (as defined in the 2023 Senior Secured Credit Facility) and (iii) to refinance certain existing indebtedness. Borrowings under the Revolver will be made, at the Borrower’s option, at the Adjusted Term SOFR rate or the base rate, plus, in each case, an applicable margin. 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 % ( 2.00 % at September 30, 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 September 30, 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: 113 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) Consolidated Total Net Leverage Ratio Commitment Fee Letter of Credit Fee Term Benchmark Loans Base Rate Loans > 3.0 to 1.0 0.30 % 3.00 % 3.00 % 2.00 % > 2.5 to 1.0 but < 3.0 to 1.0 0.25 % 2.50 % 2.50 % 1.50 % > 2.0 to 1.0 but < 2.5 to 1.0 0.20 % 2.25 % 2.25 % 1.25 % < 2.0 to 1.0 0.15 % 2.00 % 2.00 % 1.00 % In addition to paying interest on outstanding principal under the Revolver, the Borrower will be required to pay a commitment fee equal to the product of between 0.15 % and 0.30 % (the applicable percentage depending on the Borrower’s consolidated total net leverage ratio as reflected in the schedule above, 0.15 % at September 30, 2024) times the actual daily amount by which $ 450,000 exceeds the total amount outstanding under the Revolver and available to be drawn under all outstanding letters of credit. The Borrower will be permitted to voluntarily reduce the unutilized portion of the commitment amount and repay outstanding loans under the 2023 Senior Secured Credit Facility, whether such amounts are issued under the Revolver or under the additional term loan facilities or additional revolving credit facilities, at any time without premium or penalty. In addition, if the total amount borrowed under the Revolver exceeds $ 450,000 at any time, the 2023 Senior Secured Credit Facility requires the Borrower to prepay such excess outstanding amounts. All obligations under the 2023 Senior Secured Credit Facility are unconditionally guaranteed by the Company, and each of the Company’s existing and future direct and indirect material, wholly owned domestic subsidiaries, subject to certain exceptions. The obligations are secured by first-priority security interests in substantially all tangible and intangible assets of the Borrower, the Company and each subsidiary guarantor, in each case whether owned on the date of the initial borrowings or thereafter acquired. The 2023 Senior Secured Credit Facility places certain restrictions on the ability of the Borrower, the Company and their subsidiaries to, among other things, incur debt and liens; merge, consolidate or liquidate; dispose of assets; enter into hedging arrangements; make certain restricted payments; undertake transactions with affiliates; enter into sale-leaseback transactions; make certain investments; prepay or modify the terms of certain indebtedness; and modify the terms of certain organizational agreements. The 2023 Senior Secured Credit Facility contains customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, certain events of bankruptcy and insolvency, material judgments, certain events with respect to employee benefit plans, invalidity of loan documents and certain changes in control. Debt issuance costs The Company incurred $ 930 and $ 3,079 in debt issuance costs during the year ended September 30, 2024 and 2023, respectively, and did no t incur any debt issuance costs during the year ended September 30, 2022. The Company's debt issuance costs related to the 2023 Senior Secured Credit Facility are being amortized over the related term of the debt using the straight-line method, which is not materially different than the effective interest rate method, and are presented within other assets in the consolidated balance sheets. The amortization of deferred debt issuance costs is included in interest expense and amounted to approximately $ 1,175 , $ 1,514 and $ 1,046 during the years ended September 30, 2024, 2023 and 2022, respectively. In connection with the replacement of our prior Senior Secured Credit Facility (which was replaced by the 2023 Senior Secured Credit Facility), the Company recorded a debt extinguishment charge of $ 203 during the year ended September 30, 2023 for the write-off of deferred financing costs, which was recorded in interest expense in the consolidated statements of operations. 114 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) 12. INCOME TAXES i3 Verticals, Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from i3 Verticals, LLC based on i3 Verticals, Inc.'s economic interest in i3 Verticals, LLC. i3 Verticals, LLC's members, including the Company, are liable for federal, state and local income taxes based on their share of i3 Verticals, LLC's pass-through taxable income. i3 Verticals, LLC is not a taxable entity for federal income tax purposes, but is subject to and reports entity level tax in both Tennessee and Texas. In addition, certain subsidiaries of i3 Verticals, LLC are corporations that are subject to state and federal income taxes. The Company's income tax (benefit) expense for continuing operations during the years ended September 30, 2024, 2023 and 2022 were the following: Year ended September 30, 2024 2023 2022 Current: Federal tax expense $ 2,383 $ 2,363 $ 649 State tax expense 739 1,172 636 Deferred: Federal tax expense (benefit) 626 ( 8,255 ) ( 7,460 ) State tax (benefit) expense ( 9,416 ) 932 6,327 Income tax (benefit) expense $ ( 5,668 ) $ ( 3,788 ) $ 152 A reconciliation of income tax expense (benefit) from continuing operations computed at the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows: Year ended September 30, 2024 2023 2022 Expected U.S. federal income taxes at statutory rate $ ( 3,993 ) 21.0 % $ ( 5,767 ) 21.0 % $ ( 8,169 ) 21.0 % Partnership income not taxed at federal level ( 31 ) 0.2 % ( 3,344 ) 12.2 % 1,706 ( 4.4 ) % Valuation allowance 2,248 ( 11.8 ) % 4,049 ( 14.7 ) % 8,308 ( 21.4 ) % State and local income taxes, net of federal benefit ( 2,853 ) 15.0 % 1,101 ( 4.0 ) % ( 2,800 ) 7.2 % Nondeductible expenses and other permanent items 20 ( 0.1 ) % 93 ( 0.3 ) % ( 136 ) 0.3 % Revaluation of debt and other debt transaction differences ( 261 ) 1.4 % 536 ( 2.0 ) % 1,195 ( 3.1 ) % Change in liability for uncertain tax positions 218 ( 1.1 ) % 155 ( 0.6 ) % ( 25 ) 0.1 % Federal tax credits ( 1,027 ) 5.4 % ( 615 ) 2.2 % — — % Other 11 ( 0.1 ) % 4 — % 73 ( 0.2 ) % Income tax (benefit) expense $ ( 5,668 ) 29.8 % $ ( 3,788 ) 13.8 % $ 152 ( 0.4 ) % 115 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) Deferred income taxes are provided for the temporary differences between the financial reporting basis and tax basis of the Company’s assets and liabilities. Net deferred taxes spanning multiple jurisdictions as of September 30, 2024 and 2023 were as follows: September 30, 2024 2023 (1) Deferred tax assets: Investment in partnership $ 52,039 $ 52,432 Stock-based compensation 15,241 13,144 Accrued expenses 59 247 Net operating loss carryforwards 367 14,794 Section 163j carryforward 4,604 3,599 Federal tax credits — 698 Operating lease liabilities 286 578 Other 17 89 Gross deferred tax assets 72,613 85,581 Valuation allowance ( 17,631 ) ( 28,232 ) Deferred tax liabilities: Intangible assets ( 17,131 ) ( 21,844 ) Operating lease right of use assets ( 267 ) ( 538 ) Other ( 541 ) ( 1,064 ) Net deferred tax asset $ 37,043 $ 33,903 __________________________ 1. In connection with the sale of the Merchant Services Business, $ 1,035 of the Company's net deferred tax liability (as of September 30, 2023) were classified as "Long-term liabilities held for sale" in the accompanying consolidated balance sheets and were not included in these amounts as the amount related to the Merchant Services Business was a deferred tax liability. Federal net operating loss carryforwards for continuing operations as of September 30, 2024 and 2023 were $ 188 and $ 42,137 , respectively. Federal tax credits were $ 0 for continuing operations, resulting in a