I3 VERTICALS, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our audited financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those under the heading "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K. Certain amounts in this section may not foot due to rounding. 50 -------------------------------------------------------------------------------- Executive Overview Recognizing the convergence of software and payments,i3 Verticals was founded in 2012 with the purpose of delivering seamlessly integrated payment and software solutions to SMBs and organizations in strategic vertical markets. Since commencing operations, we have built a broad suite of payment and software solutions that address the specific needs of SMBs and other organizations in our strategic vertical markets, and we believe our suite of solutions differentiates us from our competition. Our primary strategic vertical markets include education, non-profit, public sector and healthcare. COVID-19 InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughoutthe United States and other parts of the world. The spread of COVID-19 and its variant strains brought about many precautions at the state and local government levels to mitigate the spread of the virus, including the closure of local government facilities and parks, schools, restaurants, many businesses and other locations of public assembly. Throughout fiscal 2020 and 2021 governments have imposed and reimposed restrictions in response to increased transmission rates of COVID-19 and eased such restrictions once the transmission rates declined across multiple cycles. The COVID-19 pandemic significantly affected overall economic conditions inthe United States . The economic impact of these conditions materially impacted our business. Our payment volume fluctuated as a result of the impact of the COVID-19 pandemic. Despite positive developments, such as the availability of vaccines, there are no reliable estimates of how long the pandemic will continue, how many people are likely to be affected by it or the duration or types of restrictions that will be imposed. For that reason, we are unable to predict the long-term impact of COVID-19 and its variant strains on our business at this time. Acquisitions A core component of our growth strategy includes a disciplined approach to acquisitions of companies and technology, evidenced by numerous platform acquisitions and tuck-in acquisitions since our inception in 2012. Our acquisitions have opened new strategic vertical markets, increased the number of businesses and organizations to whom we provide solutions and augmented our existing payment and software solutions and capabilities. Acquisitions subsequent toSeptember 30, 2021 Subsequent toSeptember 30, 2021 , we completed the acquisition of one business within theCompany's Healthcare vertical that provides comprehensive revenue cycle management and related administrative and consulting services for hospitals, including academic teaching institutions with residents, practice groups and healthcare providers primarily in the southeast. Total purchase consideration included 60,000 in cash and revolving line of credit proceeds, and an amount of contingent consideration, which is still being valued. Acquisitions during the year endedSeptember 30, 2021 OnNovember 17, 2020 , we completed the acquisition of substantially all of the assets ofImageSoft, Inc. to expand our software offerings, primarily in the public sector vertical. Total purchase consideration was$46.3 million , including$40.0 million in cash consideration, funded by proceeds from our revolving credit facility, and$6.3 million in contingent consideration OnFebruary 1, 2021 , we completed the acquisition of substantially all the assets of Business Information Systems, GP, aTennessee general partnership andBusiness Information Systems, Inc. , aTennessee corporation (collectively "BIS") to expand our software offerings, primarily in the Public Sector vertical. Total purchase consideration was$95.5 million , including$52.5 million in cash on hand and proceeds from the Company's revolving credit facility, 1,202,914 shares of the Company's Class A Common Stock, and$7.8 million in contingent consideration. During the year endedSeptember 30, 2021 , we also completed the acquisitions of six unrelated businesses, to expand the Company's software offerings in the public sector and healthcare vertical markets, and to add proprietary technology that will augment the Company's existing platform across several verticals. Total purchase consideration was$65.5 million , including$57.0 million in revolving credit facility proceeds, and$8.5 million of contingent consideration. 51 -------------------------------------------------------------------------------- Acquisitions during the year endedSeptember 30, 2020 During the year endedSeptember 30, 2020 , we completed the acquisitions of three unrelated businesses. Two expanded our geographic reach and software capabilities in the public sector vertical. The other added text-to-pay capabilities and other software solutions in our non-profit vertical. Total purchase consideration was$32.6 million , including$27.9 million in revolving credit facility proceeds and$4.7 million of contingent consideration. The results of operations of these acquired businesses have been included in our financial statements since the applicable acquisition date. For additional information, see Note 4 to our consolidated financial statements. Our Revenue and Expenses Revenues We generate revenue from software licenses and subscriptions, other software related services, and volume-based payment processing fees ("discount fees"), and to a lesser extent, software licensing subscriptions, ongoing support and other POS-related solutions that we provide to our clients directly and through our distribution partners. Volume-based fees represent a percentage of the dollar amount of each credit or debit transaction processed. Revenues are also derived from a variety of fixed transaction or service fees, including authorization fees, convenience fees, statement fees, annual fees and fees for other miscellaneous services, such as handling chargebacks. Interchange and network fees. Interchange and network fees consist primarily of pass-through fees that make up a portion of discount fee revenue. These include assessment fees payable to card associations, which are a percentage of the processing volume we generate fromVisa and Mastercard. Upon our adoption ofFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606") onOctober 1, 2019 , these fees are presented net within revenue. Expenses Other costs of services. Other costs of services include costs directly attributable to processing and bank sponsorship costs. These also include related costs such as residual payments to our distribution partners, which are based on a percentage of the net revenues (revenue less interchange and network fees) generated from client referrals. Losses resulting from excessive chargebacks against a client are included in other cost of services. The cost of equipment sold is also included in cost of services. Interchange and other costs of services are recognized at the time the client's transactions are processed. Selling, general and administrative. Selling, general and administrative expenses include salaries and other employment costs, professional services, rent and utilities and other operating costs. Depreciation and amortization. Depreciation expense consists of depreciation on our investments in property, equipment and computer hardware and software. Depreciation expense is recognized on a straight-line basis over the estimated useful life of the asset. Amortization expense for acquired intangible assets and internally developed software is recognized using a proportional cash flow method. Amortization expense for internally developed software is recognized over the estimated useful life of the asset. The useful lives of contract-based intangible assets are equal to the terms of the agreement. Interest expense, net. Our interest expense consists of interest on our outstanding indebtedness under our Senior Secured Credit Facility and Exchangeable Notes, and amortization of debt discount and issuance costs. How We Assess Our Business Merchant Services Our Merchant Services segment provides comprehensive payment solutions to businesses and organizations. Our Merchant Services segment includes third-party integrated payment solutions as well as merchant of record payment services across our strategic vertical markets. 52 --------------------------------------------------------------------------------Proprietary Software and Payments OurProprietary Software and Payments segment delivers embedded payments solutions to our clients through proprietary software. Payments are delivered through both the payment facilitator model and the traditional merchant processing model. We haveProprietary Software and Payments clients across all of our strategic vertical markets. Other Our Other category includes corporate overhead expenses, when presenting reportable segment information. EffectiveJuly 1, 2020 , we realigned one component from theProprietary Software and Payments segment to the Merchant Services segment. Prior periods have been retroactively adjusted to reflect the Company's current segment presentation. For additional information on our segments, see Note 17 to our consolidated financial statements. Key Operating Metrics We evaluate our performance through key operating metrics, including: •the dollar volume of payments our clients process through us ("payment volume"); •the portion of our payment volume that is produced by integrated transactions; and •period-to-period payment volume attrition. Our payment volume for the years endedSeptember 30, 2021 and 2020 was$18.8 billion and$14.4 billion , respectively, representing a period-to-period growth rate of 31%. We focus on volume because it is a reflection of the scale and economic activity of our client base and because a significant part of our revenue is derived as a percentage of our clients' dollar volume receipts. Payment volume reflects the addition of new clients and same store payment volume growth of existing clients, partially offset by client attrition during the period. Integrated payments represents payment transactions that are generated in situations where payment technology is embedded within our own proprietary software, a client's software or critical business process. We evaluate the portion of our payment volume that is produced by integrated transactions because we believe the convergence of software and payments is a significant trend impacting our industry. We believe integrated payments create stronger client relationships with higher payment volume retention and growth. Integrated payments grew to 60% of our payment volume for the year endedSeptember 30, 2021 from 55% for the year endedSeptember 30, 2020 . We measure period-to-period payment volume attrition as the change in card-based payment volume for all clients that were processing with us for the same period in the prior year. We exclude from our calculations payment volume from new clients added during the period. We experience attrition in payment volume as a result of several factors, including business closures, transfers of clients' accounts to our competitors and account closures that we initiate due to heightened credit risks. During the year endedSeptember 30, 2021 , our average net volume attrition per month remained below 1%. 53 -------------------------------------------------------------------------------- Results of Operations Year EndedSeptember 30, 2021 Compared to Year EndedSeptember 30, 2020 The following table presents our historical results of operations for the periods indicated: Year ended September 30, Change (in thousands) 2021 2020 Amount % Revenue$ 224,124 $ 150,134 $ 73,990 49.3 % Operating expenses Other costs of services 57,706 47,230 10,476 22.2 % Selling general and administrative 134,872 78,323 56,549 72.2 % Depreciation and amortization 24,418 18,217 6,201 34.0 % Change in fair value of contingent consideration 7,140 (1,409) 8,549 n/m Total operating expenses 224,136 142,361 81,775 57.4 % (Loss) income from operations (12) 7,773 (7,785) n/m Other expenses Interest expense, net 9,799 8,926 873 9.8 % Other (income) expense (2,595) 2,621 (5,216) n/m Total other expenses 7,204 11,547 (4,343) (37.6) % Loss before income taxes (7,216) (3,774) (3,442) 91.2 % Provision for (benefit from) income taxes 623 (2,795) 3,418 n/m Net loss (7,839) (979) (6,860) 700.7 % Net loss attributable to non-controlling interest (3,382) (560) (2,822) 503.9 % Net loss attributable to i3 Verticals, Inc.$ (4,457) $ (419) $ (4,038) 963.7 %
n/m = not meaningful
Revenue
Revenue increased$74.0 million , or 49.3%, to$224.1 million for the year endedSeptember 30, 2021 from$150.1 million for the year endedSeptember 30, 2020 . This increase was driven by an increase in revenue from existing businesses of$10.4 million , primarily due to an overall increase in consumer spending as a result of recovery from the COVID-19 pandemic. Acquisitions completed during the 2021 and 2020 fiscal years contributed an incremental$63.6 million , net of intercompany eliminations, to our revenue for the year endedSeptember 30, 2021 . Revenue within Merchant Services increased$10.9 million , or 10.8%, to$111.9 million for the year endedSeptember 30, 2021 from$100.9 million for the year endedSeptember 30, 2020 . 54 -------------------------------------------------------------------------------- Revenue withinProprietary Software and Payments increased$63.5 million , or 124.6%, to$114.4 million for the year endedSeptember 30, 2021 from$51.0 million for the year endedSeptember 30, 2020 . This increase was principally driven by acquisitions completed during the 2021 and 2020 fiscal years, in addition to an overall increase in consumer spending, as a result of recovery from the COVID-19 pandemic. Payment volume increased$4.4 billion , or 30.7%, to$18.8 billion for the year endedSeptember 30, 2021 from$14.4 billion for the year endedSeptember 30, 2020 . This increase was principally driven by acquisitions completed during the 2021 and 2020 fiscal years and organic growth prior to the COVID-19 pandemic. Other Costs of Services Other costs of services increased$10.5 million , or 22.2%, to$57.7 million for the year endedSeptember 30, 2021 from$47.2 million for the year endedSeptember 30, 2020 . Acquisitions completed during the 2021 and 2020 fiscal years contributed an incremental$4.6 million , net of inter-segment eliminations, to our other costs of services for the year endedSeptember 30, 2021 . The remaining increase was driven by an increase in revenue from existing businesses of$5.9 million , primarily due to an overall increase in consumer spending as a result of recovery from the COVID-19 pandemic. Other costs of services within Merchant Services increased$7.3 million , or 16.6%, to$51.2 million for the year endedSeptember 30, 2021 from$43.9 million for the year endedSeptember 30, 2020 . This increase was principally driven an increase in other cost of services from existing businesses of$6.6 million as a result of recovery from the COVID-19 pandemic. Other costs of services withinProprietary Software and Payments increased$3.6 million , or 70.3%, to$8.6 million for the year endedSeptember 30, 2021 from$5.1 million for the year endedSeptember 30, 2020 . Acquisitions completed during the 2020 and 2021 fiscal years contributed an incremental$3.9 million , net of intercompany eliminations, to our other cost of sales for the year endedSeptember 30, 2021 . Selling, General and Administrative Expenses Selling, general and administrative expenses increased$56.5 million , or 72.2%, to$134.9 million for the year endedSeptember 30, 2021 from$78.3 million for the year endedSeptember 30, 2020 . This increase was principally driven by a$50.4 million increase in employment expense, primarily resulting from an increase in headcount that resulted from acquisitions and an increase in stock compensation expense. The majority of the remaining increase was comprised of increases in professional services and insurane of$1.7 million and technological services of$1.3 million . Depreciation and Amortization Depreciation and amortization increased$6.2 million , or 34.0%, to$24.4 million for the year endedSeptember 30, 2021 from$18.2 million for the year endedSeptember 30, 2020 . Amortization expense increased$5.7 million to$22.1 million for the year endedSeptember 30, 2021 from$16.4 million for the year endedSeptember 30, 2020 primarily due to greater amortization expense resulting from acquisitions completed during the 2021 and 2020 fiscal years. Depreciation expense increased$0.5 million to$2.3 million for the year endedSeptember 30, 2021 from$1.8 million for the year endedSeptember 30, 2020 . Change in Fair Value of Contingent Consideration Change in fair value of contingent consideration to be paid in connection with acquisitions was a charge of$7.1 million for the year endedSeptember 30, 2021 due to the performance of some of our acquisitions exceeding our expectations. The change in fair value of contingent consideration for the year endedSeptember 30, 2020 was a benefit of$1.4 million . Interest Expense, net Interest expense, net, increased$0.9 million , or 9.8%, to$9.8 million for the year endedSeptember 30, 2021 from$8.9 million for the year endedSeptember 30, 2020 . The increase reflected a higher average outstanding debt balance for the year endedSeptember 30, 2021 as compared to the year endedSeptember 30, 2020 . 55 -------------------------------------------------------------------------------- Other (income) expense Other income was$2.6 million for the year endedSeptember 30, 2021 , relating to a net gain on sales of investments of$2.1 million and adjustments of liabilities under our Tax Receivable Agreement related to the remeasurement of the underlying deferred tax asset for changes in estimated income tax rates of$0.5 million . Other expense was$2.6 million for the year endedSeptember 30, 2020 , relating to a loss on retirement of debt due to the carrying value exceeding the fair value of the repurchased portion of the Exchangeable Notes at the dates of repurchases. Provision for Income Taxes The provision for income taxes increased to$0.6 million for the year endedSeptember 30, 2021 from a benefit of$2.8 million for the year endedSeptember 30, 2020 . As described in Note 2 to our consolidated financial statements, we had a$2.7 million reduction in the valuation allowance on the deferred tax asset related to our investment in partnership and a corresponding increase in the benefit from income taxes in the year endedSeptember 30, 2020 that did not recur in the year endedSeptember 30, 2021 . In addition, current state income tax expense increased for the year endedSeptember 30, 2021 from the year endedSeptember 30, 2020 due to the mix of earnings within the Company. Our effective tax rate of (9)% for the year endedSeptember 30, 2021 differs from the federal statutory rate due to the increase in the valuation allowance, increase in state taxes, and increase in the tax effect of the revaluation of liabilities.i3 Verticals, Inc. is subject to federal, state and local income taxes with respect to its allocable share of any taxable income ofi3 Verticals, LLC and is taxed at the prevailing corporate tax rates. Year EndedSeptember 30, 2020 Compared to Year EndedSeptember 30, 2019 For discussion of our results of operations for fiscal 2020 compared to fiscal 2019, refer to the Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of our Form 10-K for the fiscal year endedSeptember 30, 2020 , filed with theSEC onNovember 23, 2020 . Seasonality We have experienced in the past, and may continue to experience, seasonal fluctuations in our revenues as a result of consumer and business spending patterns. Revenues during the first quarter of the calendar year, which is our second fiscal quarter, tend to decrease in comparison to the remaining three quarters of the calendar year on a same store basis. This decrease is due to the relatively higher number and amount of electronic payment transactions related to seasonal retail events, such as holiday and vacation spending in their second, third and fourth quarters of the calendar year. The number of business days in a month or quarter also may affect seasonal fluctuations. Revenue in our education vertical fluctuates with the school calendar. Revenue for our education customers is strongest in August, September, October, January and February, at the start of each semester, and generally weakens throughout the semester, with little revenue in the summer months of June and July. Operating expenses show less seasonal fluctuation, with the result that net income is subject to the same seasonal factors as our revenues. The growth in our business may have partially overshadowed seasonal trends to date, and seasonal impacts on our business may be more pronounced in the future. Furthermore, we are not able to predict the impact that the COVID-19 pandemic may have on the seasonality of our business. Liquidity and Capital Resources We have historically financed our operations (not including acquisitions) and working capital through net cash from operating activities. As ofSeptember 30, 2021 , we had$3.6 million of cash and cash equivalents and available borrowing capacity of$170.6 million under our Senior Secured Credit Facility, subject to the financial covenants. We usually minimize cash balances by making payments on our revolving credit facility to minimize borrowings and interest expense. As ofSeptember 30, 2021 , we had borrowings outstanding of$104.4 million under the Senior Secured Credit Facility. Our primary cash needs are to fund working capital requirements, invest in our technology infrastructure, fund acquisitions and related contingent consideration, make scheduled principal and interest payments on our outstanding indebtedness and pay tax distributions to members. We historically have had positive cash flow provided by operations. We currently expect that our cash flow from operations, current cash and cash equivalents and available borrowing capacity under the Senior Secured Credit Facility will be sufficient to fund our operations and planned capital expenditures and to service our debt obligations for at least the next twelve months. 56 -------------------------------------------------------------------------------- Material Cash Requirements The following table summarizes our material cash requirements as ofSeptember 30, 2021 related to contracts, leases and borrowings:
Payments Due by Period
Less than 1 More than 5
Material Cash Requirements Total year 1 to 3 years 3 to 5 years years
(in thousands)
Processing minimums(1) $ 7,052 $ 3,912 $ 3,140 $ - $ -
Facility leases 17,916 4,014 6,291 4,142 3,469
Senior Secured Credit Facility
and related interest(2) 107,808 3,579 104,229 - -
Exchangeable Notes and related
interest(3) 120,949 1,170 2,340 117,439 -
Contingent consideration(4) 36,229 25,768 10,461 - -
Total $ 289,954 $ 38,443 $ 126,461 $ 121,581 $ 3,469
__________________________
1.We have non-exclusive agreements with several processors to provide us
services related to transaction processing and transmittal, transaction
authorization and data capture, and access to various reporting tools. Certain
of these agreements require us to submit a minimum monthly number of
transactions for processing. If we submit a number of transactions that is lower
than the minimum, we are required to pay to the processor the fees it would have
received if we had submitted the required minimum number of transactions.
2.We estimated interest payments through the maturity of our Senior Secured
Credit Facility by applying the interest rate of 3.41% in effect on the
outstanding balance as of September 30, 2021 , plus the unused fee rate of 0.30%
in effect as of September 30, 2021 .
3.We calculated interest payments through the maturity of our Exchangeable Notes
by applying the coupon interest rate of 1.00% on the outstanding principal
balance as of September 30, 2021 of $117.0 million .
4.In connection with certain of our acquisitions, we may be obligated to pay the
seller of the acquired entity certain amounts of contingent consideration as set
forth in the relevant purchasing documents, whereby additional consideration may
be due upon the achievement of certain specified financial performance targets.
i3 Verticals, Inc. accounts for the fair values of such contingent payments in
accordance with the Level 3 financial instrument fair value hierarchy at the
close of each subsequent reporting period. The acquisition-date fair value of
contingent consideration is valued using a Monte Carlo simulation. i3 Verticals,
Inc. subsequently reassesses such fair value based on probability estimates with
respect to the acquired entity's likelihood of achieving the respective
financial performance targets.
Potential payments under the Tax Receivable Agreement are not reflected in this
table. See "-Tax Receivable Agreement" below.
