You should read the following discussion and analysis of our financial condition
and results of operations together with our unaudited condensed consolidated
financial statements and related notes included elsewhere in this Quarterly
Report on Form 10-Q, as well as our audited consolidated financial statements
and related notes as disclosed in our Annual Report on Form 10-K for the year
ended September 30, 2019 ("Form 10-K"), filed with the SEC on November 22, 2019.
The terms "i3 Verticals," "we," "us" and "our" and similar references refer (1)
before the completion of our IPO or the reorganization transactions entered into
in connection therewith (the "Reorganization Transactions"), which are described
in the notes to the condensed consolidated financial statements, to i3
Verticals, LLC and, when appropriate, its subsidiaries, and (2) after the
Reorganization Transactions to i3 Verticals, Inc. and, when 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:
•the anticipated impact to our business operations, payment volume and volume
attrition due to the recent global pandemic of a novel strain of the coronavirus
(COVID-19), including the impact of social distancing, shelter-in-place,
shutdowns of non-essential businesses and similar measures imposed or undertaken
by governments;
•our indebtedness and our ability to maintain compliance with the financial
covenants in our Senior Secured Credit Facility (as defined below) in light of
the impacts of the coronavirus (COVID-19);
•our ability to generate revenue sufficient to maintain profitability and
positive cash flow;
•competition in our industry and our ability to compete effectively;
•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;
•our ability to protect our systems and data from continually evolving
cybersecurity risks or other technological risks;
•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 clients, many of which are SMBs, which can be difficult
and costly to retain;
•our ability to successfully manage our intellectual property;
•our ability to attract, recruit, retain and develop key personnel and qualified
employees;
                                       41
--------------------------------------------------------------------------------

•risks related to laws, regulations and industry standards;
•operating and financial restrictions imposed by our Senior Secured Credit
Facility (as defined below);
•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;
and
•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, in this Quarterly Report on Form
10-Q, and in our other 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
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, property management and healthcare.
COVID-19 Recent Developments
On March 11, 2020, the World Health Organization declared the outbreak of
COVID-19 as a pandemic, which continues to spread throughout the United States
and other parts of the world. It is impossible to predict the effect and
ultimate impact of the COVID-19 pandemic as the situation is rapidly evolving.
The spread of COVID-19 has caused public health officials to recommend
precautions 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. As a result, we and our clients have seen a
significant disruption in business, including a steep decline in payment volume
and the number of transactions processed, and therefore, a decline in revenue in
our strategic verticals. There are no reliable estimates of how long the
pandemic will last or how many people are likely to be affected by it. For that
reason, we are unable to predict the long-term impact of the pandemic on our
business at this time.
COVID-19 is having a significant effect on overall economic conditions in the
United States, and efforts to contain the spread of COVID-19 intensified in
March and April 2020. The economic impact of these conditions is materially
impacting our business and is expected to continue to adversely impact our
strategic verticals and our business in general. For example, for the six months
ended March 31, 2020, a significant portion of our revenue
                                       42
--------------------------------------------------------------------------------