deferred tax asset of $ 39 as of September 30, 2024 compared to $ 698 of federal tax credits for continuing operations, resulting in a deferred tax asset of $ 9,547 as of September 30, 2023. The federal net operating loss carryforwards will begin to expire in 2035. The use of federal net operating losses and credits are limited to the future taxable income of separate legal entities. As a result, a valuation allowance of $ 40 for continuing operations has been provided for certain federal deferred tax assets, a increase of $ 7 during the year ended September 30, 2024. State net operating loss carryforwards as of September 30, 2024 for continuing operations totaled $ 5,450 , resulting in a deferred tax asset of $ 328 . The state net operating loss carryforwards will begin to expire in 2027. The use of certain state net operating losses are limited to future taxable earnings of separate legal entities. As a result, a valuation allowance for continuing operations of $ 17 has been provided for state loss carryforwards and other state tax attributes, a decrease of $ 8,137 during the year ended September 30, 2024. The Company also considered a valuation allowance on its $ 52,039 outside basis of investment in i3 Verticals, LLC deferred tax asset as of September 30, 2024. The Company has recorded a valuation allowance of $ 17,574 against the portion of the deferred tax benefit that is capital in nature and against the amount not expected to be realized, resulting in a decrease in valuation allowance of $ 2,472 during the year ended September 30, 2024. Management believes that it is more likely than not that the results of operations will generate sufficient taxable income to realize the deferred tax assets after giving consideration to the valuation allowance. 116 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) The components of the Company’s liability for uncertain tax benefits are as follows: Gross unrecognized tax benefits as of September 30, 2022 $ 83 Increase in current year tax positions 108 Increase in prior year tax positions 73 Settlements and other reductions 26 Gross unrecognized tax benefits as of September 30, 2023 238 Increase in current year tax positions 197 Increase in prior year tax positions 78 Settlements and other reductions 57 Gross unrecognized tax benefits as of September 30, 2024 $ 456 As of September 30, 2024 and 2023, the Company had no accrued interest and no accrued penalties in either period related to uncertain tax positions. It is the Company’s policy to recognize interest and/or penalties related to income tax matters in income tax expense. The Company is no longer subject to U.S. federal, state, or local examinations by tax authorities for years before 2020. As of September 30, 2024 and 2023, there were unrecognized tax benefits of $ 456 and $ 238 that if recognized would affect the annual effective tax rate. Tax Receivable Agreement On June 25, 2018, the Company entered into a Tax Receivable Agreement with i3 Verticals, LLC and each of the Continuing Equity Owners (the “Tax Receivable Agreement”) that provides for the payment by the Company to the Continuing Equity Owners of 85 % of the amount of certain tax benefits, if any, that it actually realizes, or in some circumstances, is deemed to realize in its tax reporting, as a result of (i) future redemptions funded by the Company or exchanges, or deemed exchanges in certain circumstances, of Common Units of i3 Verticals, LLC for Class A common stock of i3 Verticals, Inc. or cash, and (ii) certain additional tax benefits attributable to payments made under the Tax Receivable Agreement. These tax benefit payments are not conditioned upon one or more of the Continuing Equity Owners maintaining a continued ownership interest in i3 Verticals, LLC. If a Continuing Equity Owner transfers Common Units but does not assign to the transferee of such units its rights under the Tax Receivable Agreement, such Continuing Equity Owner generally will continue to be entitled to receive payments under the Tax Receivable Agreement arising in respect of a subsequent exchange of such Common Units. In general, the Continuing Equity Owners’ rights under the Tax Receivable Agreement may not be assigned, sold, pledged or otherwise alienated to any person, other than certain permitted transferees, without (a) the Company's prior written consent, which should not be unreasonably withheld, conditioned or delayed, and (b) such persons becoming a party to the Tax Receivable Agreement and agreeing to succeed to the applicable Continuing Equity Owner’s interest therein. The Company expects to benefit from the remaining 15 % of the tax benefits, if any, that the Company may realize. When Class B common stock is exchanged for Class A common stock, this triggers an increase in the tax basis of the Company's Common Units in i3 Verticals, LLC subject to the provisions of the Tax Receivable Agreement. During the year ended September 30, 2022, the Company acquired an aggregate of 111,000 common units of i3 Verticals, LLC in connection with the redemption of common units, which resulted in an increase in the tax basis of our investment in i3 Verticals, LLC subject to the provisions of the Tax Receivable Agreement. As a result of these exchanges, during the year ended September 30, 2022, the Company recognized an increase to its net deferred tax assets in the amount of $ 876 , and corresponding Tax Receivable Agreement liabilities of $ 745 , representing 85 % of the tax benefits due to the Continuing Equity Owners. The Company also recognized a increase to its net deferred tax assets of $ 1,038 across all exchanges as a result of a tax rate change during the year ended September 30, 2022. During the year ended September 30, 2023, the Company acquired an aggregate of 24,748 common units of i3 Verticals, LLC in connection with the redemption of common units, which resulted in an increase in the tax basis 117 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) of our investment in i3 Verticals, LLC subject to the provisions of the Tax Receivable Agreement. As a result of these exchanges, during the year ended September 30, 2023, the Company recognized an increase to its net deferred tax assets in the amount of $ 208 , and corresponding Tax Receivable Agreement liabilities of $ 177 , representing 85 % of the tax benefits due to the Continuing Equity Owners. The Company also recognized a decrease to its net deferred tax assets of $ 932 across all exchanges as a result of a tax rate change during the year ended September 30, 2023. During the year ended September 30, 2024, the Company acquired an aggregate of 60,718 common units of i3 Verticals, LLC in connection with the redemption of common units, which resulted in an increase in the tax basis of our investment in i3 Verticals, LLC subject to the provisions of the Tax Receivable Agreement. As a result of these exchanges, during the year ended September 30, 2024, the Company recognized an increase to its net deferred tax assets in the amount of $ 426 , and corresponding Tax Receivable Agreement liabilities of $ 362 , representing 85 % of the tax benefits due to the Continuing Equity Owners. The Company also recognized a decrease to its net deferred tax assets of $ 1,187 across all exchanges as a result of a tax rate change during the year ended September 30, 2024. The deferred tax asset balance was $ 34,464 as of September 30, 2024. The Company also has a corresponding Tax Receivable Agreement liability of $ 39,197 , of which $ 9,850 was recorded in accrued expenses and other current liabilities and $ 29,347 was recorded in long-term tax receivable agreement obligations as of September 30, 2024. Payments to the Continuing Equity Owners related to exchanges through September 30, 2024 will range from $ 0 to $ 9,850 per year and are expected to be paid over the next 24 years. The amounts recorded as of September 30, 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. 