Tax Receivable Agreement
We are a party to a Tax Receivable Agreement with i3 Verticals, LLC and each of
the Continuing Equity Owners, as described in Note 11 of our consolidated
financial statements. As a result of the Tax Receivable Agreement, we have been
required to establish a liability in our consolidated financial statements. That
liability, which will increase upon the redemptions or exchanges of Common Units
for our Class A common stock, generally represents 85% of the estimated future
tax benefits, if any, relating to the increase in tax basis associated with the
Common Units we received as a result of the Reorganization Transactions and
other redemptions or exchanges by holders of Common Units. If this election is
made, the accelerated payment will be based on the present value of 100% of the
estimated future tax benefits and, as a result, the associated liability
reported on our consolidated financial statements may be increased. We expect
that the payments required under the Tax Receivable Agreement will be
substantial. The actual increase in tax basis, as well as the amount and timing
of any payments under the Tax Receivable Agreement, will vary depending upon a
number of factors, including the timing of redemptions or exchanges by the
holders of Common Units, the price of our Class A common stock at the time of
the redemption or exchange, whether such redemptions or exchanges are taxable,
the amount and timing of the taxable income we generate in the future and the
tax rate then applicable as well as the portion of our payments under the Tax
Receivable Agreement constituting imputed interest. We intend to fund the
payment of the amounts due under the Tax Receivable Agreement out of the cash
savings that we actually realize in respect of the attributes to which Tax
Receivable Agreement relates.
57
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As of September 30, 2021 , the total amount due under the Tax Receivable
Agreement was $39.1 million , and payments to the Continuing Equity Owners
related to exchanges through September 30, 2021 will range from approximately $0
to $3.2 million per year and are expected to be paid over the next 25 years. The
amounts recorded as of September 30, 2021 , 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.
Our liquidity profile reflects our completed offering in February 2020 of an
aggregate principal amount of $138.0 million in 1.0% Exchangeable Senior Notes
due 2025, with substantially all the proceeds being used to pay down outstanding
borrowings under our Senior Secured Credit Facility, as well as our September
2020 Public Offering as described below under the heading "Follow-on Offerings."
During the year ended September 30, 2020 , we repurchased $21.0 million in
aggregate principal amount of the Exchangeable Notes for an aggregate purchase
price of approximately $17.4 million . We recorded a loss on retirement of debt
of $2.3 million due to the carrying value exceeding the fair value of the
repurchased portion of the Exchangeable Notes at the dates of repurchases. We
may elect from time to time to purchase our outstanding debt in open market
purchases, privately negotiated transactions or otherwise. Any such debt
repurchases will depend upon prevailing market conditions, our liquidity
requirements, contractual restrictions, applicable securities law and other
factors.
As amended on February 18, 2020 in connection with our offering of Exchangeable
Notes, our Senior Secured Credit Facility requires us to maintain a consolidated
interest coverage ratio not less than 3.00 to 1.00, a total leverage ratio not
exceeding 5.00 to 1.00 and a consolidated senior secured leverage ratio not
exceeding 3.25 to 1.00, provided that for each of the four fiscal quarters
immediately following a qualified acquisition, the total leverage ratio and the
consolidated senior secured leverage ratio would increase by up to 0.25, subject
to certain limitations. As of September 30, 2021 , we were in compliance with
these covenants with a consolidated interest coverage ratio, total leverage
ratio and consolidated senior leverage ratio of 10.3x, 3.5x and 1.6x,
respectively. Although we believe our liquidity position remains strong, there
can be no assurance that we will be able to raise additional funds, in the form
of debt or equity, or to amend our Senior Secured Credit Facility on terms
acceptable to us, if at all, even if we determined such actions were necessary
in the future.
Any material adverse change in client demand and our ability to retain clients,
competitive market forces, or uncertainties caused by the COVID-19 pandemic, as
well as other factors listed under the heading "Note Regarding Forward-looking
Statements," and in our risk factors included herein could affect our ability to
continue to fund our liquidity needs from business operations.
Cash Flows
The following table presents a summary of cash flows from operating, investing
and financing activities for the following comparative periods.
Year Ended September 30, 2021 Compared to Year Ended September 30, 2020
Year ended September 30,
2021 2020
(in thousands)
Net cash provided by operating activities $ 46,774 $ 23,720
Net cash used in investing activities
$ 29,112
Cash Flow from Operating Activities Net cash provided by operating activities increased$23.1 million to$46.8 million for the year endedSeptember 30, 2021 from$23.7 million for the year endedSeptember 30, 2020 . While our net loss increased$6.9 million for the year endedSeptember 30, 2021 from the year endedSeptember 30, 2020 , most of this increase was driven by non-cash expenses that do not impact cash flows from operating activities. The increase in net cash provided by operating activities was due to comparatively higher increases for the year endedSeptember 30, 2021 from the year endedSeptember 30, 2020 in equity-based compensation of$10.4 million , liabilities for non-cash contingent consideration of$8.5 million , depreciation and amortization of$6.2 million , benefit from deferred income taxes of$2.9 million and debt discount and issuance cost amortization of$1.7 million , partially 58 -------------------------------------------------------------------------------- offset by the loss on the repurchase of Exchangeable Notes of$2.3 million recognized during the year endedSeptember 30, 2020 and net gain on sale of investments of$2.1 million recognized during the year endedSeptember 30, 2021 . Operating assets and liabilities increased$1.4 million , which are impacted by the timing of collections and payments. Cash Flow from Investing Activities Net cash used in investing activities increased$120.9 million to$156.3 million for the year endedSeptember 30, 2021 from$35.4 million for the year endedSeptember 30, 2020 . The increase in net cash used in investing activities was primarily driven by an increase of$121.8 million in cash used in acquisitions, net of cash acquired, and an increase of$3.3 million in expenditures for capitalized software. These increases were partially offset by$3.2 million in proceeds received from sales of investments during the year endedSeptember 30, 2021 , and a decrease of$1.0 million in expenditures for property and equipment for the year endedSeptember 30, 2021 compared to the year endedSeptember 30, 2020 . Cash Flow from Financing Activities Net cash provided by financing activities increased$73.0 million to$102.1 million for the year endedSeptember 30, 2021 from$29.1 million for the year endedSeptember 30, 2020 . The increase in net cash provided by financing activities was primarily the result of an increase in proceeds from the revolving credit facility of$130.7 million and a decrease in payments on the revolving credit facility of$114.8 million for the year endedSeptember 30, 2021 from the year endedSeptember 30, 2020 . Additionally, we made payments for purchases of exchangeable senior note hedges of$28.7 million , payments for the repurchase of Exchangeable Notes of$17.4 million , payments for Common Units ini3 Verticals, LLC from selling unitholders of$10.9 million and payments of debt issuances costs of$5.3 million during the year endedSeptember 30, 2020 that did not recur in the year endedSeptember 30, 2021 . These increases in net cash provided by financing activities were partially offset by proceeds from borrowings on exchangeable notes of$138.0 million , proceeds from issuance of Class A common stock sold in public offerings of$82.9 million and proceeds from issuance of warrants of$14.7 million during the year endedSeptember 30, 2020 that did not recur in the year endedSeptember 30, 2021 . Year EndedSeptember 30, 2020 Compared to Year EndedSeptember 30, 2019 For a discussion of the cash flows for the year endedSeptember 30, 2020 compared to the year endedSeptember 30, 2019 , refer to Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" in our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2020 , which was filed with theSecurities and Exchange Commission onNovember 23, 2020 . 59 -------------------------------------------------------------------------------- Senior Secured Credit Facility OnMay 9, 2019 , we replaced our then existing credit facility (the "2017 Senior Secured Credit Facility") with a new Amended and Restated Credit Agreement with the guarantors and lenders party thereto andBank of America, N.A ., as administrative agent (the "Senior Secured Credit Facility"). For a discussion of our existing 2017 Senior Secured Credit Facility, which consisted of$40.0 million in term loans and a$110.0 million revolving line of credit, please refer to Note 10 to the accompanying consolidated financial statements in this Annual Report on Form 10-K. The Senior Secured Credit Facility, as amended onFebruary 18, 2020 in connection with our offering of Exchangeable Notes, provides for aggregate commitments of$275.0 million in the form of a senior secured revolving credit facility. The Senior Secured Credit Facility provides that we have the right to seek additional commitments to provide additional term loan facilities or additional revolving credit commitments in an aggregate principal amount up to$50.0 million so long as, among other things, after giving pro forma effect to the incurrence of such additional borrowings and any related transactions, our consolidated interest coverage ratio would not be less than 3.00 to 1.00, our total leverage ratio would not exceed 5.00 to 1.00 and our consolidated senior leverage ratio would not exceed 3.25 to 1.00, provided that for each of the four fiscal quarters immediately following a qualified acquisition, the total leverage ratio and the consolidated senior secured leverage ratio would increase by up to 0.25, subject to certain limitations. 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 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 Senior Secured Credit Facility, together with proceeds from any additional amounts under the additional term loan facilities or additional revolving credit commitments, may only be used by us to (i) finance working capital, capital expenditures and other lawful corporate purposes, (ii) finance permitted acquisitions and (iii) to refinance certain existing indebtedness. Borrowings under the Senior Secured Credit Facility will be made, at our option, at the base rate or the Eurodollar rate, plus, in each case, an applicable margin. The base rate is a fluctuating rate of interest per annum equal to the highest of (a) the federal funds rate plus ½ of 1%, (b) the interest announced from time to time byBank of America as its prime rate and (c) the Eurodollar rate plus 1%. The Eurodollar rate will be the rate of interest per annum equal to LIBOR (based upon an interest period of one, two, three or six months or, under some circumstances, up to twelve months). The applicable margin is based upon our consolidated total leverage ratio, as reflected in the schedule below: Consolidated Total Leverage Ratio Commitment Fee Letter of Credit Fee Eurodollar Rate Loans Base Rate Loans > 3.00 to 1.0 0.30% 3.25% 3.25% 1.25% > 2.50 to 1.0 but < 3.00 to 1.0 0.25% 2.75% 2.75% 0.75% > 2.00 to 1.0 but < 2.50 to 1.0 0.20% 2.50% 2.50% 0.50% < 2.00 to 1.0 0.15% 2.25% 2.25% 0.25% In addition to paying interest on outstanding principal under the Senior Secured Credit Facility, we will be required to pay a commitment fee equal to the product of between 0.15% and 0.30% (the applicable percentage depending on our consolidated total leverage ratio as reflected in the schedule above) times the actual daily amount by which$275.0 million exceeds the total amount outstanding under the Senior Secured Credit Facility and available to be drawn under all outstanding letters of credit. We will be permitted to voluntarily reduce the unutilized portion of the commitment amount and repay outstanding loans under the Senior Secured Credit Facility, whether such amounts are issued under the Senior Secured Credit Facility or under the additional term loan facilities or additional revolving credit facilities, at any time without premium or penalty. 60 -------------------------------------------------------------------------------- In addition, if the total amount borrowed under the Senior Secured Credit Facility exceeds$275.0 million at any time, the Senior Secured Credit Facility requires us to prepay such excess outstanding amounts. All obligations under the Senior Secured Credit Facility are unconditionally guaranteed byi3 Verticals, Inc. , aDelaware corporation, and each ofi3 Verticals, Inc.'s existing and future direct and indirect material, wholly owned domestic restricted subsidiaries, subject to certain exceptions. The obligations are secured by first-priority security interests in substantially all of our tangible and intangible assets,i3 Verticals, Inc. and each subsidiary guarantor, in each case whether owned on the date of the initial borrowings or thereafter acquired. The Senior Secured Credit Facility places certain restrictions on the ability of us,i3 Verticals, Inc. and their restricted 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 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 ERISA events, invalidity of loan documents and certain changes in control. As ofSeptember 30, 2021 , we were in compliance with these covenants with a consolidated interest coverage ratio, total leverage ratio and consolidated senior leverage ratio of 10.3x, 3.5x and 1.6x, respectively. Follow-on Offerings OnJune 10, 2019 , we completed theJune 2019 Secondary Public Offering of 5,165,527 shares of our Class A common stock, at a public offering price of$22.75 per share, which included a full exercise of the underwriters' option to purchase 673,764 additional shares of Class A common stock from us. We received approximately$111.6 million of net proceeds, after deducting underwriting discounts and commissions, but before offering expenses. We used the net proceeds to purchase (1) 1,000,000 Common Units directly fromi3 Verticals, LLC , and (2) 4,165,527 Common Units (including 673,764 Common Units due to the exercise of the underwriters' option to purchase additional shares in full) and an equivalent number of Class B common stock (which shares were then canceled) from certain Continuing Equity Owners, in each case at a price per Common Unit equal to the price per share paid by the underwriters for shares of our Class A common stock in the offering.i3 Verticals, LLC received$20.9 million in net proceeds from the sale of Common Units to us, which we used to repay outstanding indebtedness. In connection with this offering, we recognized an additional deferred tax asset of$26.2 million related to the Tax Receivable Agreement and a corresponding liability of$22.2 million . OnSeptember 15, 2020 , we completed a public offering (the "September 2020 Public Offering") of 3,737,500 shares of our Class A common stock, at a public offering price of$23.50 per share, which included a full exercise of the underwriters' option to purchase 487,500 additional shares of Class A common stock from us. We received approximately$83.4 million of net proceeds, after deducting underwriting discounts and commissions, but before offering expenses. We used the net proceeds to purchase (1) 3,250,000 Common Units directly fromi3 Verticals, LLC , and (2) 487,500 Common Units pursuant to the exercise of the underwriters' option to purchase additional shares in full and an equivalent number of Class B common stock (which shares were then canceled) from certain Continuing Equity Owners, in each case at a price per Common Unit equal to the price per share paid by the underwriters for shares of our Class A common stock in the offering.i3 Verticals, LLC received$72.0 million in net proceeds from the sale of Common Units to the Company, which we used to repay outstanding indebtedness. In connection with this offering, we recognized an additional deferred tax asset of$3.0 million related to the Tax Receivable Agreement and a corresponding liability of$2.5 million . 61 -------------------------------------------------------------------------------- Exchangeable Notes OnFebruary 18, 2020 ,i3 Verticals, LLC issued$138.0 million aggregate principal amount of its 1.0% Exchangeable Senior Notes dueFebruary 15, 2025 . The Exchangeable Notes bear interest at a fixed rate of 1.0% per year, payable semiannually in arrears onFebruary 15 andAugust 15 of each year, beginning onAugust 15, 2020 . 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, ati3 Verticals, LLC's election. The Exchangeable Notes mature onFebruary 15, 2025 , unless earlier exchanged, redeemed or repurchased. We received approximately$132.8 million 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.i3 Verticals, LLC used a portion of the net proceeds of the Exchangeable Notes offering to pay down outstanding borrowings under the Senior Secured Credit Facility in connection with the effectiveness of the operative provisions of the Amendment and to pay the cost of the note hedge transactions. At-the-Market Program OnAugust 20, 2021 , we entered into an at-the-market offering sales agreement withRaymond James & Associates, Inc. ,Morgan Stanley & Co. LLC andBTIG, LLC (each a "Sales Agent"), under which we may issue and sell, from time to time and through the Sales Agents, shares of our Class A common stock having an aggregate offering price of up to$125.0 million (the "ATM Program"). As of the date of this report, we have not sold any shares of Class A common stock under the ATM Program. Critical Accounting Estimates The preparation of consolidated financial statements and related disclosures in conformity withU.S. generally accepted accounting principles ("GAAP") and the Company's discussion and analysis of its financial condition and operating results requires the Company's 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. Note 2, "Summary of Significant Accounting Policies" in the notes to the accompanying consolidated financial statements in Part II, Item 8 of this Form 10-K describe the significant accounting policies and methods used in the preparation of the Company's consolidated financial statements. 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, revenue recognition for contracts with multiple performance obligations, 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. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates. Below is a summary of our critical accounting estimates for which the nature of management's assumptions are material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and for which the impact of the estimates and assumptions on financial condition or operating performance is material. Contingent Consideration in Acquisitions On occasion, we may have acquisitions that include contingent consideration. Accounting for business combinations requires us to estimate the fair value of any contingent purchase consideration at the acquisition date. Where relevant, the fair value of material contingent consideration included in an acquisition is calculated using a Monte Carlo simulation. The contingent consideration is revalued each period until it is settled. Management reviews the historical and projected performance of each acquisition with contingent consideration and uses an income probability method to revalue the contingent consideration. The revaluation requires management to make certain assumptions and represent management's best estimate at the valuation date. The probabilities are determined based on a management review of the expected likelihood of triggering events that would cause a change in the contingent consideration paid. For example, if management's forecasted performance for an acquisition increased, we would have anticipated a higher probability of contingent consideration being paid on the acquisition and would have 62 -------------------------------------------------------------------------------- recorded additional losses from the change in fair value of contingent consideration. Conversely, if management's forecasted performance for an acquisition decreased, we would have anticipated a higher probability of contingent consideration being paid on the acquisition and would have recorded a gain from change in fair value of contingent consideration. As ofSeptember 30, 2021 , the fair value of contingent consideration recorded is$36.2 million , with maximum contingent consideration payout of$111.7 million dependent upon achievement of specified financial performance targets, as defined in the purchase agreements. Goodwill We test goodwill for impairment using a fair value approach at least annually, absent some triggering event that would require an interim impairment assessment. Absent any impairment indicators, we perform our goodwill impairment testing as ofJuly 1 each year. In our goodwill impairment review, we use significant estimates and assumptions that include the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units and determining the fair value of each reporting unit. Our assessment of qualitative factors involves significant judgments about expected future business performance and general market conditions. In a quantitative assessment, the fair value of each reporting unit is determined based on a combination of techniques, including the present value of future cash flows, applicable multiples of competitors and multiples from sales of like businesses, and requires management to make estimates and assumptions regarding discount rates, growth rates and our future long-term business plans. Changes in any of these estimates or assumptions could materially affect the determination of fair value and the associated goodwill impairment charge for each reporting unit. For example, if management's forecasted earnings decreased for a reporting unit, we may have recorded an impairment loss for that reporting unit. Related Parties Transactions involving related parties cannot be presumed to be carried out at an arm's length basis, as the requisite conditions of competitive, free-dealing markets may not exist. A description of related-party transactions is provided in Note 16 in the accompanying consolidated financial statements. Recently Issued Accounting Pronouncements Refer to Note 2, "Summary of Significant Accounting Policies" in the notes to the accompanying consolidated financial statements for further discussion. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk As ofSeptember 30, 2021 , the Senior Secured Credit Facility, as amended onFebruary 18, 2020 in connection with our offering of Exchangeable Notes, consists of a$275.0 million revolving credit facility, together with an option to increase the revolving credit facility and/or obtain incremental term loans in an additional principal amount of up to$50.0 million in the aggregate (subject to the receipt of additional commitments for any such incremental loan amounts). The Senior Secured Credit Facility accrues interest at LIBOR (based upon an interest period of one, two, three or six months or, under some circumstances, up to twelve months) plus an applicable margin of 2.25% to 3.25% (3.25% as ofSeptember 30, 2021 ), or the base rate (defined as the highest of (x) theBank of America prime rate, (y) the federal funds rate plus 0.50% and (z) LIBOR plus 1.00%), plus an applicable margin of 0.25% to 1.25% (1.25% as ofSeptember 30, 2021 ), in each case depending upon the consolidated total leverage ratio, as defined in the agreement. Interest is payable at the end of the selected interest period, but no less frequently than quarterly. Additionally, the Senior Secured Credit Facility requires the Company to pay unused commitment fees of 0.15% to 0.30% (0.30% as ofSeptember 30, 2021 ) on any undrawn amounts under the revolving credit facility and letter of credit fees of up to 3.25% on the maximum amount available to be drawn under each letter of credit issued under the agreement. The Senior Secured Credit Facility requires maintenance of certain financial ratios on a quarterly basis as follows: (i) a minimum consolidated interest coverage ratio of 3.00 to 1.00, (ii) a maximum total leverage ratio of 5.00 to 1.00, provided, that for each of the four fiscal quarters immediately following a qualified acquisition (each a "Leverage Increase Period"), the required ratio set forth above may be increased by up to 0.25, subject to certain limitations and (iii) a maximum consolidated senior secured leverage 63 -------------------------------------------------------------------------------- ratio of 3.25 to 1.00, provided, that for each Leverage Increase Period, the consolidated senior leverage ratio may be increased by up to 0.25, subject to certain limitations. As ofSeptember 30, 2021 , we were in compliance with these covenants and there was$170.6 million available for borrowing under the revolving credit facility, subject to the financial covenants. As ofSeptember 30, 2021 , we had borrowings of$104.4 million outstanding under the Senior Secured Credit Facility. A 1.0% increase or decrease in the interest rate applicable to such borrowing (which is the LIBOR rate) would have a$1.0 million dollar impact on the results of the business. Foreign Currency Exchange Rate Risk Invoices for our services are denominated inU.S. dollars. We do not expect our future operating results to be significantly affected by foreign currency transaction risk. 64 --------------------------------------------------------------------------------
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial StatementsPage
Reports of Independent Registered Public Accounting Firms
66
Consolidated Balance Sheets as of
68
Consolidated Statements of Operations for the Years Ended
69
Consolidated Statements of Changes in Equity for the Years Ended
70
Consolidated Statements of Cash Flows for the Years Ended
73
Notes to Consolidated Financial Statements 75
65-------------------------------------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors ofi3 Verticals, Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets ofi3 Verticals, Inc. , and subsidiaries (the "Company") as ofSeptember 30, 2021 and 2020, the related consolidated statements of operations, changes in equity, and cash flows, for each of the two years in the period endedSeptember 30, 2021 , and the related notes to the consolidated financial statements (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as ofSeptember 30 , 2021and 2020, and the results of its operations and its cash flows for each of the two years endedSeptember 30, 2021 , in conformity with principles generally accepted inthe United States of America . Change in Accounting Principle As discussed in Note 2 to the consolidated financial statements, the Company has adopted Accounting Standards Codification Topic 842, "Leases", using the modified retrospective adoption method onOctober 1, 2020 . As discussed in Note 2 to the consolidated financial statements, the Company has adopted Accounting Standards Codification Topic 606, "Revenue from Contracts with Customers", using the modified retrospective adoption method onOctober 1, 2019 . Basis for Opinion These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audit. We are a public accounting firm registered with thePublic Company Accounting Oversight Board (United States ) (PCAOB) and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated 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 consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. /s/Deloitte & Touche LLP Nashville, Tennessee November 22, 2021
We have served as the Company's auditor since 2020.
