I3 VERTICALS, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our Annual Report on Form 10-K for the year endedSeptember 30, 2022 ("Form 10-K"), filed with theSEC onNovember 18, 2022 . The terms "i3 Verticals ," "we," "us" and "our" and similar references refer (1) before the completion of our IPO or the reorganization transactions entered into in connection therewith (the "Reorganization Transactions"), which are described in the notes to the condensed consolidated financial statements, toi3 Verticals, LLC and, where appropriate, its subsidiaries, and (2) after the Reorganization Transactions toi3 Verticals, Inc. and, where appropriate, its subsidiaries.
Note Regarding Forward-looking Statements
This Quarterly Report on Form 10-Q includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, "forward-looking statements" within the meaning of the federal securities laws. All statements other than statements of historical facts contained in this report may be forward-looking statements. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms "believes," "estimates," "pro forma," "continues," "anticipates," "expects," "seeks," "projects," "intends," "plans," "may," "will," "would" or "should" or, in each case, their negative or other variations or comparable terminology.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. These factors include, but are not limited to, the following:
•developments related to the COVID-19 pandemic, including, without limitation, the length and severity of its impact;
•our indebtedness and our ability to maintain compliance with the financial covenants in our Senior Secured Credit Facility (as defined below);
•our ability to meet our liquidity needs;
•our ability to raise additional funds on terms acceptable to us, if at all, whether through debt, equity or a combination thereof;
•the triggering of impairment testing of our fair-valued assets, including goodwill and intangible assets, in the event of a decline in the price of our Class A common stock or otherwise;
•our ability to generate revenues sufficient to maintain profitability and positive cash flow;
•competition in our industry and our ability to compete effectively;
•consolidation in the banking and financial services industry;
•risk of shortages, price increases, changes, delays or discontinuations of hardware due to supply chain disruptions with respect to our limited number of suppliers; •impact of inflation and fluctuations in interest rates and the potential effect of such fluctuations on revenues, expenses and resulting margins; •our dependence on non-exclusive distribution partners to market our products and services;
•our ability to keep pace with rapid developments and changes in our industry and provide new products and services;
•liability and reputation damage from unauthorized disclosure, destruction or modification of data or disruption of our services;
•technical, operational and regulatory risks related to our information technology systems and third-party providers' systems;
•reliance on third parties for significant services;
•exposure to economic conditions and political risks affecting consumer and commercial spending, including the use of credit cards;
•our ability to increase our existing vertical markets, expand into new vertical markets and execute our growth strategy;
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--------------------------------------------------------------------------------•our ability to protect our systems and data from continually evolving cybersecurity risks or other technological risks, including the impact of any cybersecurity incidents or security breaches;
•our ability to successfully identify acquisition targets, complete those acquisitions and effectively integrate those acquisitions into our services;
•potential degradation of the quality of our products, services and support;
•our ability to retain customers;
•our ability to successfully manage our intellectual property;
•our ability to attract, recruit, retain and develop key personnel and qualified employees;
•risks related to laws, regulations and industry standards;
•risk of significant chargeback liability if our customers refuse or cannot reimburse chargebacks resolved in favor of their customers;
•our ability to comply with complex laws and regulations applicable to the healthcare industry or to adjust our operations in response to changing laws and regulations;
•the impact of government investigations, claims, and litigation;
•the effects of health reform initiatives;
•operating and financial restrictions imposed by our Senior Secured Credit Facility;
•risks related to the accounting method for
•our ability to raise the funds necessary to settle exchanges of the Exchangeable Notes or to repurchase the Exchangeable Notes upon a fundamental change;
•risks related to the conditional exchange feature of the Exchangeable Notes;
•the "Risk Factors" included in our Form 10-K and included in Part II, Item 1A of this Quarterly Report on Form 10-Q, if any.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.
Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and industry developments may differ materially from statements made in or suggested by the forward-looking statements contained in this Quarterly Report on Form 10-Q. The matters summarized in "Risk Factors" in our Form 10-K, and in subsequent filings could cause our actual results to differ significantly from those contained in our forward-looking statements. In addition, even if our results of operations, financial condition and liquidity, and industry developments are consistent with the forward-looking statements contained in this filing, those results or developments may not be indicative of results or developments in subsequent periods. In light of these risks and uncertainties, we caution you not to place undue reliance on these forward-looking statements. Any forward-looking statement that we make in this filing speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statement or to publicly announce the results of any revision to any of those statements to reflect future events or developments, except as required by applicable law. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data.