13. LEASES The Company’s leases consist primarily of real estate leases throughout the markets in which the Company operates. At contract inception, the Company determines whether an arrangement is or contains a lease, and for each identified lease, evaluates the classification as operating or financing. The Company had no finance leases as of September 30, 2024. Leased assets and obligations are recognized at the lease commencement date based on the present value of fixed lease payments to be made over the term of the lease. Renewal and termination options are factored into determination of the lease term only if the option is reasonably certain to be exercised. The weighted-average remaining lease term both at September 30, 2024 and 2023 was two years . The Company had no significant short-term leases during the years ended September 30, 2024 and 2023. The Company’s leases do not provide a readily determinable implicit interest rate and the Company uses its incremental borrowing rate to measure the lease liability and corresponding right-of-use asset. The incremental borrowing rates were determined based on a portfolio approach considering the Company’s current secured borrowing rate adjusted for market conditions and the length of the lease term. The weighted-average discount rate used in the measurement of our lease liabilities was 7.7 % and 7.9 % as of September 30, 2024 and 2023, respectively. Operating lease cost is recognized on a straight-line basis over the lease term. Operating lease costs from continuing operations for the years ended September 30, 2024, 2023 and 2022, were $ 4,160 , $ 4,388 and $ 4,607 , respectively, which are included in selling, general and administrative expenses in the consolidated statements of operations. Total operating lease costs from continuing operations for the years ended September 30, 2024, 2023 and 2022, include variable lease costs of approximately $ 44 , $ 39 and $ 55 , respectively, which are primarily comprised 118 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) of costs of maintenance and utilities and changes in rates, and are determined based on the actual costs incurred during the period. Variable payments are expensed in the period incurred and not included in the measurement of lease assets and liabilities. Short-term rent expense from continuing operations for the years ended September 30, 2024, 2023 and 2022, was $ 31 , $ 8 and $ 65 , respectively, and are included in selling, general and administrative expenses in the consolidated statements of operations. As of September 30, 2024, maturities of lease liabilities for continuing operations are as follows: Years ending September 30: 2025 4,002 2026 3,287 2027 1,378 2028 601 2029 591 Thereafter 620 Total future minimum lease payments (undiscounted) (1) 10,479 Less: present value discount ( 657 ) Present value of lease liability $ 9,822 _________________________ 1. Total future minimum lease payments excludes payments of $ 9 for leases designated as short-term leases, which are excluded from the Company's right-of-use assets. These payments will be made within the next twelve months. 14. FAIR VALUE MEASUREMENTS The Company applies the provisions of ASC 820, Fair Value Measurement , which defines fair value, establishes a framework for its measurement and expands disclosures about fair value measurements. Fair value is the price that would be received to sell an asset or the price paid to transfer a liability as of the measurement date. A three-tier, fair-value reporting hierarchy exists for disclosure of fair value measurements based on the observability of the inputs to the valuation of financial assets and liabilities. The three levels are: Level 1 — Quoted prices for identical instruments in active markets. Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable in active exchange markets. The carrying value of the Company’s financial instruments, including cash and cash equivalents, restricted cash, settlement assets and obligations, accounts receivable, other assets, accounts payable, and accrued expenses, approximated their fair values as of September 30, 2024 and 2023, because of the relatively short maturity dates on these instruments. The carrying amount of debt approximates fair value as of September 30, 2024 and 2023, because interest rates on these instruments approximate market interest rates. 119 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) The Company has no Level 1 or Level 2 financial instruments measured at fair value on a recurring basis. The following tables present the changes in the Company's Level 3 financial instruments that are measured at fair value on a recurring basis. Accrued Contingent Consideration Balance at September 30, 2022 (1) $ 19,636 Contingent consideration accrued at time of business combination 760 Change in fair value of contingent consideration included in Operating expenses 10,767 Contingent consideration paid ( 22,924 ) Balance at September 30, 2023 8,239 Contingent consideration accrued at time of business combination 2,130 Change in fair value of contingent consideration included in Operating expenses ( 690 ) Contingent consideration paid ( 7,327 ) Balance at September 30, 2024 $ 2,352 __________________________ 1. In connection with the sale of the Merchant Services Business, $ 3,197 of the Company's accrued contingent consideration (as of September 30, 2022) were classified as "Current liabilities held for sale" in the accompanying consolidated balance sheets and were not included in these amounts. The fair value of contingent consideration obligations includes inputs not observable in the market and thus represents a Level 3 measurement. The amount to be paid under these obligations is contingent upon the achievement of certain growth metrics related to the financial performance of the entities subsequent to acquisition. The fair value of material contingent consideration included in an acquisition is calculated using a Monte Carlo simulation as well as a discounted cash flows analysis. The contingent consideration is revalued each period until it is settled. Management reviews the historical and projected performance of each acquisition with contingent consideration and uses an income probability method to revalue the contingent consideration. The revaluation requires management to make certain assumptions and represent management's best estimate at the valuation date. The probabilities are determined based on a management review of the expected likelihood of triggering events that would cause a change in the contingent consideration paid. The Company develops the projected future financial results based on an analysis of historical results, market conditions, and the expected impact of anticipated changes in the Company's overall business and/or product strategies. Approximately $ 716 and $ 6,825 of contingent consideration was recorded in accrued expenses and other current liabilities as of September 30, 2024 and 2023, respectively. Approximately $ 1,636 and $ 1,414 of contingent consideration was recorded in other long-term liabilities as of September 30, 2024 and 2023, respectively. Disclosure of Fair Values The Company's financial instruments that are not remeasured at fair value include the Exchangeable Notes (see Note 11). The Company estimates the fair value of the Exchangeable Notes through consideration of quoted market prices of similar instruments, classified as Level 2 as described above. The estimated fair value of the Exchangeable Notes was $ 25,685 as of September 30, 2024. 