and payment volume within our Merchant Services segment and our Proprietary
Software and Payments segment was derived from our education and public sector
strategic verticals. Due to the temporary closure of schools and many local
government facilities throughout the nation, we expect the combined revenue and
payment volume from multiple of these and other strategic verticals will be
adversely impacted for the duration of the closure.
On April 3, 2020, we announced certain proactive actions in response to the
significant ongoing uncertainty around the severity and duration of the COVID-19
pandemic. We have temporarily furloughed a portion of our employees and have
implemented a workforce reduction program that includes the elimination of
certain positions as well as a general reduction in headcount. The total number
of employees impacted by the furlough and workforce reduction represented
approximately 12% of our workforce.
At March 31, 2020, we had $1.6 million of cash and cash equivalents and $256.0
million of available capacity under our Senior Secured Credit Facility (as
defined in the "Senior Secured Credit Facility" subsection within the "Liquidity
and Capital Resources" section below), subject to our financial covenants. 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 of March 31, 2020, we
were in compliance with these covenants with a consolidated interest coverage
ratio, total leverage ratio and consolidated senior leverage ratio of 6.11x,
3.41x and 0.38x, respectively. For additional information about our Senior
Secured Credit Facility and Exchangeable Notes, see the section entitled
"Liquidity and Capital Resources" below.
The impact of the COVID-19 pandemic is fluid and continues to evolve, and
therefore, we cannot currently predict with certainty the extent to which our
business, results of operations, financial condition or liquidity will
ultimately be impacted. Our top priority is to protect our employees and their
families, as well as our vendors and clients. We continue to take precautionary
measures as directed by health authorities and local and national governments.
Given the dynamic nature of these circumstances, the duration of business
disruption and reduced revenues and payment volume, the related financial effect
cannot be reasonably estimated at this time but is expected to materially
adversely impact our business for our third quarter and 2020 fiscal year.
Moreover, if general economic conditions continue to deteriorate or remain
uncertain for an extended period of time, the trading price of our common stock,
which has already declined in recent weeks, could decline further. This could
cause a triggering event for impairment testing in the future. See "Item 1A.
Risk Factors-The COVID-19 pandemic is significantly affecting our operations,
business and financial condition, and our liquidity could also be negatively
impacted, particularly if the U.S. economy remains unstable for a significant
amount of time".
In recognition of the significant threat to the liquidity of financial markets
posed by COVID-19, the Federal Reserve and Congress have taken dramatic actions
to provide liquidity to businesses and the banking system in the U.S. For
example, on March 27, 2020, the President signed into law the Coronavirus Aid,
Relief, and Economic Security Act (the "CARES Act"), a sweeping stimulus bill
intended to bolster the U.S. economy, among other things, and provide emergency
assistance to qualifying businesses and individuals. There can be no assurance
that these interventions by the government will be successful, and the financial
markets may experience significant contractions in available liquidity. While we
may receive financial, tax or other relief and other benefits under and as a
result of the CARES Act, it is not possible to estimate at this time the need,
availability, extent or impact of any such relief.
Public Equity Offerings
On June 25, 2018, we completed the initial public offering ("IPO") of 7,647,500
shares of our Class A common stock at a public offering price of $13.00 per
share. We received approximately $92.5 million of net proceeds, after deducting
underwriting discounts and commissions, which we used to purchase 7,264,083
newly issued common units from i3 Verticals, LLC ("Common Units") for
approximately $87.8 million, and 383,417 Common Units from a selling Common Unit
holder for approximately $4.6 million, 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 IPO.
On June 10, 2019, we completed a secondary public offering (the "June 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
                                       43
--------------------------------------------------------------------------------

commissions, but before offering expenses. We 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
holders, other than i3 Verticals, Inc., of Common Units in i3 Verticals, LLC
("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 the Company, which it 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.
Exchangeable Notes Offering
On February 18, 2020, i3 Verticals, LLC issued $138.0 million aggregate
principal amount of its 1.0% Exchangeable Senior Notes due February 15, 2025
(the "Exchangeable Notes"). The Exchangeable Notes bear interest at a fixed rate
of 1.0% per year, payable semiannually in arrears on February 15 and August 15
of each year, beginning on August 15, 2020. Prior to August 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, at i3 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 or i3 Verticals, LLC's delivery of a notice of redemption, i3 Verticals,
LLC will increase, in certain circumstances, the exchange rate for a holder who
elects to exchange its Exchangeable Notes in connection with such a corporate
event or notice of redemption, as the case may be.
The Exchangeable Notes mature on February 15, 2025, unless earlier exchanged,
redeemed or repurchased. We received approximately $132.7 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. For
additional information, see Note 5. "Long-Term Debt, Net" to our condensed
consolidated financial statements.
Acquisitions
Acquisitions during the six months ended March 31, 2019
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. During the six months
ended March 31, 2020, the Company was active in executing its acquisition
strategy, though it did not complete any acquisitions during this period. This
was primarily the result of our decision to defer the projected closing of
certain acquisitions as a result of the uncertainty from the COVID-19 pandemic
and our desire to maintain liquidity as a result.
During the six months ended March 31, 2019, the Company completed the
acquisitions of four unrelated businesses. These four acquisitions expanded our
software offerings in the public sector vertical market, provided technology
that enhances our Burton Platform and expanded our merchant base. Total net
purchase consideration was $45.8 million, which included $41.2 million of cash
consideration funded with proceeds from our revolving line of credit and $4.6
million of contingent consideration.