66
--------------------------------------------------------------------------------Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directorsi3 Verticals, Inc. Nashville, Tennessee Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated statement of operations, changes in equity, and cash flows ofi3 Verticals, Inc. (the "Company") for the year endedSeptember 30, 2019 , and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of its operations and its cash flows for the year endedSeptember 30, 2019 , in conformity with accounting principles generally accepted inthe United States of America . Basis for Opinion These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audit. We are a public accounting firm registered with thePublic Company Accounting Oversight Board (United States ) ("PCAOB") and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the consolidated 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 consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. /s/BDO USA, LLP Nashville, Tennessee November 22, 2019 , except for Notes 8 and 17 to which the date isNovember 23, 2020 67 -------------------------------------------------------------------------------- i3 Verticals, Inc. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) September 30, 2021 2020 Assets Current assets Cash and cash equivalents$ 3,641 $ 15,568 Accounts receivable, net 38,500 17,538 Settlement assets 4,768 - Prepaid expenses and other current assets 11,214 4,869 Total current assets 58,123 37,975 Property and equipment, net 5,902 5,339 Restricted cash 9,522 5,033 Capitalized software, net 41,371 16,989 Goodwill 292,243 187,005 Intangible assets, net 171,706 109,233 Deferred tax asset 49,992 36,755 Operating lease right-of-use assets 14,479 - Other assets 8,462 5,197 Total assets$ 651,800 $ 403,526 Liabilities and equity Liabilities Current liabilities Accounts payable$ 7,865 $ 3,845 Accrued expenses and other current liabilities 50,815 24,064 Settlement obligations 4,768 - Deferred revenue 29,862 10,986 Current portion of operating lease liabilities 3,201 - Total current liabilities 96,511 38,895
Long-term debt, less current portion and debt issuance costs, net 200,605
90,758
Long-term tax receivable agreement obligations 39,122 27,565
Operating lease liabilities, less current portion 11,960 -
Other long-term liabilities 14,011 6,140
Total liabilities 362,209 163,358
Commitments and contingencies (see Note 15)
Stockholders' equity
Preferred stock, par value $0.0001 per share, 10,000,000 shares
authorized; 0 shares issued and outstanding as of September 30,
2021 and 2020 - -
Class A common stock, par value
2 2
Class B common stock, par value
1 1 Additional paid-in-capital 211,237 157,598 Accumulated deficit (6,480) (2,023) Total stockholders' equity 204,760 155,578 Non-controlling interest 84,831 84,590 Total equity 289,591 240,168 Total liabilities and equity$ 651,800 $ 403,526 See Notes to the Consolidated Financial Statements 68 -------------------------------------------------------------------------------- i3 Verticals, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share amounts) Year ended September 30, 2021 2020 2019 Revenue$ 224,124 $ 150,134 $ 376,307 Operating expenses Interchange and network fees(1) - - 242,867 Other costs of services 57,706 47,230 44,237 Selling general and administrative 134,872 78,323 62,860 Depreciation and amortization 24,418 18,217 16,564 Change in fair value of contingent consideration 7,140 (1,409) 3,389 Total operating expenses 224,136 142,361 369,917 (Loss) income from operations (12) 7,773 6,390 Other expenses Interest expense, net 9,799 8,926 6,004 Other (income) expense (2,595) 2,621 - Total other expenses 7,204 11,547 6,004 (Loss) income before income taxes (7,216) (3,774) 386 Provision for (benefit from) income taxes 623 (2,795) (177) Net (loss) income (7,839) (979) 563 Net (loss) income attributable to non-controlling interest (3,382) (560) 3,608 Net loss attributable to i3 Verticals, Inc.$ (4,457)
Net loss per share attributable to Class A common stockholders: Basic$ (0.21) $ (0.03) $ (0.29) Diluted$ (0.22) $ (0.03) $ (0.29) Weighted average shares of Class A common stock outstanding: Basic 20,994,598 14,833,378 10,490,981 Diluted 31,714,191 27,429,801 10,490,981
__________________________
1.Effective
See Notes to the Consolidated Financial Statements
69
--------------------------------------------------------------------------------
i3 Verticals, Inc.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Class A Common Stock Class B Common Stock Retained
Additional Earnings Non-Controlling
Shares Amount Shares Amount Paid-In Capital (Deficit) Interest Total Equity
Balance at September 30, 2018 9,112,042 $ 1 17,213,806 $ 2 $ 38,562 $
736 $ 72,897
- - - - 6,124 - - 6,124
Forfeitures of restricted Class A
common stock (36,113) - - - - - - -
Net (loss) income - - - - - (3,045) 3,608 563
Distributions to non-controlling
interest holders - - - - - - (2,060) (2,060)
Redemption of common units in i3
Verticals, LLC 4,292,169 - (4,292,169) (1) 12,077 - (12,077) (1)
Sale of Class A common stock in
public offering, net 1,000,000 - - - 21,660 - - 21,660
Capitalization of public offering
costs - - - - (899) - - (899)
Establishment of liabilities under a
tax receivable agreement and related
changes to deferred tax assets
associated with increases in tax
basis - - - - 3,959 - - 3,959
Issuance of restricted Class A common
stock under Equity Plan 8,799 - - - 225 - - 225
Exercise of equity-based awards 67,218 - - - 672 - - 672
Balance at September 30, 2019 14,444,115 $ 1 12,921,637 $ 1 $ 82,380 $ (2,309) $ 62,368 $ 142,441
See Notes to the Consolidated Financial Statements
70
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i3 Verticals, Inc.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (CONTINUED)
(In thousands, except share amounts)
Class A Common Stock Class B Common Stock Additional Retained
Paid-In Earnings Non-Controlling
Shares Amount Shares Amount Capital (Deficit) Interest Total Equity
Balance at September 30, 2019 14,444,115 $ 1 12,921,637 $ 1 $ 82,380 $
(2,309) $ 62,368
- - - - (2,730) - 2,730 -
Cumulative effect of adoption of new
accounting standard - - - - - 705 640 1,345
Equity-based compensation - - - - 10,452 - - 10,452
Net loss - - - - - (419) (560) (979)
Distributions to non-controlling
interest holders - - - - - - (3) (3)
Redemption of common units in i3
Verticals, LLC 1,021,016 - (1,021,016) - 5,080 - (5,080) -
Sale of Class A common stock in public
offering, net 3,250,000 1 - - 72,556 - - 72,557
Capitalization of public offering costs - - - - (697) - - (697)
Deferred tax asset adjustment - - - - (941) - - (941)
Establishment of liabilities under a tax
receivable agreement - - - - 896 - - 896
Exercise of equity-based awards 149,012 - - - 254 - - 254
Allocation of equity to non-controlling
interests - - - - (24,495) - 24,495 -
Equity component of exchangeable notes,
net of issuance costs and deferred taxes - - - - 27,578 - - 27,578
Purchases of exchangeable note hedges - - - - (28,676) - - (28,676)
Issuance of warrants - - - - 14,669 - - 14,669
Repurchases of exchangeable notes - - - - 1,272 - - 1,272
Balance at September 30, 2020 18,864,143 $ 2 11,900,621 $ 1 $ 157,598 $ (2,023) $ 84,590 $ 240,168
See Notes to the Consolidated Financial Statements
71--------------------------------------------------------------------------------
i3 Verticals, Inc.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (CONTINUED)
(In thousands, except share amounts)
Class A Common Stock Class B Common Stock Additional Retained
Paid-In Earnings Non-Controlling
Shares Amount
Shares Amount Capital (Deficit) Interest Total Equity
Balance at September 30, 2020 18,864,143 $ 2 11,900,621 $ 1 $ 157,598 $ (2,023) $ 84,590 $ 240,168
Equity-based compensation - - - - 20,860 - - 20,860
Net loss - - - - - (4,457) (3,382) (7,839)
Redemption of common units in i3
Verticals, LLC 1,671,479 - (1,671,479) - 11,714 - (11,714) -
Establishment of liabilities under a
tax receivable agreement and related
changes to deferred tax assets
associated with increases in tax
basis - - - - 269 - - 269
Exercise of equity-based awards 287,562 - - - 888 - - 888
Allocation of equity to
non-controlling interests - - - - (15,337) - 15,337 -
Issuance of Class A common stock
under the 2020 Inducement Plan 1,202,914 - - - 35,245 - - 35,245
Balance at September 30, 2021 22,026,098 $ 2 10,229,142 $ 1 $ 211,237 $ (6,480) $ 84,831 $ 289,591
See Notes to the Consolidated Financial Statements
72--------------------------------------------------------------------------------
i3 Verticals, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended September 30,
2021 2020 2019
Cash flows from operating activities:
Net (loss) income $ (7,839) $ (979) $ 563
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 24,418 18,217 16,564
Equity-based compensation 20,860 10,452 6,124
Provision for doubtful accounts 22 177 30
Amortization of debt discount and issuance costs 5,450 3,703 721
Debt issuance cost write offs - 141 152
Loss on repurchase of exchangeable notes - 2,297 -
Amortization of capitalized client acquisition
costs 533 398 -
Loss on disposal of assets - 1 8
Net gain on sale of investments (2,100) - -
Benefit from deferred income taxes (287) (3,207) (586)
Non-cash lease expense 3,204 - -
Increase (decrease) in non-cash contingent
consideration expense from original estimate 7,140 (1,409) 3,389
Changes in operating assets:
Accounts receivable (10,938) (1,028) 2,430
Prepaid expenses and other current assets (1,564) (984) (817)
Other assets (4,054) (1,544) (2,769)
Changes in operating liabilities:
Accounts payable 3,883 239 (1,768)
Accrued expenses and other current liabilities 10,453 1,575 1,572
Deferred revenue 5,150 617 2,588
Operating lease liabilities (3,139) - -
Other long-term liabilities (782) 93 (44)Contingent consideration paid in excess of original estimates
(3,636) (5,039) (1,560)
Net cash provided by operating activities 46,774 23,720 26,597
Cash flows from investing activities:
Expenditures for property and equipment (1,938) (2,911) (807)
Expenditures for capitalized software (6,159) (2,893) (2,227)
Purchases of merchant portfolios and residual
buyouts (1,819) (1,788) (3,586)
Acquisitions of businesses, net of cash acquired (149,495) (27,689) (137,036)
Acquisition of other intangibles (104) (150) (72)
Proceeds from sale of investments 3,200 - -
Net cash used in investing activities (156,315) (35,431) (143,728)
See Notes to the Consolidated Financial Statements
73
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i3 Verticals, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Year ended September 30,
2021 2020 2019
Cash flows from financing activities:
Proceeds from revolving credit facility 302,816 172,123 188,491
Payments of revolving credit facility (198,421) (313,267) (51,867)
Proceeds from borrowings on exchangeable notes - 138,000 -
Payments for purchase of exchangeable senior note
hedges - (28,676) -
Proceeds from issuance of warrants - 14,669 -
Payments for repurchase of exchangeable notes - (17,414) -
Payments of notes payable to banks - - (35,000)
Payments of debt issuance costs - (5,300) (168)
Proceeds from issuance of Class A common stock sold in public offering, net of underwriting discounts and offering costs
- 82,901 111,687
Payments for Common Units in
- (10,883) (90,027)
Payments of equity issuance costs (253) - -
Cash paid for contingent consideration (2,886) (3,492) (2,634)
Payments for required distributions to members for tax obligations
- (3) (2,060)
Proceeds from stock option exercises 1,578 764 672
Payments for employee's tax withholdings from net
settled stock option exercises (731) (310) -
Net cash provided by financing activities 102,103 29,112 119,094
Net (decrease) increase in cash, cash equivalents, and restricted cash
(7,438) 17,401 1,963
Cash, cash equivalents, and restricted cash at
beginning of period 20,601 3,200 1,237
Cash, cash equivalents, and restricted cash at end of period
$ 13,163 $
20,601
Supplemental disclosure of cash flow information: Cash paid for interest$ 4,428 $ 5,250 $ 4,911 Cash paid for income taxes$ 287 $
792
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,
2021 2020 2019
Beginning balance
Cash and cash equivalents $ 15,568 $ 1,119 $ 572
Restricted cash 5,033 2,081 665
Total cash, cash equivalents, and restricted cash $ 20,601 $ 3,200 $ 1,237
Ending balance
Cash and cash equivalents $ 3,641 $ 15,568 $ 1,119
Restricted cash 9,522 5,033 2,081
Total cash, cash equivalents, and restricted cash $ 13,163 $ 20,601 $ 3,200
See Notes to the Consolidated Financial Statements
74
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i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
1. ORGANIZATION AND OPERATIONS
i3 Verticals, Inc. (the "Company") was formed as a Delaware corporation on
January 17, 2018 . The Company was formed for the purpose of completing an
initial public offering ("IPO") of its Class A common stock and other related
transactions in order to carry on the business of i3 Verticals, LLC and its
subsidiaries. i3 Verticals, LLC was founded in 2012 and delivers seamlessly
integrated payment and software solutions to small- and medium-sized businesses
("SMBs") and organizations in strategic vertical markets. The Company's
headquarters are in 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 .
Initial Public Offering
On June 25, 2018 , the Company completed the IPO of 7,647,500 shares of its Class
A common stock at a public offering price of $13.00 per share. The Company
received approximately $92,500 of net proceeds, after deducting underwriting
discounts and commissions, which the Company used to purchase newly issued
common units from i3 Verticals, LLC (the "Common Units"), and Common Units from
a selling Common Unit holder, in each case at a price per Common Unit equal to
the price per share paid by the underwriters for shares of the Company's Class A
common stock in the IPO.
Reorganization Transactions
In connection with the IPO, the Company completed the following transactions
(the "Reorganization Transactions"):
•i3 Verticals, LLC amended and restated its existing limited liability company
agreement to, among other things, (1) convert all existing Class A units, common
units (including common units issued upon the exercise of existing warrants) and
Class P units of ownership interest in i3 Verticals, LLC into either Class A
voting common units of i3 Verticals, LLC (such holders of Class A voting common
units referred to herein as the "Continuing Equity Owners") or Class B
non-voting common units of i3 Verticals, LLC (such holders of Class B non-voting
common units referred to herein as the "Former Equity Owners"), and (2) appoint
i3 Verticals, Inc. as the sole managing member of i3 Verticals, LLC upon its
acquisition of Common Units in connection with the IPO;
•the Company amended and restated its certificate of incorporation to provide
for, among other things, Class A common stock and Class B common stock;
•i3 Verticals, LLC and the Company consummated a merger among i3 Verticals, LLC ,
i3 Verticals, Inc. and a newly formed wholly-owned subsidiary of i3 Verticals,
Inc. ("MergerSub") whereby: (1) MergerSub merged with and into i3 Verticals,
LLC , with i3 Verticals, LLC as the surviving entity; (2) Class A voting common
units converted into newly issued Common Units in i3 Verticals, LLC together
with an equal number of shares of Class B common stock of i3 Verticals, Inc. ,
and (3) Class B non-voting common units converted into Class A common stock of
i3 Verticals, Inc. based on a conversion ratio that provided an equitable
adjustment to reflect the full value of the Class B non-voting common units; and
•the Company issued shares of its Class A common stock pursuant to a voluntary
private conversion of certain subordinated notes (the "Junior Subordinated
Notes") by certain related and unrelated creditors of i3 Verticals, LLC .
75
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i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
Following the completion of the IPO and Reorganization Transactions, the Company
became a holding company and its principal asset is the Common Units in i3
Verticals, LLC that it owns. 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 .
Public Offerings
On June 10, 2019 , the Company completed a secondary public offering (the "June
2019 Secondary Public Offering") of 5,165,527 shares of its Class A common
stock, at a public offering price of $22.75 per share, which included a full
exercise of the underwriters' option to purchase 673,764 additional shares of
Class A Common Stock from the Company. The Company received approximately
$111,640 of net proceeds, after deducting underwriting discounts and
commissions, but before offering expenses. The Company used the net proceeds to
purchase (1) 1,000,000 Common Units directly from i3 Verticals, LLC , and (2)
4,165,527 Common Units (including 673,764 Common Units due to the exercise of
the underwriters' option to purchase additional shares in full) and an
equivalent number of Class B common stock (which shares were then canceled) from
certain Continuing Equity Owners, in each case at a price per Common Unit equal
to the price per share paid by the underwriters for shares of the Company's
Class A common stock in the offering. i3 Verticals, LLC received $20,870 in net
proceeds from the sale of Common Units to the Company, which it used to repay
outstanding indebtedness.
On September 15, 2020 , the Company completed a primary public offering (the
"September 2020 Public Offering") of 3,737,500 shares of its Class A common
stock, at a public offering price of $23.50 per share, which included a full
exercise of the underwriters' option to purchase 487,500 additional shares of
Class A Common Stock from the Company. The Company received approximately
$83,400 of net proceeds, after deducting underwriting discounts and commissions,
but before offering expenses. The Company used the net proceeds to purchase (1)
3,250,000 Common Units directly from i3 Verticals, LLC , and (2) 487,500 Common
Units pursuant to the exercise of the underwriters' option to purchase
additional shares in full and an equivalent number of Class B common stock
(which shares were then canceled) from certain Continuing Equity Owners, in each
case at a price per Common Unit equal to the price per share paid by the
underwriters for shares of the Company's Class A common stock in the offering.
i3 Verticals, LLC received $72,018 in net proceeds from the sale of Common Units
to the Company, which it used to repay outstanding indebtedness.
i3 Verticals, Inc. is the sole managing member of i3 Verticals, LLC and as a
result, consolidates the financial results of i3 Verticals, LLC and reports a
non-controlling interest representing the Common Units of i3 Verticals, LLC held
by the Continuing Equity Owners.
As the Reorganization Transactions are considered transactions between entities
under common control, the financial statements retroactively reflect the
accounts of i3 Verticals, LLC for periods prior to the IPO and Reorganization
Transactions.
The Continuing Equity Owners who own Common Units in i3 Verticals, LLC may
redeem at each of their options (subject in certain circumstances to time-based
vesting requirements) their Common Units for, at the election of i3 Verticals,
LLC , cash or newly-issued shares of the Company's Class A common stock.