120 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) 15. EQUITY-BASED COMPENSATION A summary of equity-based compensation expense for continuing operations recognized during the years ended September 30, 2024, 2023 and 2022 is as follows: Year ended September 30, 2024 2023 2022 Stock options $ 14,113 $ 20,923 $ 21,768 Restricted stock units 4,065 2,800 887 Equity-based compensation expense $ 18,178 $ 23,723 $ 22,655 In connection with the sale of the Merchant Services Business, $ 8,160 , $ 4,155 and $ 3,575 of the Company's equity-based compensation expense was classified as "net income from discontinued operations" in the accompanying consolidated statements of operations during the years ended September 30, 2024, 2023, and 2022, respectively. Amounts are included in general and administrative expense on the consolidated statements of operations. Current and deferred income tax benefits for continuing operations of $ 3,114 , $ 4,260 and $ 4,029 were recognized related to equity-based compensation during the years ended September 30, 2024, 2023, and 2022, respectively. Stock Options In May 2018, the Company adopted the 2018 Equity Incentive Plan (the “2018 Plan”) under which the Company may grant up to 3,500,000 stock options and other equity-based awards to employees, directors and officers. The number of shares of Class A common stock available for issuance under the 2018 Plan includes an annual increase on the first day of each year, beginning with the 2019 calendar year, equal to 4.0 % of the outstanding shares of all classes of the Company's common stock as of the last day of the immediately preceding calendar year, unless the Company’s board of directors determines prior to the last trading day of December of the immediately preceding calendar year that the increase shall be less than 4 %. As of September 30, 2024, there were 1,388,444 shares of equity awards available to grant under the 2018 Plan. In September 2020, the Company adopted the 2020 Acquisition Equity Incentive Plan (the “2020 Inducement Plan”) under which the Company may grant up to 1,500,000 stock options and other equity-based awards to individuals that were not previously employees of the Company or its subsidiaries in connection with acquisitions, as a material inducement to the individual's entry into employment with the Company or its subsidiaries within the meaning of Rule 5635(c)(4) of the Nasdaq Listing Rules. In May 2021, the Company amended the 2020 Inducement Plan to increase the number of shares of the Company's Class A common stock available for issuance from 1,500,000 to 3,000,000 shares. As of September 30, 2024, there were 1,369,876 shares of equity awards available for grant under the 2020 Inducement Plan. Share-based compensation expense includes the estimated effects of forfeitures, which will be adjusted over the requisite service period to the extent actual forfeitures differ or are expected to differ from such estimates. The Company has issued stock option awards under the 2018 Plan and the 2020 Inducement Plan. The fair value of the stock option awards during the years ended September 30, 2024 and 2023 was determined on the 121 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) grant date using the Black-Scholes valuation model based on the following weighted-average assumptions: September 30, 2024 September 30, 2023 Expected volatility (1) 52.1 % 54.9 % Expected dividend yield (2) — % — % Expected term (3) 6 years 6 years Risk-free interest rate (4) 4.1 % 3.9 % _________________ 1. For the year ended September 30, 2024, expected volatility is based on the volatility of the Company's own share price. For the year ended September 30, 2023, expected volatility is based on the historical volatility of a selected peer group over a period equivalent to the expected term. 2. The Company has assumed a dividend yield of zero as management has no plans to declare dividends in the foreseeable future. 3. Expected term represents the estimated period of time until an award is exercised and was determined using the simplified method as details of employee exercise behavior are limited due to limited historical data. 4. The risk-free rate is an interpolation of yields on U.S. Treasury securities with maturities equivalent to the expected term. A summary of stock option activity for the year ended September 30, 2024 is as follows: Stock Options Weighted Average Exercise Price Outstanding at September 30, 2023 8,576,670 $ 25.16 Granted 969,556 19.27 Exercised ( 75,135 ) 19.52 Forfeited ( 350,147 ) 27.86 Outstanding at September 30, 2024 9,120,944 $ 24.48 Exercisable at September 30, 2024 7,004,727 $ 25.22 The weighted-average grant date fair value of stock options granted during the year ended September 30, 2024 was $ 10.56 . As of September 30, 2024, there were 9,120,944 stock options outstanding, of which 7,004,727 were exercisable. As of September 30, 2024, total unrecognized compensation expense related to unvested stock options, including an estimate for pre-vesting forfeitures, was $ 15,151 , which is expected to be recognized over a weighted-average period of 2.7 years. The Company's policy is to account for forfeitures of stock-based compensation awards as they occur. The total fair value of stock options that vested during the year ended September 30, 2024 was $ 25,404 . In connection with the sale of the Merchant Services Business, the Company fully accelerated the vesting period for 188,482 options (to the extent not previously vested) held by employees of the Merchant Services Business immediately prior to the closing of the Transactions pursuant to the Purchase Agreement. Restricted Stock Units The Company has issued Class A common stock in the form of restricted stock units ("RSUs") under the 2018 Plan. 122 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) A summary of activity related to restricted stock units as of September 30, 2024 is as follows: Restricted Stock Units Weighted Average Exercise Price Outstanding at September 30, 2023 874,024 $ 24.95 Granted 318,584 19.58 Vested ( 354,951 ) 25.22 Forfeited ( 66,443 ) 23.77 Outstanding at September 30, 2024 771,214 $ 22.71 The weighted-average grant date fair value of RSUs granted during the year ended September 30, 2024 was $ 19.58 . As of September 30, 2024, total unrecognized compensation expense related to unvested RSUs, including an estimate for pre-vesting forfeitures, was $ 9,898 , which is expected to be recognized over a weighted average period of 2.8 years. The total fair value of RSUs that vested during the year ended September 30, 2024 was $ 8,989 . In connection with the sale of the Merchant Services Business, the Company fully accelerated the vesting period for 173,230 RSUs (to the extent not previously vested) held by employees of the Merchant Services Business immediately prior to the closing of the Transactions pursuant to the Purchase Agreement. 16. COMMITMENTS AND CONTINGENCIES Leases The Company utilizes office space and equipment under operating leases. Rent expense from continuing operations under these leases amounted to $ 4,190 , $ 4,396 and $ 4,665 during the years ended September 30, 2024, 2023 and 2022, respectively. Refer to Note 13 for further discussion and a table of the future minimum payments under these leases. Litigation With respect to all legal, regulatory and governmental proceedings, and in accordance with ASC 450-20, Contingencies—Loss Contingencies , the Company considers the likelihood of a negative outcome. If the Company determines the likelihood of a negative outcome with respect to any such matter is probable and the amount of the loss can be reasonably estimated, the Company records an accrual for the estimated amount of loss for the expected outcome of the matter. If the likelihood of a negative outcome with respect to material matters is reasonably possible and the Company is able to determine an estimate of the amount of possible loss or a range of loss, whether in excess of a related accrued liability or where there is no accrued liability, the Company discloses the estimate of the amount of possible loss or range of loss. However, the Company in some instances may be unable to estimate an amount of possible loss or range of loss based on the significant uncertainties involved in, or the preliminary nature of, any such material matter, and in these instances the Company will disclose the nature of the contingency and describe