                                       44
--------------------------------------------------------------------------------

Our Revenue and Expenses
Revenues
We generate revenue primarily from 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 from Visa and Mastercard. Upon our adoption of ASC
606 on October 1, 2019, these fees are presented net of revenue.
Expenses
Other costs of services. Other costs of services include costs directly
attributable to processing and bank sponsorship costs. These also include
related costs such as residual payments to our distribution partners, which are
based on a percentage of the net revenues (revenue less interchange and network
fees) generated from 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
amortization of debt 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 provides third-party
integrated payment solutions as well as traditional payment services across our
strategic vertical markets.
                                       45
--------------------------------------------------------------------------------

Proprietary Software and Payments
Our Proprietary Software and Payments segment delivers embedded payment
solutions to our clients through company-owned software. Payments are delivered
through both the payment facilitator model and the traditional merchant
processing model. Our Proprietary Software and Payments clients are primarily in
the education, property management and public sector markets.
Other
Our Other category includes corporate overhead expenses, when presenting
reportable segment information.
For additional information on our segments, see Note 11 to our condensed
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 three months ended March 31, 2020 and 2019 was $3.6
billion and $2.9 billion, respectively, representing a period-to-period growth
rate of 21.6%. Our payment volume for the six months ended March 31, 2020 and
2019 was $7.4 billion and $5.9 billion, respectively, representing a
period-to-period growth rate of 26.0%. Our payment volume has been adversely
impacted by the deteriorating economic conditions as a result of the impact of
the COVID-19 pandemic. Our payment volume in the month of March 2020 was down
between 1% and 2% compared to March 2019. We focus on payment 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 represent payment transactions that are generated in
situations in which 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 55% of our payment volume for the three months ended March 31,
2020 from 49% for the three months ended March 31, 2019.
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. Volume attrition provides us useful information
regarding our ability to retain clients and volume. We use this metric to
evaluate various operating decisions and initiatives. In March of 2020, our net
volume attrition on a per month basis was approximately 2% to 2.5% due to the
adverse impact of the COVID-19 pandemic on the month. However, during the six
months ended March 31, 2020, our average net volume attrition per month remained
below 1%.
                                       46
--------------------------------------------------------------------------------

Results of Operations
Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
The following table presents our historical results of operations for the
periods indicated:
                                                    Three months ended March 31,                                       Change
(in thousands)                                        2020                  2019              Amount                   %

Revenue                                         $      39,178           $  85,394          $ (46,216)                    (54.1) %

Operating expenses
Interchange and network fees(1)                                            54,685            (54,685)                      n/m
Other costs of services                                11,955              10,193              1,762                      17.3  %
Selling general and administrative                     20,786              14,319              6,467                      45.2  %
Depreciation and amortization                           4,538               3,898                640                      16.4  %
Change in fair value of contingent
consideration                                            (142)              2,502             (2,644)                      n/m
Total operating expenses                               37,137              85,597            (48,460)                    (56.6) %

Income (loss) from operations                           2,041                (203)             2,244                       n/m

Interest expense, net                                   2,184               1,155              1,029                      89.1  %

(Loss) income before income taxes                        (143)             (1,358)             1,215                     (89.5) %

Benefit from income taxes                              (2,062)               (136)            (1,926)                  1,416.2  %

Net income (loss)                                       1,919              (1,222)             3,141                          n/m

Net income (loss) attributable to
non-controlling interest                                1,182                (120)             1,302                          n/m
Net income (loss) attributable to i3
Verticals, Inc.                                 $         737           $  (1,102)         $   1,839                          n/m


n/m = not meaningful
__________________________
1.Effective October 1, 2019, our revenues are presented net of interchange and
network fees in accordance with Accounting Standards Codification Topic 606,
Revenue from Contracts with Customers. See Note 2 to our condensed consolidated
financial statements for a description of the recently adopted accounting
pronouncement.
Revenue
Revenue decreased $46.2 million, or 54.1%, to $39.2 million for the three months
ended March 31, 2020 from $85.4 million for the three months ended March 31,
2019. This decrease was driven by the adoption of ASC 606 effective October 1,
2019, which resulted in our revenues being presented net of interchange and
network fees prospectively. This change in presentation affected our reported
revenues and operating expenses for the three months ended March 31, 2020 by the
same amount and had no effect on our income from operations. Our revenue in the
month of March 2020 was also negatively impacted an overall reduction in
consumer spending as a result of COVID-19.
                                       47
--------------------------------------------------------------------------------