Executive Overview
We deliver seamless integrated software and services to customers in strategic
vertical markets. Building on its broad suite of software and services
solutions, we create and acquire software products to serve the specific needs
of our customers. Our primary strategic verticals are Public Sector (including
Education) and Healthcare.
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--------------------------------------------------------------------------------COVID-19 Update and Economic Trends
InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 as a pandemic. 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 years 2020, 2021 and 2022, 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. While uncertainty around the pandemic has diminished, uncertainty remains regarding broader economic impacts as a result of inflationary pressures, rising rates, monetary policy, and the current geopolitical situation, which could potentially cause new, or exacerbate existing, economic challenges that we may face. These conditions could worsen, or others could arise, if theU.S. and global economies were to enter recessionary periods, triggered or exacerbated by monetary policy designed to curb inflation. As the future magnitude, duration and effects of these conditions are difficult to predict at this time, we are unable to predict the extent of the potential effect on our financial results.
Liquidity
AtDecember 31, 2022 , we had$3.6 million of cash and cash equivalents and$111.8 million of available capacity under our Senior Secured Credit Facility subject to our financial covenants. As ofDecember 31, 2022 , we were in compliance with these covenants with a consolidated interest coverage ratio, total leverage ratio and consolidated senior leverage ratio of 5.18x, 4.03x and 2.77x, respectively. For additional information about our Senior Secured Credit Facility and Exchangeable Notes, see the section entitled "Liquidity and Capital Resources" below. Acquisitions Recent acquisitions EffectiveJanuary 1, 2023 , we completed the acquisition of one business to expand our software offerings in the Public Sector vertical. The total purchase consideration was$14.5 million , including$12.5 million in cash funded by the proceeds from our revolving credit facility,$2.0 million of our Class A Common Stock, and an amount in contingent consideration which is still being valued.
Acquisitions during the three months ended
During the three months endedDecember 31, 2022 , we completed the acquisition of two businesses to expand our software offerings. Total purchase consideration consisted of$89.5 million in cash funded by the proceeds from our revolving credit facility.
Acquisitions during the three months ended
During the three months endedDecember 31, 2021 , we completed the acquisition of two business to expand our software offerings in the Healthcare vertical. Total purchase consideration was$100.5 million , including$95.0 million in cash funded by the proceeds from the Company's revolving credit facility, and$5.5 million in contingent consideration.
Our Revenue and Expenses
Revenues
We generate revenue from software licensing subscriptions, ongoing software
support, volume-based payment processing fees ("discount fees") and POS-related
solutions that we provide to our customers directly and through our distribution
partners. Volume-based fees represent a percentage of the dollar amount of each
credit or debit transaction processed. Revenues are also derived from a variety
of fixed transaction or service fees, including authorization fees, convenience
fees, statement fees, annual fees and fees for other miscellaneous services,
such as handling chargebacks.
Interchange and network fees. Interchange and network fees consist primarily of
pass-through fees that make up a portion of discount fee revenue. These include
assessment fees payable to card associations, which are a percentage of the
processing volume we generate from Visa and Mastercard. These fees are presented
net of revenue.
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--------------------------------------------------------------------------------Expenses
Other costs of services. Other costs of services include costs directly attributable to processing and bank sponsorship costs. These also include related costs such as residual payments to our distribution partners, which are based on a percentage of the net revenues (revenue less interchange and network fees) generated from customer referrals. Losses resulting from excessive chargebacks against a customer are included in other cost of services. The cost of equipment sold is also included in cost of services. Interchange and other costs of services are recognized at the time the customer's transactions are processed.
Selling, general and administrative. Selling, general and administrative expenses include salaries and other employment costs, professional services, rent and utilities and other operating costs.
Depreciation and amortization. Depreciation expense consists of depreciation on our investments in property, equipment and computer hardware and software. Depreciation expense is recognized on a straight-line basis over the estimated useful life of the asset. Amortization expense for acquired intangible assets and internally developed software is recognized using a proportional cash flow method. Amortization expense for internally developed software is recognized over the estimated useful life of the asset. The useful lives of contract-based intangible assets are equal to the terms of the agreement.
Interest expense, net. Our interest expense consists of interest on our outstanding indebtedness under our 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 traditional merchant processing services across our strategic vertical markets.