why the Company is unable to determine an estimate of possible loss or range of loss. 123 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) The Company is involved in ordinary course legal proceedings, which include all claims, lawsuits, investigations and proceedings, including unasserted claims, which are probable of being asserted, arising in the ordinary course of business. The Company has considered all such ordinary course legal proceedings in formulating its disclosures and assessments. After taking into consideration the evaluation of such legal matters by the Company's legal counsel, the Company's management believes at this time such matters will not have a material impact on the Company's consolidated balance sheet, results of operations or cash flows. S&S Litigation On June 2, 2021, the State of Louisiana, Division of Administration (the “State”) and a putative class of Louisiana sheriffs and law enforcement districts (collectively "Plaintiffs") filed a Petition (as amended on October 4, 2021, the “Petition”), in the 19 th Judicial District Court for the Parish of East Baton Rouge against i3-Software & Services, LLC (“S&S”), a subsidiary of the Company located in Shreveport, Louisiana, the Company, i3 Verticals, LLC, the current leader of the S&S business, the former leader of the S&S business, and 1120 South Pointe Properties, LLC (“South Pointe”), the former owner of the assets of the S&S business (collectively "Defendants") . See State of Louisiana, by and through its Division of Administration, East Baton Rouge Parish Law Enforcement District, by and through the duly elected East Baton Rouge Parish Sheriff, Sid J. Gautreaux, III, et. al., individually and as class representatives vs. i3-Software & Services, LLC; 1120 South Pointe Properties, LLC, formerly known as Software and Services of Louisiana, L.L.C.; i3 Verticals, Inc.; i3 Verticals, LLC; Gregory R. Teeters; and Scott Carrington . The Petition was amended on October 4, 2021 to amend and expand the putative class and subsequently removed to the United States District Court for the Middle District of Louisiana. The Petition seeks monetary damages for the cost of network remediation of $ 15,000 purportedly spent by the State and $ 7,000 purportedly spent by the Plaintiffs, return of purchase prices, potential additional expenses related to remediation and any obligation to notify parties of an alleged data breach as and if required by applicable law, and reasonable attorneys’ fees. The claimed damages relate to a third-party remote access software product used in connection with services provided by S&S to certain Louisiana law enforcement districts and alleged inadequacies in the Company’s cybersecurity practices. Plaintiffs moved to remand the action to state court on November 5, 2021, and the motion was referred to a magistrate to make a report and recommendation to the district court judge. On July 5, 2022, the magistrate recommended that the matter be remanded to state court. On July 19, 2022, the Company and all other defendants filed objections to the recommendation. On August 3, 2022, the Plaintiffs filed a response to those objections. On August 16, 2022, the district court granted the Plaintiffs’ motion to remand, and all Defendants appealed. Oral argument on this motion in front of the United States Fifth Circuit Court of Appeals took place on April 4, 2023, and on September 1, 2023, the Fifth Circuit panel affirmed the District Court order to remand the case back to state court. On September 29, 2023, all Defendants-Appellants filed a Petition for Rehearing En Banc, which the Plaintiffs-Appellees opposed on October 12, 2023. As a result of Defendants’ petition, the Fifth Circuit held its mandate, effectively staying the effective date of its decision, but the Fifth Circuit ultimately denied the petition for rehearing on February 22, 2024, sending the case back to the 19th Judicial District Court for the Parish of East Baton Rouge, where the case remains pending. All Defendants have filed pleading-stage motions to dismiss, some of which were granted. The Court is allowing plaintiffs to re-plead certain claims and has severed the claims brought by the Division of Administration from the claims brought by the parish Sheriffs and Districts. The assets of the S&S business were acquired from South Pointe by the Company in 2018 for $ 17,000 , including upfront cash consideration and contingent consideration, and provides software and payments services within the Company’s Public Sector vertical to local government agencies almost exclusively in Louisiana. The Company is unable to predict the outcome of this litigation. While we do not believe that this matter will have a material adverse effect on our business or financial condition, we cannot give assurance that this matter will not have a material effect on our results of operations or cash flows for the period in which it is resolved. 124 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) 17. RELATED PARTY TRANSACTIONS In connection with the Company's IPO, the Company and i3 Verticals, LLC entered into a Tax Receivable Agreement with the Continuing Equity Owners that provides for the payment by the Company to the Continuing Equity Owners of 85 % of the amount of certain tax benefits, if any, that it actually realizes, or in some circumstances, is deemed to realize in its tax reporting, as a result of (i) future redemptions funded by the Company or exchanges, or deemed exchanges in certain circumstances, of Common Units of i3 Verticals, LLC for Class A common stock of i3 Verticals, Inc. or cash, and (ii) certain additional tax benefits attributable to payments made under the Tax Receivable Agreement. See Note 12 for further information. As of September 30, 2024, the total amount due under the Tax Receivable Agreement was $ 39,197 . 18. SEGMENTS The Company determines its operating segments based on ASC 280, Segment Reporting , in alignment with how the chief operating decision making group monitors and manages the performance of the business as well as the level at which financial information is reviewed. The Company’s operating segments are strategic business units that offer different products and services. As noted above, on September 20, 2024, the Company completed the transactions contemplated by the Purchase Agreement dated June 26, 2024, and sold the equity interests of the Acquired Entities comprising the Merchant Services Business. The Merchant Services Business comprised the Company's entire former Merchant Services segment and a small portion of the Company's former Software and Services segment. As a result of the sale of the Merchant Services Business, the historical results of the Merchant Services Business have been reflected as discontinued operations in our consolidated financial statements, and the Company no longer presents a Merchant Services segment. See Note 2 to our consolidated financial statements for additional information. After giving effect to these developments, the Company's core business for continuing operations is delivering seamlessly software solutions integrated with our proprietary payment facilitator platform to customers in strategic vertical markets. The Company has since updated its segmentation, and the core business consists of two new operating segments and reportable segments, Public Sector and Healthcare. The Public Sector has products and solutions that create an efficient flow of information throughout a variety of public sector entities. We serve customers at both the state and local level and our geographic reach covers most of the United States and some of Canada. Our solutions help our customers provide more responsive and efficient services to their citizens and stakeholders. The Healthcare segment is dedicated to delivering integrated solutions across the healthcare ecosystem, catering to providers and payers, with a strong emphasis on enhancing process efficiency and ensuring compliance. The Other category includes corporate overhead expenses, technology resources shared across segments and inter-segment eliminations. The Company has since updated its intercompany transactions and allocations to adhere to the updated segment structure, which includes Public Sector intercompany, Healthcare intercompany, and intercompany locations within its business. As described above, these transactions include, but are not limited to, resources shared across segments and also exist to eliminate revenue and cost between components that should not be included on a consolidated basis. Although our intercompany structure and allocations have changed due to our updated segments, this reporting is consistent with our accounting policies from prior periods. 