Revenue without the effect of the adoption of ASC 606 increased $17.0 million,
or 19.9%, to $102.4 million for the three months ended March 31, 2020 from $85.4
million for the three months ended March 31, 2019. This increase was principally
driven by acquisitions completed during the 2019 fiscal year. These acquisitions
contributed an incremental $15.2 million, net of inter-segment eliminations, to
our revenue for the three months ended March 31, 2020. The remaining $1.8
million of increased revenue was due primarily to an increase in payment volume.
Without the effect of the adoption of ASC 606, revenue related to a subset of
merchant contracts purchased in 2014 and 2017 (the "Purchased Portfolios"),
which have a higher rate of revenue attrition and payment volume attrition than
the rest of our business, decreased $0.9 million, or 29.5%, to $2.1 million for
the three months ended March 31, 2020 from $3.0 million for the three months
ended March 31, 2019. Excluding revenues from the Purchased Portfolios and the
effect of the adoption of ASC 606, revenue grew $17.9 million, or 21.7%, to
$100.2 million for the three months ended March 31, 2020 from $82.4 million for
the three months ended March 31, 2019.
Without the effect of the adoption of ASC 606, revenue within Merchant Services
increased $9.2 million, or 12.0%, to $86.1 million for the three months ended
March 31, 2020 from $76.9 million for the three months ended March 31, 2019.
This increase was principally driven by an increase in payments revenue of $11.0
million, partially offset by a decrease in other revenue of $1.8 million for the
three months ended March 31, 2020. The increase in payments revenue was
primarily due to an increase in payment volume.
Without the effect of the adoption of ASC 606, revenue within Proprietary
Software and Payments increased $8.3 million, or 97.2%, to $16.8 million for the
three months ended March 31, 2020 from $8.5 million for the three months ended
March 31, 2019. This increase was principally driven by an increase in other
revenue of $5.9 million for the three months ended March 31, 2020, driven by
software and related services. In addition, payments revenue increased $2.3
million for the three months ended March 31, 2020, driven by payment volume.
Payment volume increased $0.6 billion, or 21.6%, to $3.6 billion for the three
months ended March 31, 2020 from $2.9 billion for the three months ended March
31, 2019.
Interchange and Network Fees
Interchange and network fees decreased $54.7 million, or 100.0%, to $0.0 million
for the three months ended March 31, 2020 from $54.7 million for the three
months ended March 31, 2019. This decrease was driven by the adoption of ASC 606
effective October 1, 2019, which resulted in our revenues being presented net of
interchange and network fees prospectively. This change in presentation affected
our reported revenues and operating expenses for the three months ended March
31, 2020 by the same amount and had no effect on our income from operations.
Interchange and network fees without the effect of the adoption of ASC 606
increased $8.5 million, or 15.6%, to $63.2 million for the three months ended
March 31, 2020 from $54.7 million for the three months ended March 31, 2019.
Acquisitions completed during the 2019 fiscal year contributed an incremental
$5.4 million to our interchange and network fees for the three months ended
March 31, 2020. The remaining $3.1 million of increased interchange and network
fees was due primarily to an increase in payment volume.
Without the effect of the adoption of ASC 606, interchange and network fees
related to the Purchased Portfolios decreased $0.4 million, or 26.0%, to $1.1
million for the three months ended March 31, 2020 from $1.5 million for the
three months ended March 31, 2019. Excluding interchange and network fees from
these Purchased Portfolios and the effect of the adoption of ASC 606,
interchange and network fees grew $8.9 million, or 16.7%, to $62.1 million for
the three months ended March 31, 2020 from $53.2 million for the three months
ended March 31, 2019.
Without the effect of the adoption of ASC 606, interchange and network fees
within Merchant Services increased $8.0 million, or 15.0%, to $61.1 million for
the three months ended March 31, 2020 from $53.1 million for the three months
ended March 31, 2019. Without the effect of the adoption of ASC 606, interchange
and network fees within Proprietary Software and Payments increased $0.5
million, or 34.6%, to $2.1 million for the three months ended March 31, 2020
from $1.6 million for the three months ended March 31, 2019.
                                       48
--------------------------------------------------------------------------------