Software and Services
Our Software and Services segment delivers vertical market software solutions to customers across all of our strategic vertical markets. These solutions often include embedded payments or other recurring services.
Other
Our Other category includes corporate overhead expenses, when presenting reportable segment information.
For additional information on our segments, see Note 14 to our condensed consolidated financial statements.
Key Performance Indicators
We evaluate our performance through key performance indicators, including:
•annualized recurring revenue ("ARR");
•software and related services as a percentage of total revenue; and
•the dollar volume of payments our customers process through us ("payment volume");
ARR is the annualized revenue derived from software-as-a-service ("SaaS")
arrangements, software monetized with transaction-based fees, software
maintenance, recurring software-based services, payments revenue and other
recurring revenue sources within the quarter. This excludes contracts that are
not recurring or are one-time in nature. We focus on ARR because it helps us to
assess the health and trajectory of our business. ARR does not have a
standardized definition and is therefore unlikely to be comparable to similarly
titled measures presented by other companies. It should be reviewed
independently of revenue and it is not a forecast. The active contracts at the
end of a reporting period used in calculating ARR may or may not be extended or
renewed by our customers. ARR for the three months ended December 31, 2022 and
2021 was $290.2 million and $240.4 million , respectively, representing a
period-to-period growth rate of 20.7%.
Software and related services revenue includes the sale of subscriptions, recurring services, ongoing support, licenses, and installation and implementation services specific to software. We focus on software and related
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services revenue as a percentage of total revenue because it is a strategic goal
to expand the software services we provide our customers. Software and related
services typically result in long-term partnerships with strong recurring
revenues. Software and related services revenue as a percentage of total revenue
for the three months ended December 31, 2022 and 2021 was 47.79% and 49.15%.
Our payment volume for the three months ended December 31, 2022 and 2021 was
$5.9 billion and $5.3 billion , respectively, representing a period-to-period
growth rate of 11.4%. We focus on payment volume because it is a reflection of
the scale and economic activity of our customer base and because a significant
part of our revenue is derived as a percentage of our customers' dollar volume
receipts. Payment volume reflects the addition of new customers and same store
payment volume growth of existing customers, partially offset by customer
attrition during the period.
Results of Operations
Three Months Ended
The following table presents our historical results of operations for the
periods indicated:
Three months ended December 31, Change
(in thousands) 2022 2021 Amount %
Revenue $ 86,029 $ 73,939 $ 12,090 16.4 %
Operating expenses
Other costs of services 19,069 16,510 2,559 15.5 %
Selling, general and administrative 51,003 46,387 4,616 10.0 %
Depreciation and amortization 8,676 6,870 1,806 26.3 %
Change in fair value of contingent
consideration 1,443 4,927 (3,484) (70.7) %
Total operating expenses 80,191 74,694 5,497 7.4 %
Income (loss) from operations 5,838 (755) 6,593 n/m
Other expenses
Interest expense, net 5,490 3,154 2,336 74.1 %
Other income (203) - (203) n/m
Total other expenses 5,287 3,154 2,133 67.6 %
Income (loss) before income taxes 551 (3,909) 4,460 n/m
Provision for (benefit from) income taxes 382 (228) 610 n/m
Net income (loss) 169 (3,681) 3,850 n/m
Net income (loss) attributable to
non-controlling interest 409 (1,153) 1,562 n/m
Net loss attributable to i3 Verticals,
Inc. $ (240) $ (2,528) $ 2,288 (90.5) %
n/m = not meaningful
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Revenue
Revenue increased$12.1 million , or 16.4%, to$86.0 million for the three months endedDecember 31, 2022 from$73.9 million for the three months endedDecember 31, 2021 . This increase was principally driven by incremental revenue from acquisitions of$6.1 million , net of intercompany eliminations, all of which were within the Software and Services segment. In addition to our growth through acquisitions, revenue from existing businesses grew, resulting from growth in software and related services revenues, primarily in our Public Sector vertical, and an increase in payment volume from new and existing customers across the Company. Revenue within Software and Services increased$8.4 million , or 18.8%, to$53.2 million for the three months endedDecember 31, 2022 from$44.8 million for the three months endedDecember 31, 2021 . The increase was principally driven by growth in software and related services revenues in our Public Sector vertical. Revenue within Merchant Services increased$3.7 million , or 12.5%, to$32.8 million for the three months endedDecember 31, 2022 from$29.2 million for the three months endedDecember 31, 2021 . Payment volume from new and existing customers increased$0.4 billion , or 9.2%, to$5.3 billion for the three months endedDecember 31, 2022 from$4.8 billion for the three months endedDecember 31, 2021 . Other Costs of Services Other costs of services increased$2.6 million , or 15.5%, to$19.1 million for the three months endedDecember 31, 2022 from$16.5 million for the three months endedDecember 31, 2021 . This increase was primarily driven by an increase in other cost of services within the Merchant Services segment driven by the increase in payment volume. Other costs of services within Merchant Services increased$2.1 million , or 15.8%, to$15.6 million for the three months endedDecember 31, 2022 from$13.4 million for the three months endedDecember 31, 2021 , driven primarily by the growth in payment volume. Other costs of services within Software and Services increased$0.4 million , or 14.4%, to$3.5 million for the three months endedDecember 31, 2022 from$3.1 million for the three months endedDecember 31, 2021 , driven primarily by acquisitions.