125 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) The Company primarily uses adjusted EBITDA margin to measure operating performance and for purposes of making decisions about allocating resources to our business segments. The following is a summary of reportable segment operating performance for continuing operations for the years ended September 30, 2024, 2023 and 2022. As of and for the Year ended September 30, 2024 Public Sector Healthcare Other Total Revenue $ 184,841 $ 45,566 $ ( 484 ) $ 229,923 Other costs of services 16,125 2,932 ( 484 ) 18,573 Recurring cash SG&A expenses (1) 95,500 33,622 23,920 153,042 Total adjusted EBITDA $ 73,216 $ 9,012 $ ( 23,920 ) $ 58,308 Adjusted EBITDA Margin (2) 40 % 20 % n/m Non-recurring or non-cash SG&A expenses Stock compensation expense $ 18,178 M&A-related expenses 3,161 Other taxes and one-time expenses 2,009 Depreciation and amortization 28,796 Change in fair value of contingent consideration ( 690 ) Income from operations 6,854 Other expenses Interest expense, net 29,263 Other income ( 3,395 ) Total other expenses 25,868 Loss before income taxes $ ( 19,014 ) Total assets $ 490,328 $ 90,801 $ 149,546 $ 730,675 Goodwill $ 233,850 $ 46,828 $ — $ 280,678 n/m = not meaningful ____________________ 1. Recurring cash SG&A expenses represents recurring operating costs such as people, technology, facilities, sales and marketing. 2. Adjusted EBITDA Margin represents adjusted EBITDA as a percentage of revenue. 126 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) As of and for the Year ended September 30, 2023 Public Sector Healthcare Other Total Revenue $ 182,214 $ 44,583 $ ( 75 ) $ 226,722 Other costs of services 13,326 2,103 ( 74 ) 15,355 Recurring cash SG&A expenses (1) 95,397 33,242 23,329 151,968 Total adjusted EBITDA $ 73,491 $ 9,238 $ ( 23,330 ) $ 59,399 Adjusted EBITDA Margin (2) 40 % 21 % n/m Non-recurring or non-cash SG&A expenses Stock compensation expense $ 23,723 M&A-related expenses 1,140 Other taxes and one-time expenses 900 Depreciation and amortization 26,438 Change in fair value of contingent consideration 10,767 Loss from operations ( 3,569 ) Other expenses Interest expense, net 25,128 Other income ( 1,224 ) Total other expenses 23,904 Loss before income taxes $ ( 27,473 ) Total assets $ 482,602 $ 96,918 $ 68,274 $ 647,794 Goodwill $ 221,155 $ 46,828 $ — $ 267,983 n/m = not meaningful ____________________ 1. Recurring cash SG&A expenses represents recurring operating costs such as people, technology, facilities, sales and marketing. 2. Adjusted EBITDA Margin represents adjusted EBITDA as a percentage of revenue. 127 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) As of and for the Year ended September 30, 2022 Public Sector Healthcare Other Total Revenue $ 143,951 $ 43,823 $ ( 22 ) $ 187,752 Other costs of services 11,162 1,729 ( 57 ) 12,834 Recurring cash SG&A expenses (1) 78,280 32,948 20,202 131,430 Total adjusted EBITDA $ 54,509 $ 9,146 $ ( 20,167 ) $ 43,488 Adjusted EBITDA Margin (2) 38 % 21 % n/m Non-recurring or non-cash SG&A expenses Stock compensation expense $ 22,655 M&A-related expenses 2,101 Other taxes and one-time expenses 480 Depreciation and amortization 19,330 Change in fair value of contingent consideration 22,063 Income from operations ( 23,141 ) Other expenses Interest expense, net 14,775 Other expense 991 Total other expenses 15,766 Loss before income taxes $ ( 38,907 ) Total assets $ 373,353 $ 108,950 $ 56,699 $ 539,002 Goodwill $ 168,095 $ 46,828 $ — $ 214,923 n/m = not meaningful ____________________ 1. Recurring cash SG&A expenses represents recurring operating costs such as people, technology, facilities, sales and marketing. 2. Adjusted EBITDA Margin represents adjusted EBITDA as a percentage of revenue. The Company has not disclosed expenditures on long-lived assets as such expenditures are not reviewed by or provided to the chief operating decision maker. 128 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) 19. NON-CONTROLLING INTEREST i3 Verticals, Inc. is the sole managing member of i3 Verticals, LLC and as a result, consolidates the financial results of i3 Verticals, LLC and reports a non-controlling interest representing the Common Units of i3 Verticals, LLC held by the Continuing Equity Owners. Changes in i3 Verticals, Inc.’s ownership interest in i3 Verticals, LLC while i3 Verticals, Inc. retains its controlling interest in i3 Verticals, LLC will be accounted for as equity transactions. As such, future redemptions or direct exchanges of Common Units of i3 Verticals, LLC by the Continuing Equity Owners will result in a change in ownership and reduce or increase the amount recorded as non-controlling interest and increase or decrease additional paid-in capital when i3 Verticals, LLC has positive or negative net assets, respectively. As of September 30, 2024, and 2023, respectively, i3 Verticals, Inc. owned 23,882,035 and 23,253,272 of i3 Verticals, LLC's Common Units, representing a 70.4 % and 69.7 % economic ownership interest in i3 Verticals, LLC. The following table summarizes the impact on equity due to changes in the Company's ownership interest in i3 Verticals, LLC: Year ended September 30, 2024 2023 2022 Net income (loss) attributable to non-controlling interest $ 61,789 $ ( 1,841 ) $ ( 6,115 ) Transfers to (from) non-controlling interests: Distributions to non-controlling interest holders ( 25,608 ) — — Redemption of common units in i3 Verticals, LLC ( 576 ) ( 224 ) ( 918 ) Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis 8,470 4,305 11,511 Net transfers to non-controlling interests ( 17,714 ) 4,081 10,593 Change from net income attributable to non-controlling interests and transfers to non-controlling interests $ 44,075 $ 2,240 $ 4,478 129 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) 20. EARNINGS PER SHARE Basic earnings per share of Class A common stock is computed by dividing net income available to i3 Verticals, Inc. by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted earnings per share of Class A common stock is computed by dividing net income available to i3 Verticals, Inc. by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities. The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per share of Class A common stock from continuing operations: Year ended September 30, 2024 2023 2022 Basic and diluted net loss per share: Numerator Net loss $ ( 13,346 ) $ ( 23,685 ) $ ( 39,059 ) Less: Net loss attributable to non-controlling interests ( 4,424 ) ( 7,863 ) ( 11,828 ) Net loss attributable to Class A common stockholders $ ( 8,922 ) $ ( 15,822 ) $ ( 27,231 ) Denominator Weighted average shares of Class A common stock outstanding 23,419,421 23,137,586 22,249,656 Basic and diluted net loss per share (1)(2)(3) $ ( 0.38 ) $ ( 0.68 ) $ ( 1.22 ) ____________________ 1. For the year ended September 30, 2024, all potentially dilutive securities were anti-dilutive, so diluted net loss per share was equivalent to basic net loss per share. The following securities were excluded from the weighted average effect of dilutive securities in the computation of diluted earnings per share of Class A common stock: a. 10,067,399 shares of weighted average Class A common stock, along with the reallocation of net income assuming conversion of these shares, were excluded because the effect would have been anti-dilutive, b. 7,701,564 options to purchase shares of Class A common stock, were excluded because the exercise price of these options exceeded the average market price of our Class A common stock during the period (“out-of-the-money”) and the effect of including them would have been anti-dilutive, and c. 392,343 shares of Class A common stock, resulting from estimated stock option exercises as calculated by the treasury stock method were excluded because the effect of including them would have been anti-dilutive. 