Other Costs of Services
Other costs of services increased $1.8 million, or 17.3%, to $12.0 million for
the three months ended March 31, 2020 from $10.2 million for the three months
ended March 31, 2019. Acquisitions completed during the 2020 and 2019 fiscal
years contributed an incremental $1.9 million, net of inter-segment
eliminations, to our other costs of services for the three months ended March
31, 2020.
Other costs of services within Merchant Services increased $1.6 million, or
16.2%, to $11.3 million for the three months ended March 31, 2020 from $9.7
million for the three months ended March 31, 2019.
Other costs of services within Proprietary Software and Payments increased $0.7
million, or 153.8%, to $1.2 million for the three months ended March 31, 2020
from $0.5 million for the three months ended March 31, 2019.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $6.5 million, or 45.2%,
to $20.8 million for the three months ended March 31, 2020 from $14.3 million
for the three months ended March 31, 2019. This increase was primarily driven by
a $4.6 million increase in employment expenses, primarily resulting from an
increase in headcount that resulted from acquisitions and an increase in stock
compensation expense. Increases in insurance and professional services, software
and technological services, advertising and promotion, offering related expenses
and rent expense comprised the majority of the remainder of the increase.
Depreciation and Amortization
Depreciation and amortization increased $0.6 million, or 16.4%, to $4.5 million
for the three months ended March 31, 2020 from $3.9 million for the three months
ended March 31, 2019. Amortization expense increased $0.4 million to $4.0
million for the three months ended March 31, 2020 from $3.6 million for the
three months ended March 31, 2019 primarily due to acquisitions completed during
the prior fiscal year. Depreciation expense increased $0.2 million to $0.5
million for the three months ended March 31, 2020 from $0.3 million for the
three months ended March 31, 2019.
Change in Fair Value of Contingent Consideration
Change in fair value of contingent consideration to be paid in connection with
acquisitions was a benefit of $0.1 million for the three months ended March 31,
2020 primarily due to performance of some of our acquisitions falling below
expectations. The change in fair value of contingent consideration for the three
months ended March 31, 2019 was a charge of $2.5 million.
Interest Expense, net
Interest expense, net, increased $1.0 million, or 89.1%, to $2.2 million for the
three months ended March 31, 2020 from $1.2 million for the three months ended
March 31, 2019. The increase reflects a higher average outstanding debt balance
for the three months ended March 31, 2020 as compared to the three months ended
March 31, 2019 and amortization of the debt discount, which was the difference
between the principal amount of the Exchangeable Notes and the liability
component, recorded in connection with the issuance of the Exchangeable Notes.
Benefit from Income Taxes
The benefit from income taxes was a benefit of $2.1 million for the three months
ended March 31, 2020 from a benefit of $0.1 million for the three months ended
March 31, 2019. As described in Note 2 to our condensed consolidated financial
statements, we had a reduction in the valuation allowance recorded on a deferred
tax asset, which resulted in a $2.7 million reduction in the valuation allowance
on the deferred tax asset related to our investment in partnership and a
corresponding reduction in our income tax expense in the three months ended
March 31, 2020. Our effective tax rate was 1,442% for the three months ended
March 31, 2020. Our effective tax rate differs from the federal statutory rate
of 21% primarily due to the tax structure of the Company. The income of minority
owned i3 Verticals, LLC is not taxed and the separate loss of the Company has
minimal tax effect due to the allocations from i3 Verticals, LLC.
                                       49
--------------------------------------------------------------------------------

Six Months Ended March 31, 2020 Compared to Six Months Ended March 31, 2019
The following table presents our historical results of operations for the
periods indicated:
                                                    Six months ended March 31,                                       Change
(in thousands)                                        2020                 2019              Amount                  %

Revenue                                         $     80,289           $ 170,262          $ (89,973)                  (52.8) %

Operating expenses
Interchange and network fees(1)                                          110,514           (110,514)                    n/m
Other costs of services                               24,873              19,983              4,890                    24.5  %
Selling general and administrative                    40,073              26,835             13,238                    49.3  %
Depreciation and amortization                          9,193               7,450              1,743                    23.4  %
Change in fair value of contingent
consideration                                             12               2,153             (2,141)                  (99.4) %
Total operating expenses                              74,151             166,935            (92,784)                  (55.6) %

Income from operations                                 6,138               3,327              2,811                    84.5  %

Interest expense, net                                  4,198               2,069              2,129                   102.9  %

Income before income taxes                             1,940               1,258                682                    54.2  %

(Benefit from) provision for income taxes             (1,913)                129             (2,042)                    n/m

Net income                                             3,853               1,129              2,724                   241.3  %