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased$4.6 million , or 10.0%, to$51.0 million for the three months endedDecember 31, 2022 from$46.4 million for the three months endedDecember 31, 2021 . This increase was primarily driven by a$3.7 million increase in employment expenses, primarily resulting from an increase in headcount that resulted from acquisitions and an increase in stock compensation expense.
Depreciation and Amortization
Depreciation and amortization increased$1.8 million , or 26.3%, to$8.7 million for the three months endedDecember 31, 2022 from$6.9 million for the three months endedDecember 31, 2021 . Amortization expense increased$1.7 million to$7.9 million for the three months endedDecember 31, 2022 from$6.2 million for the three months endedDecember 31, 2021 primarily due to acquisitions completed during the 2022 and 2023 fiscal years. Depreciation expense increased$0.1 million to$0.8 million for the three months endedDecember 31, 2022 from$0.6 million for the three months endedDecember 31, 2021 .
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$1.4 million for the three months endedDecember 31, 2022 primarily due to the performance of some of our acquisitions exceeding our expectations. The change in fair value of contingent consideration for the three months endedDecember 31, 2021 was a charge of$4.9 million .
Interest Expense, net
Interest expense, net, increased$2.3 million , or 74.1%, to$5.5 million for the three months endedDecember 31, 2022 from$3.2 million for the three months endedDecember 31, 2021 . The increase reflects a higher average interest rate and a higher average outstanding debt balance for the three months endedDecember 31, 2022 , as compared to the three months endedDecember 31, 2021 . 43 --------------------------------------------------------------------------------
Other Income
Other income was$0.2 million related to contingent consideration received for an investment that was sold in a prior year for the three months endedDecember 31, 2022 . There was no other income for the three months endedDecember 31, 2021 .
Provision for (Benefit from) Income Taxes
The provision for income taxes increased to a provision for$0.4 million for the three months endedDecember 31, 2022 from a benefit of$0.2 million for three months endedDecember 31, 2021 . Our effective tax rate was 69.3% for the three months endedDecember 31, 2022 . Our effective tax rate differs from the federal statutory rate of 21% primarily due to the tax structure of the Company. The income of majority ownedi3 Verticals, LLC is not taxed and the separate loss of the Company has minimal tax effect due to the allocations fromi3 Verticals, LLC .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.
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 and working capital through net cash from operating activities. As ofDecember 31, 2022 , we had$3.6 million of cash and cash equivalents and available borrowing capacity of$111.8 million under our Senior Secured Credit Facility, subject to the financial covenants. We usually minimize cash balances by making payments on our revolving line of credit to minimize borrowings and interest expense. As ofDecember 31, 2022 , we had borrowings outstanding of$263.2 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 consistently have positive cash flow provided by operations and expect that our cash flow from operations, current cash and cash equivalents and available borrowing capacity under the Senior Secured Credit Facility will be sufficient to fund our operations and planned capital expenditures and to service our debt obligations for at least the next twelve months and foreseeable future. Our growth strategy includes acquisitions. We expect to fund acquisitions through a combination of net cash from operating activities, borrowings under our Senior Secured Credit Facility and through the issuance of equity and debt securities. As a holding company, we depend on distributions or loans fromi3 Verticals, LLC to access funds earned by our operations. The covenants contained in the Senior Secured Credit Facility may restricti3 Verticals, LLC's ability to provide funds toi3 Verticals, Inc. Our liquidity profile reflects our completed offering inFebruary 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 ofDecember 31, 2022 , the aggregate principal amount outstanding of the Exchangeable Notes was$117.0 million . We may elect from time to time to purchase our outstanding debt in open market purchases, privately negotiated transactions or otherwise. Any such debt repurchases will depend upon prevailing market conditions, our liquidity requirements, contractual restrictions, applicable securities law and other factors. 44 --------------------------------------------------------------------------------
Cash Flows
The following table presents a summary of cash flows from operating, investing and financing activities for the following comparative periods.