2. For the year ended September 30, 2023, all potentially dilutive securities were anti-dilutive, so diluted net loss per share was equivalent to basic net loss per share. The following securities were excluded from the weighted average effect of dilutive securities in the computation of diluted earnings per share of Class A common stock: a. 10,109,247 shares of weighted average Class A common stock, along with the reallocation of net income assuming conversion of these shares, were excluded because the effect would have been anti-dilutive, b. 5,580,144 options to purchase shares of Class A common stock, were excluded because the exercise price of these options exceeded the average market price of our Class A common stock during the period (“out-of-the-money”) and the effect of including them would have been anti-dilutive, and c. 723,898 shares of Class A common stock, resulting from estimated stock option exercises as calculated by the treasury stock method were excluded because the effect of including them would have been anti-dilutive. 3. For the year ended September 30, 2022, all potentially dilutive securities were anti-dilutive, so diluted net loss per share was equivalent to basic net loss per share. The following securities were excluded from the weighted average effect of dilutive securities in the computation of diluted earnings per share of Class A common stock: a. 10,170,668 shares of weighted average Class A common stock, along with the reallocation of net income assuming conversion of these shares, were excluded because the effect would have been anti-dilutive, b. 4,580,844 options to purchase shares of Class A common stock, were excluded because the exercise price of these options exceeded the average market price of our Class A common stock during the period (“out-of-the-money”) and the effect of including them would have been anti-dilutive, and c. 679,858 shares of Class A common stock, resulting from estimated stock option exercises as calculated by the treasury stock method were excluded because the effect of including them would have been anti-dilutive. 130 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per share of Class A common stock from discontinued operations: Year ended September 30, 2024 2023 2022 Basic net income per share: Numerator Net income $ 188,476 $ 21,033 $ 15,842 Less: Net income attributable to non-controlling interests 66,213 6,022 5,713 Net income attributable to Class A common stockholders $ 122,263 $ 15,011 $ 10,129 Denominator Weighted average shares of Class A common stock outstanding 23,419,421 23,137,586 22,249,656 Basic net income per share $ 5.22 $ 0.65 $ 0.46 Dilutive net loss per share: Numerator Net income attributable to Class A common stockholders $ 122,263 $ 15,011 $ 10,129 Reallocation of net income assuming conversion of common units (1) 50,342 4,549 4,290 Net income attributable to Class A common stockholders - diluted $ 172,605 $ 19,560 $ 14,419 Denominator Weighted average shares of Class A common stock outstanding 23,419,421 23,137,586 22,249,656 Weighted average effect of dilutive securities (2) 10,459,742 10,833,145 10,850,526 Weighted average shares of Class A common stock outstanding - diluted 33,879,163 33,970,731 33,100,182 Diluted net income per share $ 5.09 $ 0.58 $ 0.44 __________________________ 1. The reallocation of net income assuming conversion of common units represents the tax effected net income attributable to non-controlling interest using the effective income tax rates described in Note 12 above and assuming all common units of i3 Verticals, LLC were exchanged for Class A common stock at the beginning of the period. The common units of i3 Verticals, LLC held by the Continuing Equity Owners are potentially dilutive securities, and the computations of pro forma diluted net income per share assume that all common units of i3 Verticals, LLC were exchanged for shares of Class A common stock at the beginning of the period. 2. For the years ended September 30, 2024, 2023 and 2022 the following securities were excluded from the weighted average effect of dilutive securities in the computation of diluted net income per share of Class A common stock: a. 7,701,564 , 5,580,144 and 4,580,844 stock options for years ended September 30, 2024, 2023 and 2022, respectively, were excluded because the exercise price of these stock options exceeded the average market price of our Class A common stock during the period (“out-of-the-money”) and the effect of including them would have been anti-dilutive. Since in September 2022 the Company made the irrevocable election to settle the principal portion of its Exchangeable Notes only in cash, the Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will have a dilutive impact on diluted net income per share of common stock when the average market price of the Company's Class A common stock for a given period exceeds the exchange price of $ 40.87 per share for the Exchangeable Notes. The Warrants sold in connection with the issuance of the Exchangeable Notes are considered to be dilutive when the average price of the Company's Class A common stock during the period exceeds the Warrants' stock price of $ 62.88 per share. The effect of the additional shares that may be issued upon exercise of the Warrants will be included in the weighted average shares of Class A common stock outstanding—diluted using the treasury stock method. The Note Hedge Transactions purchased in connection with the issuance of the Exchangeable Notes are considered to be anti-dilutive and therefore do not impact our calculation of diluted net income per share. Refer to Note 11 for further discussion regarding the Exchangeable Notes. 131 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) Shares of the Company's Class B common stock do not participate in the earnings or losses of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented. 21. SIGNIFICANT NON-CASH TRANSACTIONS The Company engaged in the following significant non-cash investing and financing activities during the years ended September 30, 2024, 2023, and 2022, which are reported on a consolidated basis. See Note 2 for significant non-cash investing and financing activities from discontinued operations for major captions on the consolidated financial statements. Year ended September 30, 2024 2023 2022 Restricted Class A common stock issued as part of acquisition purchase consideration (Note 5) $ 7,517 $ 2,000 $ — Acquisition date fair value of contingent consideration in connection with business combinations $ 2,130 $ 760 $ 6,281 Residual buyouts financed through principal and interest forgiveness of a loan $ — $ 5,860 $ — Replacement of the Prior Senior Secured Credit Facility with the 2023 Senior Secured Credit Facility $ — $ 284,000 $ — Debt issuance costs financed with proceeds from the 2023 Senior Secured Credit Facility $ — $ 2,386 $ — Accrued interest financed with proceeds from the 2023 Senior Secured Credit Facility $ — $ 1,617 $ — Right-of-use assets obtained in exchange for operating lease obligations $ 2,605 $ 927 $ 7,846 132 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) 22. QUARTERLY INFORMATION (UNAUDITED) The tables below present summarized unaudited quarterly results of operations for the years ended September 30, 2024 and 2023. Management believes that all necessary adjustments have been included in the