Net income attributable to
non-controlling interest                               3,265               2,053              1,212                    59.0  %
Net income (loss) attributable to i3
Verticals, Inc.                                 $        588           $    (924)         $   1,512                        n/m


n/m = not meaningful
__________________________
1.Effective October 1, 2019, our revenues are presented net of interchange and
network fees in accordance with Accounting Standards Codification Topic 606,
Revenue from Contracts with Customers. See Note 2 to our condensed consolidated
financial statements for a description of the recently adopted accounting
pronouncement.
Revenue
Revenue decreased $90.0 million, or 52.8%, to $80.3 million for the six months
ended March 31, 2020 from $170.3 million for the six months ended March 31,
2019. This decrease was driven by the adoption of ASC 606 effective October 1,
2019, which resulted in our revenues being presented net of interchange and
network fees prospectively. This change in presentation affected our reported
revenues and operating expenses for the six months ended March 31, 2020 by the
same amount and had no effect on our income from operations. Our revenue in the
month of March 2020 was also negatively impacted an overall reduction in
consumer spending as a result of COVID-19.
Revenue without the effect of the adoption of ASC 606 increased $42.3 million,
or 24.9%, to $212.6 million for the six months ended March 31, 2020 from $170.3
million for the six months ended March 31, 2019. This increase was principally
driven by acquisitions completed during the 2019 fiscal year. These acquisitions
contributed an incremental $31.3 million, net of inter-segment eliminations, to
our revenue for the six months ended March 31, 2020. The remaining $11.0 million
of increased revenue was due primarily to an increase in payment volume.
                                       50
--------------------------------------------------------------------------------

Without the effect of the adoption of ASC 606, revenue includes revenue from the
Purchased Portfolios, which have a higher rate of revenue attrition and payment
volume attrition than the rest of our business. Revenues from the Purchased
Portfolios decreased $2.1 million, or 30.4%, to $4.8 million for the six months
ended March 31, 2020 from $6.9 million for the six months ended March 31, 2019.
Excluding revenues from the Purchased Portfolios and the effect of the adoption
of ASC 606, revenue grew $44.4 million, or 27.2%, to $207.8 million for the six
months ended March 31, 2020 from $163.4 million for the six months ended March
31, 2019.
Without the effect of the adoption of ASC 606, revenue within Merchant Services
increased $25.6 million, or 16.5%, to $180.1 million for the six months ended
March 31, 2020 from $154.6 million for the six months ended March 31, 2019. This
increase was principally driven by an increase in payments revenue of $27.5
million, partially offset by a decrease in other revenue of $1.9 million for the
six months ended March 31, 2020. The increase in payments revenue was primarily
due to an increase in payment volume.
Without the effect of the adoption of ASC 606, revenue within Proprietary
Software and Payments increased $17.7 million, or 112.9%, to $33.4 million for
the six months ended March 31, 2020 from $15.7 million for the six months ended
March 31, 2019. This increase was principally driven by an increase in other
revenue of $11.7 million for the three months ended March 31, 2020, driven by
software and related services. In addition, payments revenue increased $6.0
million for the six months ended March 31, 2020, driven by payment volume.
Payment volume increased $1.5 billion, or 26.0%, to $7.4 billion for the six
months ended March 31, 2020 from $5.9 billion for the six months ended March 31,
2019.
Interchange and Network Fees
Interchange and network fees decreased $110.5 million, or 100.0%, to $0.0
million for the six months ended March 31, 2020 from $110.5 million for the six
months ended March 31, 2019. This decrease was driven by the adoption of ASC 606
effective October 1, 2019, which resulted in our revenues being presented net of
interchange and network fees prospectively. This change in presentation affected
our reported revenues and operating expenses for the six months ended March 31,
2020 by the same amount and had no effect on our income from operations.
Interchange and network fees without the effect of the adoption of ASC 606
increased $21.8 million, or 19.7%, to $132.3 million for the six months ended
March 31, 2020 from $110.5 million for the six months ended March 31, 2019.
Acquisitions completed during the 2019 fiscal year contributed an incremental
$11.2 million to our interchange and network fees for the six months ended March
31, 2020. The remaining $10.6 million of increased interchange and network fees
was due primarily to an increase in payment volume.
Without the effect of the adoption of ASC 606, interchange and network fees
related to the Purchased Portfolios decreased $0.9 million, or 26.7%, to $2.4
million for the six months ended March 31, 2020 from $3.3 million for the six
months ended March 31, 2019. Excluding interchange and network fees from the
Purchased Portfolios and the effect of the adoption of ASC 606, interchange and
network fees grew $22.7 million, or 21.1%, to $129.9 million for the six months
ended March 31, 2020 from $107.2 million for the six months ended March 31,
2019.
Without the effect of the adoption of ASC 606, interchange and network fees
within Merchant Services increased $20.2 million, or 18.8%, to $127.6 million
for the six months ended March 31, 2020 from $107.5 million for the six months
ended March 31, 2019. Without the effect of the adoption of ASC 606, interchange
and network fees within Proprietary Software and Payments increased $1.6
million, or 53.6%, to $4.7 million for the six months ended March 31, 2020 from
$3.0 million for the six months ended March 31, 2019.
Other Costs of Services
Other costs of services increased $4.9 million, or 24.5%, to $24.9 million for
the six months ended March 31, 2020 from $20.0 million for the six months ended
March 31, 2019. Acquisitions completed during the 2020 and 2019 fiscal years
contributed an incremental $3.9 million, net of inter-segment eliminations, to
our other costs of services for the six months ended March 31, 2020.
                                       51
--------------------------------------------------------------------------------