As of September 30, 2021 , i3 Verticals, Inc. owned 68.3% of the economic
interest in i3 Verticals, LLC . As of September 30, 2021 , the Continuing Equity
Owners owned Common Units in i3 Verticals, LLC representing approximately 31.7%
of the economic interest in i3 Verticals, LLC , shares of Class A common stock in
the Company representing approximately 0.6% of the economic interest and voting
power in the Company, and shares of Class B common stock in i3 Verticals, Inc. ,
representing approximately 31.7% of the voting power in the Company. Combining
the Class A common stock and Class B common stock, the Continuing Equity Holders
hold approximately 32.3% of the economic interest and voting power in i3
Verticals, Inc.
76
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i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") and pursuant to the reporting and disclosure rules and
regulations of the Securities and Exchange Commission ("SEC").
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 transferrable into cash
with an original maturity less than 90 days.
Restricted Cash
Restricted cash represents funds held-on-deposit with processing banks pursuant
to agreements to cover potential merchant losses. It is presented as long-term
assets on the accompanying consolidated balance sheets since the related
agreements extend beyond the next twelve months. Following the adoption of
Accounting Standards Update ("ASU") 2016-18, Statement of Cash Flows: Restricted
Cash (Topic 230), the Company includes restricted cash along with the cash and
cash equivalents balance for presentation in the consolidated statements of cash
flows.
Accounts Receivable and Credit Policies
Accounts receivable consist primarily of uncollateralized credit card processing
residual payments due from processing banks requiring payment within thirty days
following the end of each month. Accounts receivable also include amounts due
from the sales of the Company's technology solutions to its customers. The
carrying amount of accounts receivable is reduced by an allowance for doubtful
accounts, if necessary, which reflects management's best estimate of the amounts
that will not be collected. The allowance is estimated based on management's
knowledge of its customers, historical loss experience and existing economic
conditions. Accounts receivable and the allowance are written-off when, in
management's opinion, all collection efforts have been exhausted. The Company's
allowance for doubtful accounts was $181 and $310 as of September 30, 2021 and
2020, respectively; however, actual write-offs may exceed estimated amounts.
Settlement Assets and Obligations
Settlement assets and obligations result when funds are temporarily held or owed
by the Company on behalf of merchants, consumers, schools, and other
institutions. Timing differences, interchange expense, 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. As of September 30, 2021 , settlement assets
and settlement obligations were both $4,768 . As of September 30, 2020 , the
Company had no settlement assets or settlement obligations.
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 basis, or net
realizable value. Inventories were $2,220 and $1,309 at September 30, 2021 and
2020, respectively, and are included within prepaid expenses and other current
assets on the accompanying consolidated balance sheets.
77
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i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share 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 during the years ended September 30,
2021 , 2020 and 2019.
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 clients. 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.
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. Impairment charges during the years ended
September 30, 2021 , 2020 and 2019 were nominal.
Identifiable software technology intangible assets resulting from acquisitions
are amortized using the straight-line method over periods not exceeding their
remaining estimated useful lives. GAAP requires that intangible assets with
estimated useful lives be amortized over their respective estimated useful lives
to their residual values, and reviewed for impairment. Acquisition technology
intangibles' net book values are included in capitalized software, net in the
accompanying consolidated balance sheets.
Notes Receivable
Notes receivable consist of loans made to unrelated entities. Notes receivable
were $4,695 and $1,195 at September 30, 2021 and 2020, respectively, and are
included within 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 material contingent
consideration included in an acquisition is calculated using a Monte Carlo
simulation. The fair value of merchant relationships and non-compete assets
acquired is identified using the Income Approach.
78
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i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
The fair value of trade names acquired is identified using the Relief from
Royalty Method. The fair value of deferred revenue is identified using the
Adjusted Fulfillment Cost 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, 2021 contributed $57,819 and
$6,530 of revenue and net income, respectively, to the results in the Company's
consolidated statements of operations for the year then ended.
Goodwill
In accordance with ASC 350, Intangibles-Goodwill and Other, the Company tests
goodwill for impairment for each reporting unit on an annual basis in the fourth
quarter, or when events or circumstances indicate the fair value of a reporting
unit is below its carrying value.
The Company's goodwill represents the excess of the purchase price over the fair
value of the net identifiable assets acquired in business combinations. The
goodwill generated from the business combinations is primarily related to the
value placed on the employee workforce and expected synergies. Judgment is
involved in determining if an indicator or change in circumstances relating to
impairment has occurred. Such changes may include, among others, a significant
decline in expected future cash flows, a significant adverse change in the
business climate, and unforeseen competition. No goodwill impairment charges
were recognized during the years ended September 30, 2021 , 2020 and 2019.
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.
Subsequent to the adoption on January 1, 2017 of ASU No. 2017-04,
Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment, 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 good impairment test. For each of the years ended
September 30, 2021 , 2020 and 2019 the Company performed a quantitative
assessment for each of its reporting units. The Company determined that none of
the reporting units were impaired.
79
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i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
Intangible Assets
Intangible assets include acquired merchant relationships, residual buyouts,
referral agreements, trademarks, tradenames, website development costs and
non-compete agreements. Merchant relationships represent the fair value of
customer relationships purchased by the Company. Residual buyouts represent the
right to not have to pay a residual to an independent sales agent related to
certain future transactions with the agent's referred merchants. Referral
agreements represent the right to exclusively obtain referrals from a partner
for their customers' credit card processing services.
The Company amortizes definite lived identifiable intangible assets using a
method that reflects the pattern in which the economic benefits of the
intangible asset are expected to be consumed or otherwise utilized. The
estimated useful lives of the Company's customer-related intangible assets
approximate the expected distribution of cash flows, whether straight-line or
accelerated, generated from each asset. The useful lives of contract-based
intangible assets are equal to the terms of the agreement.
During the first quarter of fiscal year 2019, management determined it was
appropriate to change the amortization rate of our merchant contract intangible
assets to reflect the expected distribution of future cash flows. This change
was applied prospectively beginning on October 1, 2018 and resulted in $1,290 in
additional amortization expense recorded in the year ended September 30, 2019 .
Management evaluates the remaining useful lives and carrying values of
long-lived assets, including definite lived intangible assets, at least
annually, or when events and circumstances warrant such a review, to determine
whether significant events or changes in circumstances indicate that a change in
the useful life or impairment in value may have occurred. There were no
impairment charges during the years ended September 30, 2021 , 2020 and 2019.
Income Taxes
i3 Verticals, Inc. is taxed as a corporation and pays corporate federal, state
and local taxes on income allocated to it from i3 Verticals, LLC based on i3
Verticals, Inc.'s economic interest in i3 Verticals, LLC . i3 Verticals, LLC's
members, including the Company, are liable for federal, state and local income
taxes based on their share of i3 Verticals, LLC's pass-through taxable income.
i3 Verticals, LLC is not a taxable entity for federal income tax purposes, but
is subject to and reports entity level tax in both Tennessee and Texas . In
addition, certain subsidiaries of i3 Verticals, LLC are corporations that are
subject to state and federal income taxes.
The amount provided for state income taxes is based upon the amounts of current
and deferred taxes payable or refundable at the date of the consolidated
financial statements as a result of all events recognized in the financial
statements as measured by the provisions of enacted tax laws.
Under GAAP, a tax position is recognized as a benefit only if it is "more likely
than not" that the tax position would be sustained in a tax examination, with a
tax examination being presumed to occur. The amount recognized is the largest
amount of tax benefit that is greater than 50% likely of being realized on
examination. For tax positions not meeting the "more likely than not" test, no
tax benefit is recorded. The Company reports a liability for unrecognized tax
positions taken or expected to be taken in a tax return. The Company recognizes
interest and penalties, if any, related to unrecognized tax benefits as part of
income tax expense. See additional discussion in Note 11.
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
80
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i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
presented within accrued expenses and other current liabilities and other
long-term liabilities on the Company's consolidated balance sheets,
respectively.
Classification of Financial Instruments
The Company classifies certain financial instruments issued as either equity or
as liabilities. Determination of classification is based upon the underlying
properties of the instrument. See specific discussion regarding the nature of
instruments issued, the presentation on the consolidated financial statements
and the related valuation method applied in Notes 10, 13, and 14.
Revenue Recognition and Deferred Revenue
For the years ended September 30, 2021 and 2020, 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 adopted ASC
606 on October 1, 2019 , using the modified retrospective method and applying the
standard to all contracts not completed on the date of adoption. Results for the
reporting period beginning October 1, 2019 are presented under ASC 606, while
prior period amounts continue to be reported in accordance with the Company's
historic accounting practices under previous guidance.
The majority of the Company's revenue for the years ended September 30, 2021 ,
2020 and 2019 is derived from volume-based payment processing fees ("discount
fees") and other related fixed transaction or service fees. The remainder is
comprised of sales of software licensing subscriptions, ongoing support, and
other POS-related solutions the Company provides to its clients directly and
through its processing bank relationships.
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 clients under
which the client engages the Company to provide both payment authorization
services and transaction settlement services for all of the cardholder
transactions of the client, 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 clients require on a daily basis over the contract
term. These services are stand ready obligations, as the timing and quantity of
transactions to be processed is not determinable. Under a stand-ready
obligation, the Company's performance obligation is defined by each time
increment rather than by the underlying activities satisfied over time based on
days elapsed. Because the service of standing ready is substantially the same
each day and has the same pattern of transfer to the client, 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.
81
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i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
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 client or the net amount retained is a matter of judgment
that depends on the facts and circumstances of the arrangement. The
determination of gross versus net recognition of revenue requires judgment that
depends on whether the Company controls the good or service before it is
transferred to the merchant or whether the Company is acting as an agent of a
third party. The assessment is provided separately for each performance
obligation identified. Under its agreements, the Company incurs interchange and
network pass-through charges from the third-party card issuers and card
networks, respectively, related to the provision of payment authorization
services. The Company has determined that it is acting as an agent with respect
to these payment authorization services, based on the following factors: (1) the
Company has no discretion over which card issuing bank will be used to process a
transaction and is unable to direct the activity of the merchant to another card
issuing bank, and (2) interchange and card network rates are pre-established by
the card issuers or card networks, and the Company has no latitude in
determining these fees. Therefore, revenue allocated to the payment
authorization performance obligation is presented net of interchange and card
network fees paid to the card issuing banks and card networks, respectively, for
the years ended September 30, 2021 and 2020, subsequent to the adoption of ASC
606.
With regards to the Company's discount fees, generally, where the Company has
control over merchant pricing, merchant portability, credit risk and ultimate
responsibility for the merchant relationship, revenues are reported at the time
of sale equal to the full amount of the discount charged to the merchant, less
interchange and network fees. Revenues generated from merchant portfolios where
the Company does not have control over merchant pricing, liability for merchant
losses or credit risk or rights of portability are reported net of interchange
and network fees as well as third-party processing costs directly attributable
to processing and bank sponsorship costs.
Revenues are also derived from a variety of fixed transaction or service fees,
including authorization fees, convenience fees, statement fees, annual fees,
gateway fees, which are charged for accessing our payment and software
solutions, and fees for other miscellaneous services, such as handling
chargebacks. Revenues derived from service fees are recognized at the time the
services are performed and there are no further performance obligations. Revenue
from fixed transactions, which principally relates to the sale of equipment, is
recognized upon transfer of ownership and delivery to the client, after which
there are no further performance obligations.
Revenues from sales of the Company's software are recognized when the related
performance obligations are satisfied. Sales of software licenses are
categorized into one of two categories of intellectual property in accordance
with ASC 606, functional or symbolic. The key distinction is whether the license
represents a right to use (functional) or a right to access (symbolic)
intellectual property. The Company generates sales of one-time software
licenses, which is functional intellectual property. Revenue from functional
intellectual property is recognized at a point in time, when delivered to the
client. The Company also offers access to its software under
software-as-a-service ("SaaS") arrangements, which represent services
arrangements. Revenue from SaaS arrangements is recognized over time, over the
term of the agreement.
Arrangements may contain multiple performance obligations, such as payment
authorization services, transaction settlement services, hardware, software
products, maintenance, and professional installation and training services.
Revenues are allocated to each performance obligation based on the standalone
selling price of each good or service. The selling price for a deliverable is
based on standalone selling price, if available, the adjusted market assessment
approach, estimated cost plus margin approach, or residual approach. The Company
establishes estimated selling price, based on the judgment of the Company's
management, considering internal factors such as margin objectives, pricing
practices and controls, client segment pricing strategies and the product life
cycle. In arrangements with multiple performance obligations, the Company
determines allocation of the transaction price at inception of the arrangement
and uses the standalone selling prices for the majority of the Company's revenue
recognition.
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i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
Revenues from sales of the Company's combined hardware and software element are
recognized when each performance obligation has been satisfied which has been
determined to be upon the delivery of the product. Revenues derived from service
fees are recognized at the time the services are performed and there are no
further performance obligations. The Company's professional services, including
training, installation, and repair services are recognized as revenue as these
services are performed.
The table below presents a disaggregation of the Company's revenue from
contracts with clients by product by segment. Refer to Note 17 for discussion of
the Company's segments. The Company's products are defined as follows:
•Payments - Includes discount fees, gateway fees and other related fixed
transaction or service fees.
•Software and related services - Includes sales of software licenses, software
as a service, ongoing software maintenance and support, and other professional
services related to our software offerings
•Other - Includes sales of equipment, non-software related professional services
and other revenues.
For the
year ended
Proprietary
Merchant Software and
Services Payments Other Total
Payments revenue $ 92,325 $ 29,451 $ (2,095) $ 119,681
Software and related services revenue 11,872 75,736 (18) 87,590
Other revenue 7,673 9,246 (66) 16,853
Total revenue $ 111,870 $ 114,433 $ (2,179) $ 224,124
For the
year ended
Proprietary
Software and
Merchant Services Payments Other Total
Payments revenue $ 82,913 $ 19,359 $ (1,757) $ 100,515
Software and related services revenue 10,203 26,634 - 36,837
Other revenue 7,833 4,960 (11) 12,782
Total revenue $ 100,949 $ 50,953 $ (1,768) $ 150,134
The table below presents a disaggregation of the Company's revenue from
contracts with clients by timing of transfer of goods or services by segment.
The Company's revenue included in each category are defined as follows:
•Revenue transferred over time - Includes discount fees, gateway fees, sales of
SaaS and ongoing support contract revenue.
•Revenue transferred at a point in time - Includes fixed service fees, software
licenses sold as functional intellectual property, professional services and
other equipment.
83
--------------------------------------------------------------------------------
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
For the year ended September 30, 2021
Proprietary
Merchant Software and
Services Payments Other Total
Revenue earned over time $ 83,203 $ 76,367 $ (2,003) $ 157,567
Revenue earned at a point in time 28,667 38,066 (176) 66,557
Total revenue $ 111,870 $ 114,433 $ (2,179) $ 224,124
For the year ended September 30, 2020
Proprietary
Software and
Merchant Services Payments Other Total
Revenue earned over time $ 72,800 $ 35,222 $ (1,743) $ 106,279
Revenue earned at a point in time 28,149 15,731 (25) 43,855
Total revenue $ 100,949 $ 50,953 $ (1,768) $ 150,134
Contract Assets
The Company bills for fixed fee professional services once the Company achieves
pre-determined milestones in the contract. 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. For the
Company's time and materials professional services contracts and transaction
processing services, the Company periodically bills the customer after services
have been provided but has the right to invoice the customer for services
performed to date at any time. Unbilled amounts associated with these services
are presented as accounts receivable as the Company has an unconditional right
to payment for services performed.
As of September 30, 2021 and September 30, 2020 , the Company's contract assets
from contracts with customers was $1,505 and $0 , respectively
Contract Liabilities
Deferred revenue represents amounts billed to clients 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
year ended September 30, 2021 :
Balance at September 30, 2019 $ 10,237
Deferral of revenue 22,963
Recognition of unearned revenue (22,146)
Balance at September 30, 2020 $ 11,054
Deferral of revenue 29,966
Recognition of unearned revenue (10,996)
Balance at September 30, 2021 $ 30,024
84
--------------------------------------------------------------------------------
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
Costs to Obtain and Fulfill a Contract
The Company capitalizes incremental costs to obtain new contracts and contract
renewals and amortizes these costs on a straight-line basis as an expense over
the benefit period, which is generally the contract term, unless a commensurate
payment is not expected at renewal. As of September 30, 2021 , the Company had
$3,851 of capitalized contract costs, compared to $3,140 of capitalized contract
costs as of September 30, 2020 . The contract costs relate to commissions paid to
obtain new sales, included within "Prepaid expenses and other current assets"
and "Other assets" on the consolidated balance sheets. The Company recorded
commissions expense related to these costs for the years ended September 30,
2021 and 2020 of $533 and $398 , 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 clients, or have a substantive stay requirement prior to payment.
Interchange and Network Fees
Interchange and network fees consist primarily of fees that are directly related
to discount fee revenue. These include interchange fees paid to issuers and
assessment fees payable to card associations, which are a percentage of the
processing volume the Company generates from Visa and Mastercard, as well as
fees charged by card-issuing banks. Interchange and network fees are recognized
at the time the merchant's transactions are processed. As noted above, after
adoption of ASC 606 on October 1, 2019 , these fees are presented net in discount
fee revenue because the Company is acting as an agent in the provision of
payment authorization services.
Other Cost of Services
Other costs of services include third-party processing costs directly
attributable to processing and bank sponsorship costs, which may not be based on
a percentage of volume. These costs also include related costs such as residual
payments to sales groups, which are based on a percentage of the net revenues
generated from merchant referrals. In certain merchant processing bank
relationships the Company is liable for chargebacks against a merchant equal to
the volume of the transaction. Losses resulting from chargebacks against a
merchant are included in other cost of services on the accompanying condensed
consolidated statement of operations. The Company evaluates its risk for such
transactions and estimates its potential loss from chargebacks based primarily
on historical experience and other relevant factors. The reserve for merchant
losses is included within accrued expenses and other current liabilities on the
accompanying condensed consolidated balance sheets. The cost of equipment sold
is also included in other cost of services. Other costs of services are
recognized at the time the associated revenue is earned.
The Company accounts for all governmental taxes associated with revenue
transactions on a net basis.
Selling General and Administrative
Selling general and administrative 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
was $2,623 , $1,813 and $1,443 for the years ended September 30, 2021 , 2020 and
2019, 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
85
--------------------------------------------------------------------------------
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
the estimated fair value of the share-based awards on the date of grant and
recognized as expense on a straight-line basis over the requisite service
period, which is generally the vesting period.
Equity-based compensation was $20,860 , $10,452 and $6,124 for the years ended
September 30, 2021 , 2020 and 2019, 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, revenue
recognition for contracts with multiple performance obligations, 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.
During the year ended September 30, 2020 , the Company recorded a $2,668
reduction in the valuation allowance on the deferred tax asset related to the
Company's investment in partnership and a corresponding reduction in the
Company's income tax expense for the year ended September 30, 2020 . Management
determined an additional portion of the deferred tax asset will be more likely
than not realized based off an evaluation of the four sources of taxable income.
See Note 11 for a discussion of the current period changes in valuation
allowances.
During the year ended September 30, 2020 , the Company elected to make a policy
change to allocate stock compensation expense to the holders of shares of Class
B common stock of i3 Verticals, Inc. This change resulted in a $235 reduction in
the benefit from income taxes and a corresponding reduction in the Company's net
loss, a $3,728 increase to the net loss attributable to non-controlling interest
and a $3,493 decrease to the net loss attributable to i3 Verticals, Inc. for the
year ended September 30, 2020 .
Recently Issued Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In May 2014 , the FASB issued ASU 2014-09, Revenue from Contracts with Customers
(Topic 606) ("ASU 2014-09"). The FASB issued updates and clarifications to ASU
2014-09, including ASU 2016-08, Revenue from Contracts with Customers (Topic
606): Principal versus Agent Considerations (Reporting Gross versus Net) issued
in March 2016 , ASU 2016-10, Revenue from Contracts with Customers (Topic 606):
Identifying Performance Obligations and Licensing issued in April 2016 and ASU
2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope
Improvements and Practical Expedients issued in May 2016 . ASU 2014-09 supersedes
the revenue recognition requirements in ASC 605. The new standard provides a
five-step analysis of transactions to determine when and how revenue is
recognized, based upon the core principle that revenue is recognized to depict
the transfer of goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those
goods or services. The new standard also requires additional disclosures
regarding the nature, amount, timing, and uncertainty of revenue and cash flows
arising from contracts with customers. The new standard, as amended, became
effective for the Company on October 1, 2019 . The amendment allows companies to
use either a full retrospective or a modified retrospective approach, through a
cumulative adjustment, to adopt this ASU No. 2014-09.