amounts stated below for a fair presentation of the results of operations for the periods presented when read in conjunction with the consolidated financial statements for the years ended September 30, 2024 and 2023. Results of operations for a particular quarter are not necessarily indicative of results of operations for an annual period and are not predictive of future periods. Three Months Ended September 30, June 30, March 31, December 31, Fiscal Year 2024: Revenue $ 60,864 $ 56,037 $ 57,968 $ 55,054 Other costs of services 5,033 4,722 4,703 4,115 Income (loss) from operations 3,554 ( 669 ) 2,486 1,485 Net income (loss) from continuing operations attributable to i3 Verticals, Inc. 6,329 ( 10,656 ) ( 1,709 ) ( 2,885 ) Net income from discontinued operations attributable to i3 Verticals, Inc. 111,581 3,111 3,587 3,983 Net income attributable to i3 Verticals, Inc. $ 117,910 $ ( 7,545 ) $ 1,878 $ 1,098 Basic earnings (loss) per share from continuing operations attributable to i3 Verticals, Inc $ 0.27 $ ( 0.45 ) $ ( 0.07 ) $ ( 0.12 ) Diluted earnings (loss) per share from continuing operations attributable to i3 Verticals, Inc. (1)(2)(5) $ 0.20 $ ( 0.45 ) $ ( 0.07 ) $ ( 0.12 ) Basic earnings per share from discontinued operations attributable to i3 Verticals, Inc $ 4.72 $ 0.13 $ 0.15 $ 0.17 Diluted earnings per share from discontinued operations attributable to i3 Verticals, Inc. (3)(4)(5) $ 4.60 $ 0.13 $ 0.15 $ 0.16 Fiscal Year 2023: Revenue $ 58,584 $ 57,260 $ 59,167 $ 51,712 Other costs of services 4,083 3,944 3,990 3,338 Income (loss) from operations 1,255 ( 4,577 ) 313 ( 558 ) Net income (loss) from continuing operations attributable to i3 Verticals, Inc. 569 ( 8,040 ) ( 4,071 ) ( 4,280 ) Net income from discontinued operations attributable to i3 Verticals, Inc. 3,979 2,885 4,107 4,040 Net income attributable to i3 Verticals, Inc. $ 4,548 $ ( 5,155 ) $ 36 $ ( 240 ) Basic earnings (loss) per share from continuing operations attributable to i3 Verticals, Inc. $ 0.02 $ ( 0.35 ) $ ( 0.18 ) $ ( 0.19 ) Diluted loss per share from continuing operations attributable to i3 Verticals, Inc. (1)(2)(5) $ ( 0.02 ) $ ( 0.35 ) $ ( 0.18 ) $ ( 0.19 ) Basic earnings per share from discontinued operations attributable to i3 Verticals, Inc $ 0.17 $ 0.12 $ 0.18 $ 0.18 Diluted earnings per share from discontinued operations attributable to i3 Verticals, Inc. (3)(4)(5) $ 0.13 $ 0.12 $ 0.15 $ 0.16 133 i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) 1. For the three months ended September 30, 2024; June 30, 2024; March 31, 2024; and December 31, 2023 the following securities were excluded from the weighted average effect of dilutive securities in the computation of diluted net earnings per share of Class A common stock from continuing operations: a. 10,032,676 , 10,052,017 , 10,091,604 and 10,093,394 shares of weighted average Class A common stock, along with the reallocation of net income assuming conversion of these shares, for the three months ended September 30, 2024; June 30, 2024; March 31, 2024; and December 31, 2023, respectively, were excluded because the effect would have been anti-dilutive, b. 6,679,386 , 7,764,984 , 7,852,595 and 7,496,394 stock options for the three months ended September 30, 2024; June 30, 2024; March 31, 2024; and December 31, 2023, respectively, were excluded because the exercise price of these stock options exceeded the average market price of our Class A common stock during the period (“out-of-the-money”) and the effect of including them would have been anti-dilutive, and c. 479,859 , 234,503 , 387,235 and 467,777 shares of Class A common stock, resulting from estimated stock option exercises as calculated by the treasury stock method for the three months ended September 30, 2024; June 30, 2024; March 31, 2024; and December 31, 2023, respectively, were excluded because the effect of including them would have been anti-dilutive. 2. For the three months ended September 30, 2023; June 30, 2023; March 31, 2023; and December 31, 2022 the following securities were excluded from the weighted average effect of dilutive securities in the computation of diluted net earnings per share of Class A common stock from continuing operations: a. 10,099,678 , 10,108,218 , 10,110,975 and 10,118,142 shares of weighted average Class A common stock, along with the reallocation of net income assuming conversion of these shares, for the three months ended September 30, 2023; June 30, 2023; March 31, 2023; and December 31, 2022, respectively, were excluded because the effect would have been anti-dilutive, b. 5,672,144 , 5,729,321 , 4,018,042 and 5,652,711 stock options for the three months ended September 30, 2023; June 30, 2023; March 31, 2023; and December 31, 2022, respectively, were excluded because the exercise price of these stock options exceeded the average market price of our Class A common stock during the period (“out-of-the-money”) and the effect of including them would have been anti-dilutive, and c. 675,004 , 557,728 , 1,022,267 and 696,427 shares of Class A common stock, resulting from estimated stock option exercises as calculated by the treasury stock method for the three months ended September 30, 2023; June 30, 2023; March 31, 2023; and December 31, 2022, respectively, were excluded because the effect of including them would have been anti-dilutive. 3. For the three months ended September 30, 2024; June 30, 2024; March 31, 2024; and December 31, 2023 the following securities were excluded from the weighted average effect of dilutive securities in the computation of diluted net income per share of Class A common stock from discontinued operations: a. 10,052,017 and 10,091,604 shares of weighted average Class A common stock, along with the reallocation of net income assuming conversion of these shares, for the three months ended June 30, 2024 and March 31, 2024, respectively, were excluded because the effect would have been anti-dilutive, b. 6,679,386 , 7,764,984 , 7,852,595 and 7,496,394 stock options for the three months ended September 30, 2024; June 30, 2024; March 31, 2024; and December 31, 2023, respectively, were excluded because the exercise price of these stock options exceeded the average market price of our Class A common stock during the period (“out-of-the-money”) and the effect of including them would have been anti-dilutive. 4. For the three months ended September 30, 2023; June 30, 2023; March 31, 2023; and December 31, 2022 the following securities were excluded from the weighted average effect of dilutive securities in the computation of diluted net income per share of Class A common stock from discontinued operations: a. 10,108,218 shares of weighted average Class A common stock, along with the reallocation of net income assuming conversion of these shares, for the three months ended June 30, 2023, were excluded because the effect would have been anti-dilutive, b. 5,672,144 , 5,729,321 , 4,018,042 and 5,652,711 stock options for the three months ended September 30, 2023; June 30, 2023; March 31, 2023; and December 31, 2022, respectively, were excluded because the exercise price of these stock options exceeded the average market price of our Class A common stock during the period (“out-of-the-money”) and the effect of including them would have been anti-dilutive. 5. The reallocation of net income assuming conversion of common units represents the tax effected net income attributable to non-controlling interest using the effective income tax rates described in Note 9 above and assuming all common units of i3 Verticals, LLC were exchanged for Class A common stock at the beginning of the period. The common units of i3 Verticals, LLC held by the Continuing Equity Owners are potentially dilutive securities, and the computations of pro forma diluted net income per share assume that all common units of i3 Verticals, LLC were exchanged for shares of Class A common stock at the beginning of the period. 134 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None.