Other costs of services within Merchant Services increased $4.3 million, or
22.4%, to $23.4 million for the six months ended March 31, 2020 from $19.1
million for the six months ended March 31, 2019.
Other costs of services within Proprietary Software and Payments was increased
$1.5 million, or 178.8%, to $2.4 million for the six months ended March 31, 2020
from $0.9 million for the six months ended March 31, 2019.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $13.2 million, or 49.3%,
to $40.1 million for the six months ended March 31, 2020 from $26.8 million for
the six months ended March 31, 2019. This increase was primarily driven by a
$9.8 million increase in employment expense, primarily resulting from an
increase in headcount that resulted from acquisitions and an increase in stock
compensation expense. Increases in insurance and professional services, software
and technological services, advertising and promotion, rent expense and offering
related expenses comprised the majority of the remainder of the increase.
Depreciation and Amortization
Depreciation and amortization increased $1.7 million, or 23.4%, to $9.2 million
for the six months ended March 31, 2020 from $7.5 million for the six months
ended March 31, 2019. Amortization expense increased $1.3 million to $8.3
million for the six months ended March 31, 2020 from $6.9 million for the six
months ended March 31, 2019 primarily due to acquisitions completed during the
prior fiscal year. Depreciation expense increased $0.4 million to $0.9 million
for the six months ended March 31, 2020 from $0.5 million for the six months
ended March 31, 2019.
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 less than $0.1 million for the six months ended
March 31, 2020 primarily due to on average slightly stronger performance of some
of our acquisitions than expectations. The change in fair value of contingent
consideration for the six months ended March 31, 2019 was a charge of $2.2
million.
Interest Expense, net
Interest expense, net, increased $2.1 million, or 102.9%, to $4.2 million for
the six months ended March 31, 2020 from $2.1 million for the six months ended
March 31, 2019. The increase reflects a higher average outstanding debt balance
for the six months ended March 31, 2020 as compared to the six months ended
March 31, 2019 and amortization of the debt discount, which was the difference
between the principal amount of the Exchangeable Notes and the liability
component, recorded in connection with the issuance of the Exchangeable Notes.
Provision for Income Taxes
The provision for income taxes decreased to a benefit of $1.9 million for the
six months ended March 31, 2020 from an expense of $0.1 million for the six
months ended March 31, 2019. As described in Note 2 to our condensed
consolidated financial statements, we had a reduction in the valuation allowance
recorded on a deferred tax asset, which resulted in a $2.7 million reduction in
the valuation allowance on the deferred tax asset related to our investment in
partnership and a corresponding reduction in our income tax expense in the six
months ended March 31, 2020. Our effective tax rate was (99)% for the six months
ended March 31, 2020. Our effective tax rate differs from the federal statutory
rate of 21% primarily due to the tax structure of the Company. The income of
minority owned i3 Verticals, LLC is not taxed and the separate loss of the
Company has minimal tax effect due to the allocations from i3 Verticals, LLC.

                                       52
--------------------------------------------------------------------------------

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, which respectively are
the third, fourth and first quarters of our fiscal 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 clients 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. We expect COVID-19 to have an
adverse impact on our results of operations relative to the prior year and the
normal seasonality of our business.