Three Months Ended
Three months ended December 31,
2022 2021
(in thousands)
Net cash provided by operating activities $ 18,179 $ 21,910
Net cash used in investing activities $ (94,530) $ (62,353)
Net cash provided by financing activities $
76,925
Cash Flow from Operating Activities
Net cash provided by operating activities decreased$3.7 million to$18.2 million for the three months endedDecember 31, 2022 from$21.9 million for the three months endedDecember 31, 2021 . Our net income increased from a net loss of$3.7 million for the three months endedDecember 31, 2021 to net income of$0.2 million for the three months endedDecember 31, 2022 . Most of this increase in net income was driven by reductions in non-cash expenses that do not impact cash flows from operating activities. The primary drivers of the decrease in cash provided by operating activities, despite the increase in net income, were a decrease in non-cash contingent consideration of$3.5 million and a decrease in amortization of debt discount and issuance costs of$1.1 million , partially offset by an increase in depreciation and amortization of$1.8 million and an increase in the provision for income taxes of$0.6 million for the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 . Other changes include decreases in operating assets and liabilities of$5.7 million , which are impacted by the timing of collections and payments, for the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 .
Cash Flow from Investing Activities
Net cash used in investing activities increased$32.2 million to$94.5 million for the three months endedDecember 31, 2022 from$62.4 million for the three months endedDecember 31, 2021 . The largest driver of cash used in investing activities for the three months endedDecember 31, 2022 and 2021 was cash used in acquisitions, net of cash acquired. For the three months endedDecember 31, 2022 , we used$89.5 million of cash for acquisitions, net of cash acquired compared to$60.0 million for the three months endedDecember 31, 2021 . As a result, most of the increase in net cash used in investing activities was primarily the result of an increase of$29.5 million in cash used in acquisitions, net of cash acquired. Additionally, expenditures for property and equipment increased$1.1 million , payments for other investing activities increased$0.8 million and expenditures for capitalized software increased$0.8 million for the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 .
Cash Flow from Financing Activities
Net cash provided by financing activities increased$27.7 million to$76.9 million for the three months endedDecember 31, 2022 from$49.2 million for the three months endedDecember 31, 2021 . The increase in net cash provided by financing activities was primarily the result of an increase in proceeds from the revolving credit facility of$52.0 million and a decrease in cash paid for contingent consideration up to our original estimates of$5.2 million , partially offset by an increase in payments on the revolving credit facility of$29.1 million for the three months endedDecember 31, 2022 from the three months endedDecember 31, 2021 . 45 --------------------------------------------------------------------------------
Senior Secured Credit Facility
OnMay 9, 2019 , we replaced our senior secured credit facility with a new credit agreement (the "Senior Secured Credit Facility"). EffectiveOctober 3, 2022 , the Senior Secured Credit Facility, as amended, consisted of a$375.0 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 Term SOFR (based upon an interest period of one, three or six months), plus an adjustment of 0.10%, plus an applicable margin of 2.25% to 3.25% (3.25% as ofDecember 31, 2022 ), or the base rate (defined as the highest of (x) the Bank of America prime rate, (y) the federal funds rate plus 0.50% and (z) Term SOFR, plus an adjustment of 0.10%, plus 1.00%), plus an applicable margin of 0.25% to 1.25% (1.25% as ofDecember 31, 2022 ), 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 us to pay unused commitment fees of 0.15% to 0.30% (0.30% as ofDecember 31, 2022 ) 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 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 ofDecember 31, 2022 , we were in compliance with these covenants, and there was$111.8 million available for borrowing under the revolving credit facility, subject to the financial covenants.