The new standard changed the timing of certain revenue and expenses to be
recognized under various arrangement types. More judgment and estimates are
required when applying the requirements of the new standard than were required
under prior GAAP, such as estimating the amount of variable consideration to
include in transaction price and estimating expected periods of benefit for
certain costs. Through management's review of
86
--------------------------------------------------------------------------------
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
individual contracts and historical revenue recognition patterns in comparison
to the provisions under ASU 2014-09, the Company determined the timing of
revenue to be recognized under ASU 2014-09 for each of the Company's revenue
categories, including discount fees, software licensing subscriptions, ongoing
support, and other POS-related solutions, is similar to the timing of revenue
recognized under the historical guidance under ASC 605. The Company will
evaluate, on an ongoing basis, costs to obtain contracts with clients, as well
as certain implementation and set-up costs, and, in some cases, may be required
to amortize these costs over longer periods than they were historically
amortized. Finally, the new standard required additional disclosures regarding
revenues and related capitalized contract costs, if any.
The Company adopted the new revenue standard using a modified retrospective
basis on October 1, 2019 . The Company has recorded a $1,345 cumulative increase
to equity, including a $705 cumulative increase to accumulated earnings and a
$640 cumulative increase to non-controlling interest, as a result of the
adoption, due to capitalized costs to obtain contracts with clients being
amortized over the expected life of the client rather than the life of the
specific contract.
The Company determined that the most significant ongoing impact of adopting the
new revenue standard was driven by changes in principal versus agent
considerations, with the majority of the change overall in total net revenue
attributable to reflecting the Company's payment authorization services net of
related interchange and network fees prospectively. The Company's interchange
and network fees of $242,867 were classified in "Operating Expenses" on the
consolidated statement of operations for the year ended September 30, 2019 . The
Company's interchange and network fees of $244,097 were included as a reduction
to revenue on the consolidated statement of operations for the year ended
September 30, 2020 . Under the modified retrospective basis, the Company has not
restated its comparative consolidated financial statements for these effects.
The adoption of the new revenue standard did not have a material impact on net
income.
In February 2016 , the FASB issued ASC 842 with amendments in 2018 and 2019. ASC
842 aims to increase transparency and comparability among organizations by
requiring recognition of lease assets and lease liabilities on the balance sheet
and disclosure of key information about leasing arrangements.
The amendments to ASC 842 are effective for public business entities for fiscal
years beginning after December 15, 2018 , and interim periods within those fiscal
years, with early adoption permitted. In November 2019 , the FASB issued ASU No.
2019-10, which extends the effective date for adoption of ASC 842 for certain
entities. In June 2020 , the FASB issued ASU No. 2020-05, which further extends
the effective date for adoption of ASC 842 for certain entities. As a result of
the provisions in ASU No. 2020-05, and as the Company is an emerging growth
company and has elected to use the extended transition period of such companies,
the Company was not required to adopt ASC 842 until October 1, 2022 . The Company
elected to early adopt ASC 842 on October 1, 2020 , using the optional modified
retrospective transition method, under which the prior period financial
statements were not restated for the new guidance.
The Company elected to apply the package of practical expedients whereby the
Company did not reassess whether expired or existing leases contain a lease, did
not reassess the lease classification for any expired or existing leases, and
did not reassess initial direct costs for any existing leases. The Company
further elected to account for lease and nonlease components in a lease
arrangement as a combined lease component for all classes of leased assets. The
Company also elected to apply the short-term lease exception practical
expedient.
The adoption of ASC 842 resulted in the recognition of the right-of-use assets
of $9,093 and the lease liabilities of $9,760 as of October 1, 2020 . The
adoption of ASC 842 also resulted in a reduction in existing prepaid expenses
and other current assets of $202 and in accrued expenses and other current
liabilities and other long-term liabilities of $869 as of October 1, 2020 . Lease
liabilities are measured as the present value of remaining lease payments,
utilizing the Company's incremental borrowing rate based on the remaining lease
term as of the adoption date. The right-of-use assets are measured at an amount
equal to the lease liabilities adjusted by the amounts of certain assets and
liabilities, such as deferred lease obligations and prepaid rent, that were
previously
87
--------------------------------------------------------------------------------
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
recognized on the balance sheet prior to the initial application of ASC 842.
Refer to Note 12 for further information.
In August 2018 , the FASB issued ASU No. 2018-13, Fair Value Measurement:
Disclosure Framework-Changes to the Disclosure Requirements for Fair Value
Measurement (Topic 820). The amendments in ASU No. 2018-13 provide clarification
and modify the disclosure requirements on fair value measurement in Topic 820,
Fair Value Measurement. The amendments in this ASU No. 2018-13 are effective for
public business entities for fiscal years beginning after December 15, 2019 , and
interim periods within those fiscal years, with early adoption permitted. As a
public business entity, the Company is an emerging growth company and has
elected to use the extended transition period provided for such companies. As a
result, the Company was not required to adopt this ASU No. 2018-13 until October
1, 2021 . The Company elected to early adopt ASU No. 2018-13 on September 30,
2021 , and the adoption did not have a material impact on its disclosures.
In October 2021 , the FASB issued ASU No. 2021-08, Business Combinations (Topic
805)-Accounting for Contract Assets and Contract Liabilities from Contracts with
Customers. The amendments in ASU No. 2021-08 address diversity and inconsistency
related to the recognition and measurement of contract assets and contract
liabilities acquired in a business combination. The amendments in ASU No.
2021-08 require that an acquirer recognize and measure contract assets and
contract liabilities acquired in a business combination in accordance with Topic
606, Revenue from Contracts with Customers. Upon adoption, an acquirer should
account for the related revenue contracts of the acquiree as if it has
originated the contracts.
For public business entities, the amendments in ASU No. 2021-08 are effective
for fiscal years beginning after December 15, 2022 , including interim periods
within those fiscal years. The amendments in ASU No. 2021-08 should be applied
prospectively to business combinations occurring on or after the effective date
of the amendments. Early adoption of the amendments is permitted. An entity that
early adopts should apply the amendments (1) retrospectively to all business
combinations for which the acquisition date occurs on or after the beginning of
the fiscal year that includes the interim period of early application and (2)
prospectively to all business combinations that occur on or after the date of
initial application. The Company has early adopted ASU No. 2021-08 effective
October 1, 2020 .
88
--------------------------------------------------------------------------------
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
The adoption of ASU 2021-08 resulted in adjustments to the fair values assigned
to goodwill and deferred revenue assumed as of the acquisition dates of
acquisitions occurring during the year ended September 30, 2021 , and an increase
in revenue for the year ended September 30, 2021 due to recognition of revenue
earned during the period for deferred revenue contracts acquired in business
combinations. The following tables present the material impacts of adopting ASU
2021-08 on the Company's consolidated balance sheets as of September 30, 2021 :
As of
Excluding impacts Presentation with
of adoption of ASU adoption of ASU
2021-08 Adjustment 2021-08
Assets
Goodwill $ 287,448 $ 4,795 $ 292,243
Deferred tax asset $ 50,619 $ (627) $ 49,992
Liabilities and equity
Liabilities
Current liabilities
Accrued expenses and other current
liabilities $ 50,779 $ 36 $ 50,815
Deferred revenue $ 29,567 $ 295 $ 29,862
Long-term tax receivable agreement
obligations $ 39,131 $ (9) $ 39,122
Stockholders' equity
Additional paid-in-capital $ 211,044 $ 193 $ 211,237
Accumulated deficit $ (8,813) $ 2,333 $ (6,480)
Non-controlling interest $ 83,511 $ 1,320 $ 84,831
The following tables present the material impacts of adoption of ASU 2021-08 on
the Company's consolidated statements of operations for the year ended September
30, 2021 :
Year ended September 30, 2021
Excluding impacts of Presentation with
adoption of ASU adoption of ASU
2021-08 Adjustment 2021-08
Revenue $ 219,624 $ 4,500 $ 224,124
Provision for income taxes $ 71 $ 552 $ 623
Net loss $ (11,787) $ 3,948 $ (7,839)
Net loss attributable to non-controlling
interest $ (4,997) $ 1,615 $ (3,382)
Net loss attributable to i3 Verticals, Inc. $ (6,790) $ 2,333 $ (4,457)
Net loss per share attributable to Class A
common stockholders:
Basic $ (0.32) $ 0.11 $ (0.21)
Diluted $ (0.33) $ 0.11 $ (0.22)
89
--------------------------------------------------------------------------------
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
The adoption of ASU 2021-08 did not have a material impact on the results of the
Company's cash flows for the year ended September 30, 2021 or the interim
periods therein.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016 , the FASB issued ASU No. 2016-13, Financial Instruments-Credit
Losses (Topic 326). The amendments in ASU No. 2016-13 require the measurement of
all expected credit losses for financial assets held at the reporting date based
on historical experience, current conditions, and reasonable and supportable
forecasts. The amendments in this ASU No. 2016-13 are effective for public
business entities for fiscal years beginning after December 15, 2019 , and
interim periods within those fiscal years, with early adoption permitted for
fiscal years beginning after December 15, 2019 , including interim periods within
those fiscal years. As a public business entity, the Company is an emerging
growth company and has elected to use the extended transition period provided
for such companies. As a result, the Company will not be required to adopt ASU
2016-13 until October 1, 2023 . The Company is currently evaluating the impact of
the adoption of this principle on the Company's condensed consolidated financial
statements.
In August 2020 , the FASB issued ASU No. 2020-06, Debt-Debt with Conversion and
Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in
Entity's Own Equity (Subtopic 815-40)-Accounting For Convertible Instruments and
Contracts in an Entity's Own Equity ("ASU 2020-06"). ASU 2020-06 simplifies
accounting for convertible instruments by removing major separation models
required under current GAAP. Consequently, more convertible debt instruments
will be reported as a single liability instrument with no separate accounting
for embedded conversion features. ASU 2020-06 removes certain settlement
conditions that are required for equity contracts to qualify for the derivative
scope exception, which will permit more equity contracts to qualify for it. ASU
2020-06 also simplifies the diluted net income per share calculation in certain
areas. The amendments in ASU 2020-06 are effective for public business entities
for fiscal years beginning after December 15, 2021 , and interim periods within
those fiscal years, with early adoption permitted for fiscal years beginning
after December 15, 2020 , and interim periods within those fiscal years. As the
Company is an emerging growth company and has elected to use the extended
transition period of such companies, the Company will not be required to adopt
ASU 2020-06 until October 1, 2022 . The Company is currently evaluating the
impact of the adoption of this principle on the Company's consolidated financial
statements.
In May 2021 , the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260),
Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock
Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity's Own
Equity (Subtopic 815-40): Issuer's Accounting for Certain Modifications or
Exchanges of Freestanding Equity-Classified Written Call Options. The amendments
in ASU No. 2021-04 provides guidance to clarify and reduce diversity in an
issuer's accounting for modifications or exchanges of freestanding
equity-classified written call options (for example, warrants) that remain
equity classified after modification or exchange. The amendments in this ASU No.
2021-04 are effective for all entities for fiscal years beginning after December
15, 2021 , and interim periods within those fiscal years, with early adoption
permitted, including interim periods within those fiscal years. As a result, the
Company will not be required to adopt ASU 2021-04 until October 1, 2022 . The
Company is currently evaluating the impact of the adoption of this principle on
the Company's condensed consolidated financial statements.
3. CREDIT RISK AND OTHER CONCENTRATIONS
The Company places its cash with high credit quality financial institutions
which provide Federal Deposit Insurance Corporation insurance. The Company
performs periodic evaluations of the relative credit standing of these
institutions and does not expect any losses related to such concentrations.
The Company's revenues are earned by processing transactions for merchant
businesses and other institutions under contract with the Company. The Company
utilizes the funds settlement services of primarily six processing banks, from
which most accounts receivable are remitted monthly.
90
--------------------------------------------------------------------------------
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
No single customer accounted for more than 10% of the Company's revenue during
the years ended September 30, 2021 , 2020 and 2019. The Company believes that the
loss of any single customer would not have a material adverse effect on the
Company's financial condition or results of operations.
The Company uses third party payment processors, three of which facilitate more
than 10% of our processing revenues for the years ended September 30, 2021 ,
2020, and 2019.
4. ACQUISITIONS
During the years ended September 30, 2021 , 2020 and 2019 the Company acquired
the following intangible assets and businesses:
Residual Buyouts
From time to time, the Company acquires future commission streams from sales
agents in exchange for an upfront cash payment. This results in an increase in
overall gross processing volume to the Company. The residual buyouts are treated
as asset acquisitions, resulting in recording a residual buyout intangible asset
at cost on the date of acquisition. These assets are amortized using a method of
amortization that reflects the pattern in which the economic benefits of the
intangible asset are expected to be utilized over their estimated useful lives.
During the years ended September 30, 2021 , 2020 and 2019, the Company purchased
$1,819 , $1,788 and $3,585 , respectively, in residual buyouts using a combination
of cash on hand and borrowings on the Company's revolving credit facility. The
acquired residual buyout intangible assets have weighted average estimated
amortization periods of eight, eight and seven years, respectively.
2019 Business Combinations
During the year ended September 30, 2019 , the Company completed the acquisitions
of unrelated businesses, including Pace Payment Systems, Inc.
Purchase of Pace Payment Systems, Inc.
On May 31, 2019 , i3-Holdings Sub, Inc. acquired all of the stock of Pace Payment
Systems, Inc. ("Pace") via a reverse triangular merger involving Pace and a
special acquisition subsidiary of i3-Holdings Sub, Inc. The Company acquired
Pace to expand its software offerings, primarily in the public sector and
education verticals. The total purchase consideration was $56,053 , including
$52,492 in cash consideration, funded by proceeds from the Company's revolving
credit facility, $3,336 of contingent consideration and $225 of restricted
shares of Class A common stock in i3 Verticals .
The goodwill associated with the acquisition is not deductible for tax purposes.
The acquired merchant relationships intangible asset has an estimated
amortization period of fifteen years. The non-compete agreement and trade name
have estimated amortization periods of three and five years, respectively. The
weighted-average estimated amortization period of all intangibles acquired is
fifteen years. The acquired capitalized software has an estimated amortization
period of seven years. The acquisition also included deferred tax assets related
to net operating losses and Section 163(j) carryforwards and deferred tax
liabilities related to intangibles, which are presented as a total net deferred
tax asset as of September 30, 2020 .
Acquisition-related costs for Pace amounted to approximately $507 ($444 during
fiscal year 2019) and were expensed as incurred.
Certain provisions in the merger agreement provide for additional consideration
of up to $20,000 in the aggregate, to be paid based upon achievement of
specified financial performance targets, as defined in the purchase agreement,
in the 24 months from January 1, 2020 through December 31, 2021 . The Company
determined the acquisition date fair value of the liability for the contingent
consideration based on a discounted
91
--------------------------------------------------------------------------------
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
cash flow analysis. In each subsequent reporting period, the Company will
reassess the current estimates of performance relative to the targets and adjust
the contingent liability to its fair value through earnings. See additional
disclosures in Note 13.
Other 2019 Business Combinations
The Company completed the acquisitions of other businesses to expand the
Company's software offerings in the public sector vertical market, provide
technology that enhances the Company's Burton Platform and expand the Company's
merchant base. Total purchase consideration was $98,887 , including $89,191 in
revolving credit facility proceeds and $9,696 of contingent cash consideration.
For some of these businesses acquired, the goodwill associated with the
acquisitions is deductible for tax purposes, and goodwill associated with the
acquisitions of others of the businesses is not deductible for tax purposes. The
acquired merchant relationships intangible assets have estimated amortization
periods of between thirteen and twenty years. The non-compete agreement and
trade names have weighted-average amortization periods of three and five years,
respectively. The weighted-average amortization period for all intangibles
acquired is sixteen years. The acquired capitalized software has an estimated
amortization period of six years.
Acquisition-related costs for the other businesses amounted to approximately
$1,299 and were expensed as incurred.
Certain provisions in the purchase agreements provide for additional
consideration of up to $34,900 , 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 2021 . The Company
determined the acquisition date fair values of the liabilities for the
contingent consideration based on probability forecasts and discounted cash flow
analyses. In each subsequent reporting period, the Company will reassess its
current estimates of performance relative to the targets and adjust the
contingent liabilities to their fair values through earnings. See additional
disclosures in Note 13.
92
--------------------------------------------------------------------------------
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
Summary of 2019 Business Combinations
The fair values assigned to certain assets and liabilities assumed, as of the
acquisition dates, during the year ended September 30, 2019 were as follows:
Pace Other Total
Cash and cash equivalents $ 108 $ 4,453 $ 4,561
Accounts receivable 545 4,907 5,452
Settlement assets - 18 18
Inventories 45 61 106
Prepaid expenses and other current assets 59 483 542
Property and equipment 527 1,929 2,456
Capitalized software 3,400 9,440 12,840
Acquired merchant relationships 13,400 34,480 47,880
Exclusivity Agreements - - -
Non-compete agreements 60 150 210
Trade name 500 1,540 2,040
Goodwill 35,589 47,483 83,072
Other assets 2,622 2 2,624
Total assets acquired 56,855 104,946 161,801
Accounts payable 722 369 1,091Accrued expenses and other current liabilities 56 2,284
2,340
Settlement obligations - 18 18
Deferred revenue, current 24 2,698 2,722
Other long-term liabilities - 690 690
Net assets acquired $ 56,053 $ 98,887 $ 154,940
2020 Business Combinations
During the year ended September 30, 2020 , the Company completed the acquisitions
of three unrelated businesses. Two expanded the Company's geographic reach and
software capabilities in the public sector vertical. The other adds text-to-pay
capabilities and other software solutions in the Company's non-profit vertical.
Total purchase consideration was $32,633 , including $27,885 in revolving credit
facility proceeds and $4,748 of contingent consideration. Certain of the
purchase price allocations assigned for these acquisitions are preliminary.
For some of these business acquired, the goodwill associated with the
acquisitions is deductible for tax purposes, and goodwill associated with the
acquisitions of others of the businesses is not deductible for tax purposes. The
acquired merchant relationships intangible assets have estimated amortization
periods of between fifteen and eighteen years. The non-compete agreement and
trade names both have weighted-average amortization periods three years. The
weighted-average amortization period for all intangibles acquired is sixteen
years. The acquired capitalized software has an estimated amortization period of
seven years.
Acquisition-related costs for these businesses amounted to approximately $547
and were expensed as incurred.
Certain provisions in the purchase agreements provide for additional
consideration of up to $18,600 , in the aggregate, to be paid based upon the
achievement of specified financial performance targets, as defined in the
93
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i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
purchase agreements, through no later than September 2022 . The Company
determined the acquisition date fair values of the liabilities for the
contingent consideration based on probability forecasts and discounted cash flow
analyses. In each subsequent reporting period, the Company will reassess its
current estimates of performance relative to the targets and adjust the
contingent liabilities to their fair values through earnings. See additional
disclosures in Note 13.
Summary of 2020 Business Combinations
The fair values assigned to certain assets and liabilities assumed, as of the
acquisition dates, during the year ended September 30, 2020 were as follows:
Cash and cash equivalents $ 313
Accounts receivable 846
Prepaid expenses and other current assets 54
Property and equipment 122
Capitalized software 1,970
Acquired merchant relationships 11,900
Non-compete agreements 90
Trade name 300
Goodwill 20,213
Other assets 17
Total assets acquired 35,825
Accounts payable 168
Accrued expenses and other current liabilities 635
Deferred revenue, current 200
Other long-term liabilities 2,194
Net assets acquired $ 32,628
During the year ended September 30, 2021 , the Company finalized the purchase
price allocations for the 2020 business combinations, which resulted in
additional adjustments to increase current assets by $137 , increase goodwill by
$265 and decrease liabilities by $407 . The table above reflects the adjusted
amounts.
2021 Business Combinations
During the year ended September 30, 2021 , the Company completed the acquisitions
of eight unrelated businesses, including Business Information Systems, Inc. ,
ImageSoft Inc. , and six other collectively material businesses.
Purchase of Business Information Systems, Inc.
On February 1, 2021 , the Company completed the acquisition of substantially all
of the assets of Business Information Systems, GP, a Tennessee general
partnership and Business Information Systems, Inc. , a Tennessee corporation
(collectively "BIS") to expand its software offerings, primarily in the Public
Sector vertical. BIS is within the Proprietary Software & Payments segment.