The Senior Secured Credit Facility is secured by substantially all of our assets. 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 us. 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 our activities during the period covered. As a holding company, we depend on distributions or loans fromi3 Verticals, LLC to access funds earned by our operations. The covenants contained in the Senior Secured Credit Facility may restricti3 Verticals, LLC's ability to provide funds toi3 Verticals, Inc.
Exchangeable Notes
OnFebruary 18, 2020 ,i3 Verticals, LLC issued$138.0 million aggregate principal amount of its 1.0% Exchangeable 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 into cash, shares of the Company's 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. The net proceeds from the sale of the Exchangeable Notes were approximately$132.8 million , after deducting discounts and commissions to the certain initial purchasers and other estimated fees and expenses.i3 Verticals, LLC used a portion of the net proceeds of the Exchangeable Notes offering to pay down outstanding borrowings under the Senior Secured Credit Facility in connection with the effectiveness of the operative provisions of the amendment to the Senior Secured Credit Facility and to pay the cost of the Note Hedge Transactions.
At-the-Market Program
OnAugust 20, 2021 , we, together withi3 Verticals, LLC , 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 million (the "ATM Program"). During the quarter endedDecember 31, 2022 , we did not sell any Class A common stock under the ATM Program. As of December 46 --------------------------------------------------------------------------------
31, 2022, we had a remaining capacity to sell up to
The proceeds from these issuances were used to repay outstanding indebtedness under the Senior Secured Credit Facility and for other general corporate purposes.
Material Cash Requirements
The following table summarizes our material cash requirements as of
Payments Due by Period
Less than 1 More than 5
Contractual Obligations Total year 1 to 3 years 3 to 5 years years
(in thousands)
Processing minimums(1) $ 4,508 $ 3,743 $ 765 $ - $ -
Facility leases 20,358 5,585 8,656 4,303 1,814
Senior Secured Credit Facility
and related interest(2) 292,915 19,784 273,131 - -
Exchangeable Notes and related
interest(3) 119,486 1,170 118,316 - -
Contingent consideration(4) 20,064 18,847 1,217 - -
Total $ 457,331 $ 49,129 $ 402,085 $ 4,303 $ 1,814
__________________________
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 7.69% in effect on the
outstanding balance as of December 31, 2022 , plus the unused fee rate of 0.30%
in effect as of December 31, 2022 .
3.We calculated interest payments through the maturity of our Exchangeable Notes
by applying the coupon interest rate of 1.0% on the principal balance as of
December 31, 2022 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.
47
--------------------------------------------------------------------------------Tax Receivable Agreement
We are a party to a Tax Receivable Agreement withi3 Verticals, LLC and each of the Continuing Equity Owners, as described in Note 8 of our condensed consolidated financial statements. As a result of the Tax Receivable Agreement, we have been required to establish a liability in our condensed consolidated financial statements. That liability, which will increase upon the redemptions or exchanges of Common Units for our Class A common stock, generally represents 85% of the estimated future tax benefits, if any, relating to the increase in tax basis associated with the Common Units we received as a result of the Reorganization Transactions and other redemptions or exchanges by holders of Common Units. If this election is made, the accelerated payment will be based on the present value of 100% of the estimated future tax benefits and, as a result, the associated liability reported on our condensed consolidated financial statements may be increased. We expect that the payments required under the Tax Receivable Agreement will be substantial. The actual increase in tax basis, as well as the amount and timing of any payments under the Tax Receivable Agreement, will vary depending upon a number of factors, including the timing of redemptions or exchanges by the holders of Common Units, the price of our Class A common stock at the time of the redemption or exchange, whether such redemptions or exchanges are taxable, the amount and timing of the taxable income we generate in the future and the tax rate then applicable as well as the portion of our payments under the Tax Receivable Agreement constituting imputed interest. We intend to fund the payment of the amounts due under the Tax Receivable Agreement out of the cash savings that we actually realize in respect of the attributes to which Tax Receivable Agreement relates. As ofDecember 31, 2022 , the total amount due under the Tax Receivable Agreement was$40.8 million , and payments to the Continuing Equity Owners related to exchanges throughDecember 31, 2022 will range from$0 to$3.3 million per year and are expected to be paid over the next 24 years. The amounts recorded as ofDecember 31, 2022 , 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.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, goodwill and intangible assets, contingent consideration, and equity-based compensation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are those that we consider the most critical to understanding our financial condition and results of operations.
As of
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