Total purchase consideration was $95,495 , including $52,500 in cash on hand and
proceeds from the Company's revolving credit facility, 1,202,914 shares of the
Company's Class A Common Stock (valued at $35,245 ), and $7,750 in contingent
consideration.
The goodwill associated with the acquisition is deductible for tax purposes. The
acquired merchant relationships intangible asset has an estimated amortization
period of nineteen years. The non-compete agreement and trade name have
estimated amortization periods of three and five years, respectively. The
94
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i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
weighted-average estimated amortization period of all intangibles acquired is
nineteen years. The acquired capitalized software has an estimated amortization
period of ten years.
Acquisition-related costs for BIS amounted to approximately $374 and were
expensed as incurred.
Certain provisions in the merger agreement provide for additional consideration
of up to $16,000 in the aggregate, to be paid based upon achievement of
specified financial performance targets, as defined in the purchase agreement,
in the 24 months from February 1, 2021 through January 31, 2023 . The Company
determined the acquisition date fair value of the liability for the contingent
consideration based on a probability forecast and discounted cash flow analysis.
In each subsequent reporting period, the Company will reassess the current
estimates of performance relative to the targets and adjust the contingent
liability to its fair value through earnings. See additional disclosures in Note
13.
Purchase of ImageSoft, Inc.
On November 17, 2020 , the Company completed the acquisition of substantially all
of the assets of ImageSoft, Inc. ("ImageSoft") to expand its software offerings,
primarily in the Public Sector vertical. ImageSoft , is within the Proprietary
Software & Payments segment. Total purchase consideration was $46,300 , including
$40,000 in cash consideration, funded by proceeds from the Company's revolving
credit facility, and $6,300 in contingent consideration.
The goodwill associated with the acquisition is deductible for tax purposes. The
acquired merchant relationships intangible asset has an estimated amortization
period of twenty years. The non-compete agreement and trade name have estimated
amortization periods of three and five years, respectively. The weighted-average
estimated amortization period of all intangibles acquired is nineteen years. The
acquired capitalized software has an estimated amortization period of seven
years.
Acquisition-related costs for ImageSoft amounted to approximately $403 and were
expensed as incurred.
Certain provisions in the merger agreement provide for additional consideration
of up to $20,000 in the aggregate, to be paid based upon achievement of
specified financial performance targets, as defined in the purchase agreement,
in the 24 months from May 1, 2021 through April 30, 2023 . The Company determined
the acquisition date fair value of the liability for the contingent
consideration based on a probability forecast and discounted cash flow analysis.
In each subsequent reporting period, the Company will reassess the current
estimates of performance relative to the targets and adjust the contingent
liability to its fair value through earnings. See additional disclosures in Note
13.
Other Business Combinations
From October 1, 2020 to September 30, 2021 , the Company completed the
acquisitions of six other businesses to expand the Company's software offerings
in the public sector and Healthcare vertical markets and to add proprietary
technology that will augment the Company's existing platform across several
verticals. Five of these businesses are within the Proprietary Software &
Payments segment and one is within the Merchant Services segment. Total purchase
consideration was $65,527 , including $57,000 in cash consideration, funded by
proceeds from the Company's revolving credit facility, and $8,527 of contingent
consideration.
For each of these businesses acquired, the goodwill associated with the
acquisition is deductible for tax purposes. The acquired merchant relationships
intangible assets have estimated amortization periods of between ten and
twenty-five years. The non-compete agreement and trade names have estimated
amortization periods of three years. The weighted-average amortization period
for all intangibles acquired is eighteen years. The acquired capitalized
software has a weighted-average amortization period of seven years.
Acquisition-related costs for these businesses amounted to approximately $1,083
and were expensed as incurred.
95
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i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
Certain provisions in the purchase agreements provide for additional
consideration of up to $50,200 , in the aggregate, to be paid based upon the
achievement of specified financial performance targets, as defined in the
purchase agreements, through no later than June 2023 . The Company determined the
acquisition date fair values of the liabilities for the contingent consideration
based on probability forecasts and discounted cash flow analyses. In each
subsequent reporting period, the Company will reassess its current estimates of
performance relative to the targets and adjust the contingent liabilities to
their fair values through earnings. See additional disclosures in Note 13.
Summary of 2021 Business Combinations
The fair values assigned to certain assets and liabilities assumed, as of the
acquisition dates, during the year ended September 30, 2021 were as follows:
BIS ImageSoft, Inc. Other Total
Accounts receivable $ 1,567 $ 4,997 $ 3,216 $ 9,780
Settlement assets 6,889 120 - 7,009
Inventories 458 - 161 619
Prepaid expenses and other current
assets 10 2,897 2,036 4,943
Property and equipment 206 433 312 951
Capitalized software 15,200 5,200 4,100 24,500
Acquired merchant relationships 32,300 16,300 24,040 72,640
Non-compete agreements 100 610 390 1,100
Trade name 700 1,100 840 2,640
Goodwill 46,660 22,408 35,906 104,974
Operating lease right-of-use assets - 332 472 804
Other assets - 6 32 38
Total assets acquired 104,090 54,403 71,505 229,998
Accrued expenses and other current
liabilities 138 910 1 1,049
Settlement obligations 6,889 120 - 7,009
Deferred revenue, current 1,568 6,748 5,505 13,821
Current portion of operating lease
liabilities - 75 221 296
Operating lease liabilities, less
current portion - 250 251 501
Net assets acquired $ 95,495 $ 46,300 $ 65,527 $ 207,322
The fair values assigned were updated to reflect the retrospective adoption of
ASU 2021-08, which resulted in increases to the fair values assigned to deferred
revenue and goodwill as of the acquisition dates. Refer to Note 2 for further
discussion.
Pro Forma Results of Operations for 2021 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, 2021 had occurred on October 1, 2019 . 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
96
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i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
information does not purport to be indicative of the results of operations that
would have been attained had the acquisitions been made on these dates, or of
results of operations that may occur in the future.
Year ended September 30,
2021 2020
Revenue $ 249,333 $ 227,190
Net loss $ (7,595) $ (2,042) 5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
A summary of the Company's prepaid expenses and other current assets as of
2021 2020
Inventory $ 2,220 $ 1,309
Prepaid licenses 4,646 157
Prepaid insurance 1,074 1,466
Other current assets 3,274 1,937
Prepaid expenses and other current assets
6. PROPERTY AND EQUIPMENT, NET A summary of the Company's property and equipment as ofSeptember 30, 2021 and 2020 is as follows: Estimated Useful Life 2021
2020
Computer equipment and software(1) 2 to 7 years
$ 2,382 Furniture and fixtures 2 to 7 years 2,125 1,867 Terminals 2 to 3 years 945 584 Office equipment 2 to 5 years 1,173 942 Automobiles 3 years 481 366 Leasehold improvements 2 to 7 years 2,788 2,194 Accumulated depreciation (4,592) (2,996) Property and equipment, net$ 5,902 $ 5,339 ____________________ 1.Includes computer software of$707 and$694 as ofSeptember 30, 2021 and 2020, respectively. Depreciation expense for the years endedSeptember 30, 2021 , 2020 and 2019 amounted to$2,312 ,$1,825 and$1,195 , respectively. 97 -------------------------------------------------------------------------------- i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) 7. CAPITALIZED SOFTWARE, NET A summary of the Company's capitalized software as ofSeptember 30, 2021 and 2020 is as follows: Estimated Useful Life 2021 2020 Software development costs 1 to 7 years$ 46,417 $ 21,485 Development in progress 6,612 2,638 Accumulated amortization (11,658) (7,134) Capitalized software, net$ 41,371 $ 16,989 The Company capitalized software development costs (including acquisitions) totaling$30,659 and$5,756 during the years endedSeptember 30, 2021 and 2020, respectively. Amortization expense for capitalized software development costs amounted to$6,276 ,$3,978 and$2,977 during the years endedSeptember 30, 2021 , 2020 and 2019, respectively. There were no amounts written down to net realizable value during the years endedSeptember 30, 2021 , 2020 and 2019, respectively. 8. GOODWILL AND INTANGIBLE ASSETS Changes in the carrying amount of goodwill are as follows: Proprietary Merchant Software and Services Payments Other Total Balance at September 30, 2019$ 117,334 $ 50,950 $ -$ 168,284 Goodwill reassigned in segment realignment(1) (419) 419 - -Goodwill attributable to preliminary purchase price adjustments and acquisition activity during the year ended September 30, 2020 (933) 19,654 - 18,721 Balance at September 30, 2020 115,982 71,023 - 187,005Goodwill attributable to preliminary purchase price adjustments and acquisition activity during the year ended September 30, 2021 3,104 102,134 - 105,238 Balance at September 30, 2021$ 119,086 $
173,157 $ -
____________________
1.Represents the reallocation of goodwill related to a component which was realigned from theProprietary Software and Payments segment to the Merchant Services segment as ofJuly 1, 2020 . See Note 17 for additional information. Intangible assets consisted of the following as ofSeptember 30, 2021 : 98 --------------------------------------------------------------------------------
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
Accumulated Carrying
Cost Amortization Value Amortization Life and MethodFinite-lived intangible assets:
10 to 25 years - accelerated
Merchant relationships $ 227,211 $ (65,815) $ 161,396 or straight-line
Non-compete agreements 2,878 (1,907) 971 3 to 6 years - straight-line Website and brand development costs 240
(133) 107 3 to 4 years - straight-line
Trade names 6,320 (2,668) 3,652 3 to 7 years - straight-line
Residual buyouts 6,718 (1,407) 5,311 8 years - straight-line
Referral and exclusivity agreements 800 (573) 227 5 years - straight-line
Total finite-lived intangible assets 244,167 (72,503) 171,664
Indefinite-lived intangible assets: Trademarks 42 -
42
Total identifiable intangible assets
Intangible assets consisted of the following as of
Accumulated
Cost Amortization Carrying Value Amortization Life and Method Finite-lived intangible assets:
12 to 20 years - accelerated
Merchant relationships $ 154,571 $ (53,388) $ 101,183 or straight-line
Non-compete agreements 1,700 (851) 849 2 to 5 years - straight-line
Website development costs 215 (65) 150 3 to 4 years - straight-line
Trade names 3,880 (1,538) 2,342 3 to 7 years - straight-line
Residual buyouts 5,373 (1,172) 4,201 2 to 8 years - straight-line
5 to 10 years -
Referral and exclusivity agreements 900 (434) 466 straight-line
Total finite-lived intangible assets 166,639 (57,448) 109,191
Indefinite-lived intangible assets:
Trademarks 42 - 42
Total identifiable intangible assets 166,681 (57,448) 109,233
Amortization expense for intangible assets amounted to
99
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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, 2021 , 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 :
2022 $ 15,360
2023 14,501
2024 13,519
2025 13,237
2026 12,842
Thereafter 102,205
$ 171,664
9. ACCRUED EXPENSES AND OTHER LIABILITIES
A summary of the Company's accrued expenses and other current liabilities as of
September 30, 2021 and 2020 is as follows:
2021 2020
Accrued wages, bonuses, commissions and vacation
271 141
Accrued contingent consideration - current portion 25,768 10,062 Escrow liabilities
9,067 4,363
Customer deposits 1,913 1,828
Employee health self-insurance liability 1,032 -
Other current liabilities 6,115 3,803
Accrued expenses and other current liabilities
A summary of the Company's long-term liabilities as of
2021 2020
Accrued contingent consideration - long-term portion
3,280 2,212
Other long-term liabilities 270
956
Total other long-term liabilities$ 14,011 $ 6,140 100
--------------------------------------------------------------------------------
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
10. LONG-TERM DEBT, NET
A summary of long-term debt, net as of September 30, 2021 and September 30, 2020
is as follows:
Maturity 2021 2020
Revolving lines of credit to banks under the
Senior Secured Credit Facility May 9, 2024 $ 104,396 $ -
1.0% Exchangeable Senior Notes due 2025 February 15, 2025 99,808 95,325
Debt issuance costs, net (3,599) (4,567)
Total long-term debt, net of issuance costs 2020 Exchangeable Notes Offering OnFebruary 18, 2020 ,i3 Verticals, LLC issued$138,000 aggregate principal amount of 1.0% Exchangeable Senior Notes due 2025 (the "Exchangeable Notes") in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). The Company 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 1.00% per year, payable semiannually in arrears onFebruary 15 andAugust 15 of each year, beginning onAugust 15, 2020 . The Exchangeable Notes will mature onFebruary 15, 2025 , unless converted or repurchased at an earlier date.i3 Verticals, LLC issued the Exchangeable Notes pursuant to an Indenture, dated as ofFebruary 18, 2020 (the "Indenture"), amongi3 Verticals, LLC , the Company andU.S. Bank National Association , as trustee. Prior toAugust 15, 2024 , the Exchangeable Notes are exchangeable only upon satisfaction of certain conditions and during certain periods described in the Indenture, and thereafter, the Exchangeable Notes are exchangeable at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. The Exchangeable Notes are exchangeable on the terms set forth in the Indenture into cash, shares of Class A common stock, or a combination thereof, ati3 Verticals, LLC's election. The exchange rate is initially 24.4666 shares of Class A common stock per$1,000 principal amount of Exchangeable Notes (equivalent to an initial exchange price of approximately$40.87 per share of Class A common stock). The exchange rate is subject to adjustment in certain circumstances. In addition, following certain corporate events that occur prior to the maturity date ori3 Verticals, LLC's delivery of a notice of redemption,i3 Verticals, LLC will increase, in certain circumstances, the exchange rate for a holderwho elects to exchange its Exchangeable Notes in connection with such a corporate event or notice of redemption, as the case may be. If the Company ori3 Verticals, LLC undergoes a fundamental change, holders may requirei3 Verticals, LLC to repurchase all or part of their Exchangeable Notes at a repurchase price equal to 100% of the principal amount of the Exchangeable Notes to be repurchased, plus accrued and unpaid interest to, but not including, the fundamental change repurchase date. As ofSeptember 30, 2021 , none of the conditions permitting the holders of the Exchangeable Notes to early convert have been met.i3 Verticals, LLC may not redeem the Exchangeable Notes prior toFebruary 20, 2023 . On or afterFebruary 20, 2023 , and 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. 101 -------------------------------------------------------------------------------- i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) The Exchangeable Notes are general senior unsecured obligations ofi3 Verticals, LLC and the guarantee is the Company's senior unsecured obligation and rank senior in right of payment to all ofi3 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 ofi3 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 credit agreement governing the 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 thani3 Verticals, LLC . In accounting for the issuance of the Exchangeable Notes, the Company separated the Exchangeable Notes into liability and equity components. The carrying amount of the liability component before the allocation of any transaction costs was calculated by measuring the fair value of a similar liability that does not have an associated exchangeable feature. The carrying amount of the equity component (before the allocation of any transaction costs), representing the conversion option, which does not require separate accounting as a derivative as it meets a scope exception for certain contracts involving an entity's own equity, was determined by deducting the fair value of the liability component from the par value of the Exchangeable Notes. The difference between the principal amount of the Exchangeable Notes and the liability component represents the debt discount, which is recorded as a direct deduction from the related debt liability in the consolidated balance sheet and accreted over the period from the date of issuance to the contractual maturity date, resulting in the recognition of non-cash interest expense. The equity component of the Exchangeable Notes of approximately$28,662 is included in additional paid-in capital in the consolidated balance sheet and is not remeasured as longs as it continues to meet the conditions for equity classification. Transaction costs were allocated to the liability and equity components in the same proportion as the allocation of the proceeds. Transaction costs attributable to the liability component were recorded as debt issuance costs in the consolidated balance sheet and are amortized to interest expense using the effective interest method over the term of the Exchangeable Notes, and transaction costs attributable to the equity component were netted with the equity component in stockholders' equity. The Company incurred third-party issuance costs totaling$5,238 , in connection with the issuance of the Exchangeable Notes for the year endedSeptember 30, 2020 . The Company capitalized$4,150 of debt issuance costs in connection with the Exchangeable Notes and allocated$1,088 of the third-party issuance costs to equity during the year endedSeptember 30, 2020 . Non-cash interest expense for amortization of debt issuance costs related to the Exchangeable Notes for the years endedSeptember 30, 2021 and 2020 was$588 and$365 , respectively. The Company also wrote off a portion of the debt issuance costs in connection with the repurchase transactions in April andSeptember 2020 , as described below. Total unamortized debt issuance costs related to the Exchangeable Notes were$2,605 as ofSeptember 30, 2021 . The estimated fair value of the Exchangeable Notes was$119,633 as ofSeptember 30, 2021 . The estimated fair value of the Exchangeable Notes was determined through consideration of quoted market prices for similar instruments. The fair value is classified as Level 2, as defined in Note 13. The Company can choose to purchase its Exchangeable Notes on the open market. In April andSeptember 2020 , the Company paid$17,414 in aggregate to repurchase$21,000 in aggregate principal amount of the Exchangeable Notes and to repay approximately$24 in accrued interest on the repurchased portion of the Exchangeable Notes. The Company recorded a loss on retirement of debt of$2,297 due to the carrying value exceeding the fair value of the repurchased portion of the Exchangeable Notes at the dates of repurchases. The Company wrote off$592 of debt issuance costs in connection with the repurchase transactions. Exchangeable Note Hedge Transactions OnFebruary 12, 2020 , concurrently with the pricing of the Exchangeable Notes, and onFebruary 13, 2020 , concurrently with the exercise by the initial purchasers of their right to purchase additional Exchangeable Notes, i3 102 -------------------------------------------------------------------------------- i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts)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 byi3 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. Warrant Transactions OnFebruary 12, 2020 , concurrently with the pricing of the Exchangeable Notes, and onFebruary 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 onMay 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. Senior Secured Credit Facility OnMay 9, 2019 , the Company replaced its existing 2017 Senior Secured Credit Facility (defined below) with a new credit agreement (the "Senior Secured Credit Facility"). The Company concluded that the replacement of the 2017 Senior Secured Credit Facility should be accounted for as a debt modification based on the guidance in ASC 470-50. In connection with the replacement of the 2017 Senior Secured Credit Facility, the Company recorded a debt extinguishment charge of$152 for the write-off of deferred financing costs, which was recorded in interest expense in the consolidated statements of operations. The Senior Secured Credit Facility, as amended onFebruary 18, 2020 in connection with our offering of Exchangeable Notes, consists of a$275,000 revolving credit facility, together with an option to increase the revolving credit facility and/or obtain incremental term loans in an additional principal amount of up to$50,000 in the aggregate (subject to the receipt of additional commitments for any such incremental loan amounts). The Senior Secured Credit Facility accrues interest at LIBOR (based upon an interest period of one, two, three or six months or, under some circumstances, up to twelve months) plus an applicable margin of 2.25% to 3.25% (3.25% as ofSeptember 30, 2021 ), or the base rate (defined as the highest of (x) theBank of America prime rate, (y) the federal funds rate plus 0.50% and (z) LIBOR plus 1.00%), plus an applicable margin of 0.25% to 1.25% (1.25% as ofSeptember 30, 2021 ), in each case depending upon the consolidated total leverage ratio, as defined in the agreement. Interest is payable at the end of the selected interest period, but no less frequently than quarterly. Additionally, the Senior Secured Credit Facility requires the Company to pay unused commitment fees of 0.15% to 0.30% (0.30% as ofSeptember 30, 2021 ) on any undrawn amounts under the revolving credit facility and letter of credit fees of up to 3.25% on the maximum amount 103 -------------------------------------------------------------------------------- i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) available to be drawn under each letter of credit issued under the agreement. The Senior Secured Credit Facility requires maintenance of certain financial ratios on a quarterly basis as follows: (i) a minimum consolidated interest coverage ratio of 3.00 to 1.00, (ii) a maximum total leverage ratio of 5.00 to 1.00, provided, that for each of the four fiscal quarters immediately following a qualified acquisition (each a "Leverage Increase Period"), the required ratio set forth above may be increased by up to 0.25, subject to certain limitations and (iii) a maximum consolidated senior secured leverage ratio of 3.25 to 1.00, provided, that for each Leverage Increase Period, the consolidated senior leverage ratio may be increased by up to 0.25, subject to certain limitations. The maturity date of the Senior Secured Credit Facility isMay 9, 2024 . As ofSeptember 30, 2021 , there was$170,604 available for borrowing under the revolving credit facility, subject to the financial covenants. The Senior Secured Credit Facility is secured by substantially all assets of the Company. The lenders under the Senior Secured Credit Facility hold senior rights to collateral and principal repayment over all other creditors. The provisions of the Senior Secured Credit Facility place certain restrictions and limitations upon the Company. These include, among others, restrictions on liens, investments, indebtedness, fundamental changes and dispositions; maintenance of certain financial ratios; and certain non-financial covenants pertaining to the activities of the Company during the period covered. The Company was in compliance with such covenants as ofSeptember 30, 2021 . In addition, the Senior Secured Credit Facility restricts the Company's ability to make dividends or other distributions to the holders of the Company's equity. The Company is permitted to (i) make cash distributions to the holders of the Company's equity in order to pay taxes incurred by owners of equity ini3 Verticals, LLC , by reason of such ownership, (ii) move intercompany cash between subsidiaries that are joined to the Senior Secured Credit Facility, (iii) repurchase equity from employees, directors, officers or consultants in an aggregate amount not to exceed$3,000 per year, (iv) make certain payments in connection with the Tax Receivable Agreement, and (v) make other dividends or distributions in an aggregate amount not to exceed 5% of the net cash proceeds received from any additional common equity issuance. The Company is also permitted to make non-cash dividends in the form of additional equity issuances. Each subsidiary may make ratable distributions to persons that own equity interests in such subsidiary. All other forms of dividends or distributions are prohibited under the Senior Secured Credit Facility. 2017 Senior Secured Credit Facility OnOctober 30, 2017 , the Company replaced its then-existing credit facility with the 2017 Senior Secured Credit Facility (the "2017 Senior Secured Credit Facility"). The 2017 Senior Secured Credit Facility consisted of term loans in the original principal amount of$40,000 and a$110,000 revolving line of credit. The 2017 Senior Secured Credit Facility accrued interest, payable monthly, at the prime rate plus a margin of 0.50% to 2.00% or at the 30-day LIBOR rate plus a margin of 2.75% to 4.00%, in each case depending on the ratio of consolidated debt-to-EBITDA, as defined in the agreement. Additionally, the 2017 Senior Secured Credit Facility required the Company to pay unused commitment fees of up to 0.15% to 0.30% on any undrawn amounts under the revolving line of credit. The maturity date of the 2017 Senior Secured Credit Facility isOctober 30, 2022 . Principal payments of$1,250 were due on the last day of each calendar quarter until the maturity date, when all outstanding principal and accrued and unpaid interest were due. The 2017 Senior Secured Credit Facility was secured by substantially all assets of the Company. The lenders under the 2017 Senior Secured Credit Facility held senior rights to collateral and principal repayment over all other creditors. As previously mentioned, onMay 9, 2019 , the Company replaced its existing 2017 Senior Secured Credit Facility with the Senior Secured Credit Facility. Debt issuance costs During the year endedSeptember 30, 2020 , the Company capitalized$4,212 in connection with the issuance of the Exchangeable Notes, the Note Hedge Transactions and the Warrants and in connection with entering into the second amendment to the Senior Secured Credit Facility. The debt issuance costs are being amortized over 104 -------------------------------------------------------------------------------- i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) the related term of the debt using the effective interest rate method, and are presented net against long-term debt in the consolidated balance sheets. During the year endedSeptember 30, 2021 , the Company did not incur any additional issuance costs. The amortization of debt issuance costs is included in interest expense and amounted to approximately$968 ,$758 and$721 during the years endedSeptember 30, 2021 , 2020 and 2019, respectively. 11. INCOME TAXESi3 Verticals, Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it fromi3 Verticals, LLC based oni3 Verticals, Inc.'s economic interest ini3 Verticals, LLC .i3 Verticals, LLC's members, including the Company, are liable for federal, state and local income taxes based on their share ofi3 Verticals, LLC's pass-through taxable income.i3 Verticals, LLC is not a taxable entity for federal income tax purposes, but is subject to and reports entity level tax in bothTennessee andTexas . In addition, certain subsidiaries ofi3 Verticals, LLC are corporations that are subject to state and federal income taxes. Year ended September 30, 2021 2020 2019
Current:
Federal tax (benefit) expense
945 446 189
Deferred:
Federal tax benefit (285) (3,018) (487) State tax benefit (2) (189) (99) Income tax expense (benefit)$ 623 $ (2,795) $ (177) A reconciliation of income tax expense from operations computed at theU.S. federal statutory income tax rate to the Company's effective income tax rate is as follows: Year ended September 30, 2021 2020 2019 ExpectedU.S. federal income taxes at statutory rate$ (1,519) 21.1 % $
(792) 21.0 %
29 (0.4) % 85 (2.3) % (1,007) (260.9) %
Valuation allowance 712 (9.9) % (2,694) 71.4 % 251 65.0 %
State and local income taxes, net
of federal benefit 552 (7.6) % 244 (6.5) % 104 26.9 %
Nondeductible expenses and other
permanent items 85 (1.2) % 496 (13.1) % 582 150.8 %
Revaluation of debt and other debt
transaction differences 609 (8.4) % 222 (5.9) % (189) (49.0) %
Change in liability for uncertain
tax positions (83) 1.2 % 108 (2.9) % - - %
Federal tax credits 240 (3.3) % (431) 11.4 % - - %
Other (2) - % (33) 0.9 % 1 0.3 %
Income tax expense (benefit)
105
--------------------------------------------------------------------------------
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, 2021 and
2020 were as follows:
September 30,
2021 2020
Deferred tax assets:
Investment in partnership $ 57,080 $ 47,897
Stock-based compensation 1,714 1,187
Deferred revenue 561 525
Accrued expenses 232 181
Net operating loss carryforwards 13,441 10,969
Section 163j carryforward 1,828 2,498
Federal tax credits 661 901
Operating lease liabilities 638 -
Other 75 73
Gross deferred tax assets 76,230 64,231
Valuation allowance (20,269) (20,230)
Deferred tax liabilities:
Intangible assets $ (8,308) $ (9,167)
Operating lease right of use assets (620) -
Other (321) (291)
Net deferred tax asset $ 46,712 $ 34,543
Federal net operating loss carryforwards as of September 30, 2021 and 2020 were
$35,312 and $26,984 , respectively. Federal tax credits were $661 , resulting in a
deferred tax benefit of $8,077 as of September 30, 2021 compared to $901 of
federal tax credits, resulting in a deferred tax benefit of $6,568 as of
September 30, 2020 . The federal net operating loss carryforwards will begin to
expire in 2035 and the federal tax credits will begin to expire in 2033. 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 $793
has been provided for certain federal deferred tax assets, an increase of $405
during the year ended September 30, 2021 . State net operating loss carryforwards
as of September 30, 2021 totaled $95,060 , resulting in a deferred tax benefit of
$6,026 . The state net operating loss carryforwards will begin to expire in 2026.
The use of certain state net operating losses are limited to future taxable
earnings of separate legal entities. As a result, a valuation allowance of
$4,029 has been provided for state loss carryforwards, an increase of $458
during the year ended September 30, 2021 . The Company also considered a
valuation allowance on its $57,080 outside basis of investment in i3 Verticals,
LLC deferred tax benefit as of September 30, 2021 . The Company has recorded a
valuation allowance of $15,447 against the portion of the deferred tax benefit
that is capital in nature, resulting in a decrease in valuation allowance of
$824 during the year ended September 30, 2021 . 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.
106
--------------------------------------------------------------------------------
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
108
Increase in prior year tax positions 76
Settlements and other reductions -
Gross unrecognized tax benefits as of
-
Increase in prior year tax positions -
Settlements and other reductions $ 76 Gross unrecognized tax benefits as of
As ofSeptember 30, 2021 and 2020, the Company had accrued interest of$0 and$7 , respectively, 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 toU.S. federal, state, or local examinations by tax authorities for years before 2017. As ofSeptember 30, 2021 and 2020, there were unrecognized tax benefits of$108 and$184 that if recognized would affect the annual effective tax rate. Tax Receivable Agreement OnJune 25, 2018 , the Company entered into a Tax Receivable Agreement withi3 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 ofi3 Verticals, LLC for Class A common stock ofi3 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 ini3 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 ini3 Verticals, LLC subject to the provisions of the Tax Receivable Agreement. During the year endedSeptember 30, 2019 , the Company acquired an aggregate of 4,292,169 common units ofi3 Verticals, LLC in connection with the redemption of common units, which resulted in an increase in the tax basis of our investment ini3 Verticals, LLC subject to the provisions of the Tax Receivable Agreement. Primarily as a result of these exchanges, during the year endedSeptember 30, 2019 , the Company recognized an increase to its net deferred tax assets in the amount of$25,776 , and corresponding Tax Receivable Agreement liabilities of$22,413 , representing 85% of the tax benefits due to the Continuing Equity Owners. The results of these transactions brought the deferred tax asset and corresponding Tax Receivable Agreement liability balances to$26,736 and$23,229 , respectively, as ofSeptember 30, 2019 . 107 --------------------------------------------------------------------------------i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) During the year endedSeptember 30, 2020 , the Company acquired an aggregate of 1,021,016 common units ofi3 Verticals, LLC in connection with the redemption of common units, which resulted in an increase in the tax basis of our investment ini3 Verticals, LLC subject to the provisions of the Tax Receivable Agreement. As a result of these exchanges, during the year endedSeptember 30, 2020 , the Company recognized an increase to its net deferred tax assets in the amount of$6,307 , and corresponding Tax Receivable Agreement liabilities of$5,361 , representing 85% of the tax benefits due to the Continuing Equity Owners. During the year endedSeptember 30, 2021 , the Company acquired an aggregate of 1,671,479 common units ofi3 Verticals, LLC in connection with the redemption of common units, which resulted in an increase in the tax basis of our investment ini3 Verticals, LLC subject to the provisions of the Tax Receivable Agreement. As a result of these exchanges, during the year endedSeptember 30, 2021 , the Company recognized an increase to its net deferred tax assets in the amount of$13,990 , and corresponding Tax Receivable Agreement liabilities of$11,892 , representing 85% of the tax benefits due to the Continuing Equity Owners. The deferred tax asset and corresponding Tax Receivable Agreement liability balances were$41,633 and$39,122 , respectively, as ofSeptember 30, 2021 . Payments to the Continuing Equity Owners related to exchanges throughSeptember 30, 2021 will range from$0 to$3,174 per year and are expected to be paid over the next 25 years. The amounts recorded as ofSeptember 30, 2021 , approximate the current estimate of expected tax savings and are subject to change after the filing of the Company'sU.S. federal and state income tax returns. Future payments under the Tax Receivable Agreement with respect to subsequent exchanges would be in addition to these amounts. 12. LEASES As discussed in Note 2, the Company adopted ASC 842 effectiveOctober 1, 2020 , using the modified retrospective transition method, under which the prior period financial statements were not restated for the new guidance. 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 ofSeptember 30, 2021 . 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 atSeptember 30, 2021 was six years. The Company had no significant short-term leases during the year endedSeptember 30, 2021 . 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 7.1% as ofSeptember 30, 2021 . Operating lease cost is recognized on a straight-line basis over the lease term. Operating lease costs for the year endedSeptember 30, 2021 were$4,096 which are included in selling, general and administrative expenses in the condensed consolidated statements of operations. Total operating lease costs for the year endedSeptember 30, 2021 include variable lease costs of approximately$6 , which are primarily comprised of costs of maintenance and utilities and changes in rates, and 108 --------------------------------------------------------------------------------i3 VERTICALS, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except unit, share and per share amounts) are determined based on the actual costs incurred during the period. Variable payments are expensed in the period incurred and not included in the measurement of lease assets and liabilities. Short-term rent expense for the year endedSeptember 30, 2021 was$304 and are included in selling, general and administrative expenses in the condensed consolidated statements of operations. As ofSeptember 30, 2021 , maturities of lease liabilities are as follows: Years endingSeptember 30 : 2022$ 4,014 2023 3,451 2024 2,840 2025 2,405 2026 1,737 Thereafter 3,469
Total future minimum lease payments (undiscounted)(1) 17,916 Less: present value discount
(2,755)
Present value of lease liability $ 15,161 _________________________
1.Total future minimum lease payments excludes payments of$9 for leases designated as short-term leases, which are excluded from the Company's right-of-use assets. These payments will be made within the next twelve months. A summary of approximate future minimum payments for leases under ASC 840 as ofSeptember 30, 2020 , was as follows: Years endingSeptember 30 : 2021$ 2,726 2022 2,397 2023 2,096 2024 1,469 2025 968 Thereafter 1,221 Total$ 10,877 109
--------------------------------------------------------------------------------
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
13. FAIR VALUE MEASUREMENTS
The Company applies the provisions of ASC 820, Fair Value Measurement, which
defines fair value, establishes a framework for its measurement and expands
disclosures about fair value measurements. Fair value is the price that would be
received to sell an asset or the price paid to transfer a liability as of the
measurement date. A three-tier, fair-value reporting hierarchy exists for
disclosure of fair value measurements based on the observability of the inputs
to the valuation of financial assets and liabilities. The three levels are:
Level 1 - Quoted prices for identical instruments in active markets.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and
model-derived valuations in which all significant inputs and significant value
drivers are observable in active markets.
Level 3 - Valuations derived from valuation techniques in which one or more
significant inputs or significant value drivers are unobservable in active
exchange markets.
The carrying value of the Company's financial instruments, including cash and
cash equivalents, restricted cash, accounts receivable, other assets, accounts
payable, and accrued expenses, approximated their fair values as of September
30, 2021 and 2020, because of the relatively short maturity dates on these
instruments. The carrying amount of debt approximates fair value as of September
30, 2021 and 2020, because interest rates on these instruments approximate
market interest rates.
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, 2019 $ 18,226
Contingent consideration accrued at time of business combination 4,748
Change in fair value of contingent consideration included in Operating expenses (1,409) Contingent consideration paid (8,531) Balance at September 30, 2020 $ 13,034 Contingent consideration accrued at time of business combination
22,577
Change in fair value of contingent consideration included in
Operating expenses 7,140
Contingent consideration paid (6,522)
Balance at September 30, 2021 $ 36,229
The fair value of contingent consideration obligations includes inputs not
observable in the market and thus represents a Level 3 measurement. The amount
to be paid under these obligations is contingent upon the achievement of certain
growth metrics related to the financial performance of the entities subsequent
to acquisition. The fair value of material contingent consideration included in
an acquisition is calculated using a Monte Carlo simulation. The contingent
consideration is revalued each period until it is settled. Management reviews
the historical and projected performance of each acquisition with contingent
consideration and uses an income probability method to revalue the contingent
consideration. The revaluation requires management to make certain assumptions
and represent management's best estimate at the valuation date. The
probabilities are determined based on a management review of the expected
likelihood of triggering events that would cause a change in the contingent
consideration paid. The Company develops the projected future financial results
based on an analysis of historical results, market conditions, and the expected
impact of anticipated changes in the Company's overall business and/or product
strategies.
110
--------------------------------------------------------------------------------
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
Approximately $25,768 and $10,062 of contingent consideration was recorded in
accrued expenses and other current liabilities as of September 30, 2021 and
2020, respectively. Approximately $10,461 and $2,972 of contingent consideration
was recorded in other long-term liabilities as of September 30, 2021 and 2020,
respectively.
Disclosure of Fair Values
The Company's financial instruments that are not remeasured at fair value
include the Exchangeable Notes (see Note 10). The Company estimates the fair
value of the Exchangeable Notes through consideration of quoted market prices of
similar instruments, classified as Level 2 as described above. The estimated
fair value of the Exchangeable Notes was $119,633 as of September 30, 2021 .
14. EQUITY-BASED COMPENSATION
A summary of equity-based compensation expense recognized during the years ended
September 30, 2021 , 2020 and 2019 is as follows:
Year ended September 30,
2021 2020 2019
Stock options $ 20,860 $ 10,452 $ 6,124
Amounts are included in general and administrative expense on the consolidated
statements of operations. Income tax benefits of $1,083 , $604 and $160 were
recognized related to equity-based compensation during the years ended September
30, 2021 , 2020, and 2019, 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, 2021 , there were 323,159 options 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,
2021 , there were 1,441,420 equity awards available for grant under the 2020
Inducement Plan.
111
--------------------------------------------------------------------------------
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
The fair value of stock option awards during the years ended
September 30, 2021 September 30, 2020
Expected volatility(1) 59.7 % 28.5 %
Expected dividend yield(2) - % - %
Expected term(3) 6 years 6 years
Risk-free interest rate(4) 0.7 % 1.2 %
_________________
1.For the year ended September 30, 2021 , expected volatility is based on the
volatility of the Company's own share price. For the year ended September 30,
2020 , 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
Weighted Average
Stock Options Exercise Price
Outstanding at beginning of period 5,210,566 $ 21.73
Granted 3,179,472 29.88
Exercised (548,277) 17.04
Forfeited (294,139) 28.00
Outstanding at end of period 7,547,622 $ 25.26
The weighted-average grant date fair value of stock options granted during the
year ended September 30, 2021 was $16.27 . As of September 30, 2021 , there were
7,547,622 stock options outstanding, of which 2,914,691 were exercisable. As of
September 30, 2021 , total unrecognized compensation expense related to unvested
stock options, including an estimate for pre-vesting forfeitures, was $43,248 ,
which is expected to be recognized over a weighted-average period of 2.2 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, 2021 was $11,763 .
15. COMMITMENTS AND CONTINGENCIES
Leases
The Company utilizes office space and equipment under operating leases. Rent
expense under these leases amounted to $4,400 , $2,820 and $2,302 during the
years ended September 30, 2021 , 2020 and 2019, respectively. Refer to Note 12
for further discussion and a table of the future minimum payments under these
leases.
112
--------------------------------------------------------------------------------
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
Minimum Processing Commitments
The Company has non-exclusive agreements with several processors to provide its
services related to transaction processing and transmittal, transaction
authorization and data capture, and access to various reporting tools. Certain
of these agreements require the Company to submit a minimum monthly number of
transactions for processing. If the Company submits a number of transactions
that is lower than the minimum, it is required to pay to the processor the fees
it would have received if it had submitted the required minimum number of
transactions. As of September 30, 2021 , such minimum fee commitments were as
follows:
Years ending September 30:
2022 $ 3,912
2023 2,690
2024 450
2025 -
2026 -
Thereafter -
Total $ 7,052
Loan to Third Party Sales Organization
The Company has conditionally committed to a future buyout of the third party's
business at the earlier of (a) the 60th day following the date upon which the
founder of the third party sales organization dies or becomes disabled or (b)
the 60th day following July 1, 2023 . The buyout amount is dependent on certain
financial metrics but is capped at $29,000 , which would be net of repayment of
the secured loans. The buyout also contains certain provisions to provide
additional consideration of up to $9,000 , in the aggregate, to be paid based on
the achievement of specified financial performance targets, following the
buyout. As the eventual financial metrics are not known, the amount of the
buyout transaction as well as the additional consideration are not able to be
estimated at this time.
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, the 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.
In addition, 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 and otherwise not described below. 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.
113
--------------------------------------------------------------------------------
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
S&S Litigation
On June 2, 2021, the State of Louisiana , Division of Administration (the
"State") and a putative class of Louisiana law enforcement districts filed a
Petition (as amended on October 4, 2021, the "Petition"), in the 19th 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. The Petition was amended on October 4, 2021 to add a putative class of
Louisiana sheriffs (the "Sheriffs") and subsequently removed to the United
States District Court for the Middle District of Louisiana . 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
seeks monetary damages for the cost of network remediation of $15,000
purportedly spent by the State and $7,000 purportedly spent by the Sheriffs,
return of purchase prices, potential additional expenses related to remediation
and any obligation to notify parties of an alleged data breach as and if
required by applicable law, and reasonable attorneys' fees. The claimed damages
relate to a third-party remote access software product used in connection with
services provided by S&S to certain Louisiana Parish law enforcement districts
and alleged inadequacies in the Company's cybersecurity practices.
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 subsequent cash
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 for the period in which it is
resolved.
The Company is also aware of a related investigation led by the U.S. Department
of Justice ("DOJ"). The Company produced documents in response to subpoenas and
made employees available for interviews by the government and otherwise
cooperated fully with this investigation. The Company believes that the
investigation was focused on unauthorized access to certain S&S customers'
internal networks by unknown third parties. On September 10, 2021, the DOJ
informed the Company that the investigation was concluded with respect to the
Company and that no criminal charges would be brought against the Company.
Other
The Company's subsidiary CP-PS, LLC has certain indemnification obligations in
favor of FDS Holdings, Inc. related to the acquisition of certain assets of
Merchant Processing Solutions, LLC in February 2014. The Company has incurred
expenses related to these indemnification obligations in prior periods and may
have additional expenses in the future. However, after taking into consideration
the evaluation of such matters by the Company's legal counsel, the Company's
management believes at this time that the anticipated outcome of any existing or
potential indemnification liabilities related to this matter will not have a
material impact on the Company's consolidated financial position, results of
operations or cash flows.
16. RELATED PARTY TRANSACTIONS
In April 2016, the Company entered into a purchase agreement to purchase certain
assets of Axia, LLC. On April 29, 2016, the Company entered into a Processing
Services Agreement (the "AxiaMed Agreement") with Axia Technologies, LLC (which
has since been incorporated as Axia Technologies, Inc., doing business as
AxiaMed ("AxiaMed")), an entity controlled by the previous owner of Axia, LLC.
Under the AxiaMed Agreement, the
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i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
Company agreed to provide processing services for certain merchants as
designated by AxiaMed from time to time. In accordance with ASC 606-10-55,
revenue from the processing services is recognized net of interchange, residual
expense and other fees.
In March 2021, the Company became aware of an observable price change in the
AxiaMed equity investment, due to a planned third party acquisition of AxiaMed.
This resulted in an increase of $2,353 to the fair value of the AxiaMed
investment at March 31, 2021, which the Company recognized in other income. On
April 1, 2021, AxiaMed was sold to a third party and the Company received $2,453
for its investment in AxiaMed. Greg Daily , the Company's chief executive
officer; Clay Whitson , the Company's chief financial officer; and the Company no
longer have ownership interest in AxiaMed following the sale. The Company earned
net revenues related to the AxiaMed Agreement of $117, $95 and $81 during the
years ended September 30, 2021, 2020 and 2019 respectively.
In connection with our IPO, we entered into a Tax Receivable Agreement with
certain non-controlling interest holders that provides for the payment by the
Company to the Continuing Equity Owners of 85% of the amount of certain tax
benefits, if any, that it actually realizes, or in some circumstances, is deemed
to realize in its tax reporting, as a result of (i) future redemptions funded by
the Company or exchanges, or deemed exchanges in certain circumstances, of
Common Units of i3 Verticals, LLC for Class A common stock of i3 Verticals, Inc.
or cash, and (ii) certain additional tax benefits attributable to payments made
under the Tax Receivable Agreement. See Note 11 for further information. As of
September 30, 2021, the total amount due under the Tax Receivable Agreement was
$39,122.
17. SEGMENTS
The Company determines its operating segments based on ASC 280, Segment
Reporting, how the chief operating decision making group monitors and manages
the performance of the business and the level at which financial information is
reviewed. The Company's operating segments are strategic business units that
offer different products and services.
The Company's core business is delivering seamless integrated payment and
software solutions to SMBs and organizations in strategic vertical markets. This
is accomplished through the Merchant Services and Proprietary Software and
Payments segments.
The Merchant Services segment provides comprehensive payment solutions to
businesses and organizations. The Merchant Services segment includes third-party
integrated payment solutions as well as merchant of record payment services
across the Company's strategic vertical markets.
The Proprietary Software and Payments segment delivers solutions, including
embedded payments, to the Company's clients through company-owned software.
Payments are delivered through both the payment facilitator model and the
traditional merchant processing model.
The Other category includes corporate overhead expenses, when presenting
reportable segment information.
Effective July 1, 2020, the Company reassigned a component from the Proprietary
Software and Payments segment to the Merchant Services segment to better align
the Company's segments with its business operations.
The prior period comparatives reflected in the tables below have been
retroactively adjusted to reflect the Company's current segment presentation.
The Company primarily uses processing margin to measure operating performance.
The following is a summary of reportable segment operating performance for the
years ended September 30, 2021, 2020 and 2019.
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i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
As of and for the Year ended September 30, 2021
Proprietary
Merchant Software and
Services Payments Other Total
Revenue $ 111,870 $ 114,433 $ (2,179) $ 224,124
Other costs of services (51,234) (8,610) 2,138 (57,706)
Residuals 29,842 1,147 (2,071) 28,918
Processing margin $ 90,478 $ 106,970 $ (2,112) $ 195,336
Residuals 28,918
Selling general and administrative 134,872
Depreciation and amortization 24,418
Change in fair value of contingent
consideration 7,140
Loss from operations $ (12)
Total assets $ 208,560 $ 382,014 $ 61,226 $ 651,800
Goodwill $ 119,086 $ 173,157 $ - $ 292,243
As of and for theYear ended September 30, 2020
Proprietary
Merchant Software and
Services Payments Other Total
Revenue $ 100,949 $ 50,953 $ (1,768) $ 150,134
Other costs of services (43,940) (5,057) 1,767 (47,230)
Residuals 21,618 587 (1,757) 20,448
Processing margin $ 78,627 $ 46,483 $ (1,758) $ 123,352
Residuals 20,448
Selling general and administrative 78,323
Depreciation and amortization 18,217
Change in fair value of contingent
consideration (1,409)
Income from operations $ 7,773
Total assets $ 206,769 $ 139,107 $ 57,650 $ 403,526
Goodwill $ 115,982 $ 71,023 $ - $ 187,005
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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, 2019
Proprietary
Software and
Merchant Services Payments Other Total
Revenue $ 338,968 $ 37,339 $ - $ 376,307
Interchange and network fees (236,170) (6,697) - (242,867)
Other costs of services (41,487) (2,750) - (44,237)
Residuals 17,058 605 - 17,663
Processing margin $ 78,369 $ 28,497 $ - $ 106,866
Residuals 17,663
Selling general and administrative 62,860
Depreciation and amortization 16,564
Change in fair value of contingent
consideration 3,389
Income from operations $ 6,390
18. NON-CONTROLLING INTEREST
i3 Verticals, Inc. is the sole managing member of i3 Verticals, LLC and as a
result, consolidates the financial results of i3 Verticals, LLC and reports a
non-controlling interest representing the Common Units of i3 Verticals, LLC held
by the Continuing Equity Owners. Changes in i3 Verticals, Inc.'s ownership
interest in i3 Verticals, LLC while i3 Verticals, Inc. retains its controlling
interest in i3 Verticals, LLC will be accounted for as equity transactions. As
such, future redemptions or direct exchanges of Common Units of i3 Verticals,
LLC by the Continuing Equity Owners will result in a change in ownership and
reduce or increase the amount recorded as non-controlling interest and increase
or decrease additional paid-in capital when i3 Verticals, LLC has positive or
negative net assets, respectively.
As of September 30, 2021, and 2020, respectively, i3 Verticals, Inc. owned
22,026,098 and 18,864,143 of i3 Verticals, LLC's Common Units, representing a
68.3% and 61.3% 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,
2021 2020 2019
Net (loss) income attributable to non-controlling
interest $ (3,382) $ (560) $ 3,608
Transfers to (from) non-controlling interests:
Distributions to non-controlling interest holders - (3) (2,060)
Redemption of common units in i3 Verticals, LLC (11,714) (5,080) (12,077)
Adjustment related to prior periods - 2,730 -
Cumulative effect of adoption of new accounting standard -
640 -
Allocation of equity to non-controlling interests 15,337 24,495 -
Net transfers to (from) non-controlling interests 3,623 22,782 (14,137)
Change from net income attributable to non-controlling
interests and transfers to (from) non-controlling
interests $ 241 $ 22,222 $ (10,529)
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i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
During the year ended September 30, 2020, the Company corrected for immaterial
misstatements of equity between the Company and non-controlling interest related
to its June 2019 Secondary Public Offering by increasing non-controlling
interest and reducing additional paid-in capital. This adjustment related to
immaterial errors associated with the ownership percentage change used in the
underlying calculation giving effect to the offering.
19. EARNINGS PER SHARE
Basic earnings per share of Class A common stock is computed by dividing net
income available to i3 Verticals, Inc. by the weighted-average number of shares
of Class A common stock outstanding during the period. Diluted earnings per
share of Class A common stock is computed by dividing net income available to i3
Verticals, Inc. by the weighted-average number of shares of Class A common stock
outstanding adjusted to give effect to potentially dilutive securities.
The following table sets forth reconciliations of the numerators and
denominators used to compute basic and diluted earnings per share of Class A
common stock:
Year ended September 30,
2021 2020 2019
Basic net loss per share:
Numerator
Net (loss) income $ (7,839) $ (979) $ 563 Less: Net (loss) income attributable to non-controlling interests
(3,382) (560) 3,608
Net loss attributable to Class A common stockholders $ (4,457)
$ (419) $ (3,045)
Denominator
Weighted average shares of Class A common stock
outstanding(1) 20,994,598 14,833,378 10,490,981
Basic net loss per share(2) $ (0.21) $ (0.03) $ (0.29)
Dilutive net loss per share(2): Numerator Net loss attributable to Class A common stockholders $ (4,457)
$ (419) Reallocation of net loss assuming conversion of common units(5)
(2,556) (422)
Net loss attributable to Class A common stockholders - diluted
$ (7,013) $ (841)
Denominator
Weighted average shares of Class A common stock
outstanding(1) 20,994,598 14,833,378
Weighted average effect of dilutive securities(3)(4) 10,719,593
12,596,423
Weighted average shares of Class A common stock
outstanding - diluted 31,714,191 27,429,801
Diluted net loss per share $ (0.22) $ (0.03)
____________________
1.Excludes 6,706, 204,969 and 282,801 shares of restricted Class A common stock
for the years ended September 30, 2021, 2020 and 2019, respectively.
2.For the year ended September 30, 2019, 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.15,856,855 shares of weighted average Class B common stock for the year ended
September 30, 2019, along with the reallocation of net income assuming
conversion of these shares, were excluded because the effect would have been
anti-dilutive,
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i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
b.626,500 options to purchase shares of Class A common stock for the year ended
September 30, 2019, 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.1,009,858 shares of Class A common stock for the year ended September 30,
2019, resulting from estimated stock option exercises as calculated by the
treasury stock method, and 282,801 shares of restricted Class A common stock for
the year ended September 30, 2019 were excluded because the effect of including
them would have been anti-dilutive.
3.For the year ended September 30, 2020, 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.1,327,500 options to purchase shares of Class A common stock for the year
ended September 30, 2020, were excluded because the exercise price of these
options exceeded the average market price of our Class A common stock during the
period ("out-of-the-money") and the effect of including them would have been
anti-dilutive, and
b.1,179,538 shares of Class A common stock for the year ended September 30,
2020, resulting from estimated stock option exercises as calculated by the
treasury stock method, and 204,969 shares of restricted Class A common stock for
the year ended September 30, 2020 were excluded because the effect of including
them would have been anti-dilutive.
4.For the year ended September 30, 2021, the following securities were excluded
from the weighted average effect of dilutive securities in the computation of
diluted earnings per share of Class A common stock:
a.2,495,922 options to purchase shares of Class A common stock for the year
ended September 30, 2021, were excluded because the exercise price of these
options exceeded the average market price of our Class A common stock during the
period ("out-of-the-money") and the effect of including them would have been
anti-dilutive, and
b.1,471,027 shares of Class A common stock for the year ended September 30,
2021, resulting from estimated stock option exercises as calculated by the
treasury stock method, and 6,706 shares of restricted Class A common stock for
the year ended September 30, 2021 were excluded because the effect of including
them would have been anti-dilutive.
5.The reallocation of net income assuming conversion of common units represents
the tax effected net income attributable to non-controlling interest using the
effective income tax rates described in Note 11 above and assuming all common
units of i3 Verticals, LLC were exchanged for Class A common stock at the
beginning of the year. The common units of i3 Verticals, LLC held by the
Continuing Equity Owners are potentially dilutive securities, and the
computations of pro forma diluted net income per share assume that all common
units of i3 Verticals, LLC were exchanged for shares of Class A common stock at
the beginning of the year.
Since the Company expects to settle the principal amount of its outstanding
Exchangeable Notes in cash and any excess in cash or shares of the Company's
Class A common stock, the Company uses the treasury stock method for calculating
any potential dilutive effect of the conversion spread on diluted net income per
share, if applicable. The conversion spread will have a dilutive impact on
diluted net income per share of common stock when the average market price of
the Company's Class A common stock for a given period exceeds the exchange price
of $40.87 per share for the Exchangeable Notes.
The Warrants sold in connection with the issuance of the Exchangeable Notes are
considered to be dilutive when the average price of the Company's Class A common
stock during the period exceeds the Warrants' stock price of $62.88 per share.
The effect of the additional shares that may be issued upon exercise of the
Warrants will be included in the weighted average shares of Class A common stock
outstanding-diluted using the treasury stock method. The Note Hedge Transactions
purchased in connection with the issuance of the Exchangeable Notes are
considered to be anti-dilutive and therefore do not impact our calculation of
diluted net income per share. Refer to Note 10 for further discussion regarding
the Exchangeable Notes.
Shares of the Company's Class B common stock do not participate in the earnings
or losses of the Company and are therefore not participating securities. As
such, separate presentation of basic and diluted earnings per share of Class B
common stock under the two-class method has not been presented.
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i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
20. SIGNIFICANT NON-CASH TRANSACTIONS
The Company engaged in the following significant non-cash investing and
financing activities during the years ended September 30, 2021, 2020, and 2019:
Year ended September 30,
2021 2020 2019
Restricted Class A common stock issued as part of
acquisition purchase consideration (Note 4) $ 35,245 $ - $ 225
Acquisition date fair value of contingent
consideration in connection with business
combinations $ 22,577 $ 4,748 $ 13,032
Replacement of the 2017 Senior Secured Credit
Facility with the Senior Secured Credit Facility $ - $ - $ 100,229
Debt issuance costs and accrued interest financed
with proceeds from the 2019 Senior Secured Credit
Facility $ - $ - $ 1,271
Right-of-use assets obtained in exchange for
operating lease obligations $ 16,879 $ - $ -
21. QUARTERLY INFORMATION (UNAUDITED)
The tables below present summarized unaudited quarterly results of operations
for the year ended September 30, 2021. 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 year ended
September 30, 2021. As described in Note 2, the Company early adopted ASU
2021-08 effective October 1, 2020, and applied the amendments retrospectively to
all business combinations for which the acquisition date occurred on or October
1, 2020. Results of operations for the quarterly periods within the year ended
September 30, 2021 reflect the adoption of ASU 2021-08. Results of operations
for quarterly periods prior to October 1, 2020 remain unchanged as a result of
the adoption of ASU 2021-08 and are therefore not included in the table below.
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.
Quarter ended
December 31, March 31, June 30, September 30,
Fiscal Year 2021:
Revenue $ 44,621 $ 49,197 $ 63,129 $ 67,177
(Loss) income from operations $ (1,003) $ 1,199 $ (835) $ 627
(Loss) income before income taxes $ (3,032) $ 1,194 $ (3,539) $ (1,839)
Net (loss) income attributable to i3 $ (1,998) $ 1,303 $ (3,280) $ (482)
Verticals, Inc.
Basic net (loss) income per share
attributable to i3 Verticals, Inc.(1) $ (0.10) $ 0.06 $ (0.15) $ (0.02)
Diluted net loss per share attributable to
i3 Verticals, Inc.(2)(3) $ (0.10) $ 0.04 $ (0.15) $ (0.05)
____________________
1.Basic net (loss) income per share excludes 18,869, 4,925 and 2,949 shares of
restricted Class A common stock from the calculation for the quarters ended
December 31, 2020, March 31, 2021, and June 30, 2021, respectively.
2.For the quarters ended December 31, 2020, and March 31, June 30, and September
30, 2021, the following securities were excluded from the weighted average
effect of dilutive securities in the computation of diluted earnings per share
of Class A common stock:
a.11,668,199 and 10,229,142 shares of weighted average Class B common stock for
the quarters ended December 31, 2020, and June 30, 2021, respectively, along
with the reallocation of net income assuming conversion of these shares, were
excluded from the calculation of diluted earnings per share of Class A common
stock because the effect would have been anti-dilutive,
b.1,251,600, 1,760,997, 2,100,833 and 3,129,422 options to purchase shares of
Class A common stock for the quarters ended December 31, 2020, and March 31,
June 30, and September 30, 2021, respectively, were excluded because the
exercise price
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i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
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.1,212,584, 1,678,774 and 1,296,584 shares of Class A common stock for the
quarters ended December 31, 2020, June 30, and September 30, 2021, respectively,
resulting from estimated stock option exercises as calculated by the treasury
stock method, and 18,869 and 2,949 shares of restricted Class A common stock for
the quarters ended December 31, 2020, and June 30, 2021, respectively, were
excluded because the effect of including them would have been anti-dilutive.
3.The reallocation of net income assuming conversion of common units represents
the tax effected net income attributable to non-controlling interest using the
effective income tax rates described in Note 11 above and assuming all common
units of i3 Verticals, LLC were exchanged for Class A common stock at the
beginning of the year. The common units of i3 Verticals, LLC held by the
Continuing Equity Owners are potentially dilutive securities, and the
computations of pro forma diluted net income per share assume that all common
units of i3 Verticals, LLC were exchanged for shares of Class A common stock at
the beginning of the year.
The following tables present the material impacts of adoption of ASU 2021-08 on
the Company's consolidated statements of operations for each quarterly period:
Three months ended June 30, 2021
Presentation with
adoption of ASU
As reported Adjustment 2021-08
Revenue $ 61,964 $ 1,165 $ 63,129(Benefit from) provision for income taxes $ (110) $
772 $ 662
Net loss $ (4,594) $ 393 $ (4,201)
Net loss attributable to non-controlling
interest $ (1,286) $ 365 $ (921)
Net loss attributable to
28 $ (3,280)
Net loss per share attributable to Class A
common stockholders:
Basic $ (0.15) $ 0.00 $ (0.15)
Diluted $ (0.15) $ 0.00 $ (0.15)
Three months ended March 31, 2021
Presentation with
adoption of ASU
As reported Adjustment 2021-08
Revenue $ 47,863 $ 1,334 $ 49,197
Benefit from income taxes $ (87) $ (49) $ (136)
Net (loss) income $ (53) $ 1,383 $ 1,330
Net (loss) income attributable to
non-controlling interest $ (493) $ 520 $ 27
Net income attributable to i3 Verticals,
Inc. $ 440 $ 863 $ 1,303
Net income (loss) per share attributable to
Class A common stockholders:
Basic $ 0.02 $ 0.04 $ 0.06
Diluted $ 0.00 $ 0.04 $ 0.04
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i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit, share and per share amounts)
Three months ended December 31, 2020
Presentation with
adoption of ASU
As reported Adjustment 2021-08
Revenue $ 43,313 $ 1,308 $ 44,621
Benefit from income taxes $ (219) $ 209 $ (10)
Net loss $ (4,121) $ 1,099 $ (3,022)
Net loss attributable to non-controlling
interest $ (1,549) $ 525 $ (1,024)
Net loss attributable to
574 $ (1,998)
Net loss per share attributable to Class A
common stockholders:
Basic $ (0.13) $ 0.03 $ (0.10)
Diluted $ (0.13) $ 0.03 $ (0.10)
22. SUBSEQUENT EVENTS
Recent Acquisitions
Subsequent to September 30, 2021, the Company completed the acquisition of a
business within the Company's Healthcare vertical which provides comprehensive
revenue cycle management and related administrative and consulting services for
hospitals, including academic teaching institutions with residents, practice
groups and healthcare providers primarily in the southeast. Total purchase
consideration for the business included $60,000 in cash and revolving line of
credit proceeds, and an amount of contingent consideration, which is still being
valued.
Certain provisions in the purchase agreements provide for additional
consideration of up to $8,000, 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 2023. The Company is in
process of determining the acquisition date fair values of the liabilities for
the contingent consideration based on 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.
The effect of the acquisition will be included in the consolidated statements of
operations beginning October 1, 2021.
The Company is still evaluating the allocations of the preliminary purchase
consideration and pro forma results of operations.
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