Liquidity and Capital Resources
We have historically financed our operations (not including investments and
acquisitions) and working capital through net cash from operating activities. As
of March 31, 2020, we had $1.6 million of cash and cash equivalents and
available borrowing capacity of $256.0 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.
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. Our plan for capital expenditures and
future acquisitions for this fiscal year are being re-evaluated as we navigate
through the economic impact related to COVID-19. We will assess our plans for
acquisition opportunities against our cash availability during the crisis to
make the most strategic decisions for our business. We have the ability to pause
or terminate much of our anticipated acquisition program should our financial
position require it. 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.
As previously stated, COVID-19 is having a significant effect on overall
economic conditions in the United States, and efforts to contain the spread of
COVID-19 intensified in March and April 2020. The economic impact of these
conditions is materially impacting our business and is expected to continue to
adversely impact our strategic verticals and our business in general.
On April 3, 2020, we announced certain proactive actions in response to the
significant ongoing uncertainty around the severity and duration of the COVID-19
pandemic. We have temporarily furloughed a portion of our employees and have
implemented a workforce reduction program that includes the elimination of
certain positions as well as a general reduction in headcount. The total number
of employees impacted by the furlough and workforce reduction represented
approximately 12% of our workforce. We expect to incur immaterial charges in
connection with this action, primarily consisting of future cash expenditures
for the payment of severance, related benefits costs and certain modifications
to equity compensation arrangements in the third quarter of fiscal 2020.
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. 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.
                                       53
--------------------------------------------------------------------------------

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 March 31, 2020, we were in compliance with these
covenants with a consolidated interest coverage ratio, total leverage ratio and
consolidated senior leverage ratio of 6.11x, 3.41x and 0.38x, 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 COVID-19, as well as other
factors listed under the heading "Note Regarding Forward-looking Statements,"
and in our risk factors included herein and in our Form 10-K for the fiscal year
ended September 30, 2019 and subsequent filings 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.
Six Months Ended March 31, 2020 and 2019
                                                                      Six months ended March 31,
                                                                       2020                 2019
                                                                            (in thousands)
Net cash provided by operating activities                        $      8,847           $   11,424
Net cash used in investing activities                            $     (3,881)          $  (44,945)
Net cash (used in) provided by financing activities              $     

(4,994) $ 34,343




Cash Flow from Operating Activities
Net cash provided by operating activities decreased $2.6 million to $8.8 million
for the six months ended March 31, 2020 from $11.4 million for the six months
ended March 31, 2019. The decrease in net cash provided by operating activities
was partially offset by an increase in net income of $2.7 million. The decrease
in net cash provided by operating activities was further offset by increases in
equity-based compensation of $2.3 million, depreciation and amortization expense
of $1.7 million and amortization of debt discount and issuance costs expense of
$0.4 million. The decrease in net cash provided by operating activities was
driven by an increase in the benefit from deferred taxes of $2.7 million, a
decrease in increases in non-cash contingent consideration from original
estimates of $2.1 million and a decrease in operating assets and liabilities of
$5.3 million. The decrease in operating assets and liabilities was primarily
driven by a $3.3 million decrease in accrued liabilities, a $2.8 million
decrease in contingent consideration paid in excess of original estimates and a
$0.7 million increase in accounts receivable, partially offset by a $1.0 million
increase in deferred revenue and a $0.6 million increase in accounts payable for
the six months ended March 31, 2020 compared to the six months ended March 31,
2019.
Cash Flow from Investing Activities
Net cash used in investing activities decreased $41.1 million to $3.9 million
for the six months ended March 31, 2020 from $44.9 million for the six months
ended March 31, 2019. The largest driver of cash used in investing activities
for the six months ended March 31, 2019 was cash used in acquisitions, net of
cash acquired. For the six months ended March 31, 2019, we used $41.2 million of
cash for acquisitions, net of cash acquired.
                                       54
--------------------------------------------------------------------------------

Cash Flow from Financing Activities
Net cash used in financing activities increased $39.3 million to $5.0 million
net cash used in financing activities for the six months ended March 31, 2020
from $34.3 million net cash provided by financing activities for the six months
ended March 31, 2019. The increase in net cash used in financing activities was
primarily the result of an increase in payments on the revolving credit facility
of $191.1 million and payments for purchases of exchangeable senior note hedges
of $28.7 million during the six months ended March 31, 2020. The increase in
cash used in financing activities is partially offset by proceeds from
borrowings on exchangeable notes of $138.0 million, an increase in proceeds from
the revolving credit facility of $28.5 million, proceeds from the issuance of
warrants of $14.7 million, a decrease in payments of notes payable to banks of
$2.5 million and a decrease in payments for required distributions to members
for tax obligations of $1.0 million for the three months ended March 31, 2020
from the three months ended March 31, 2019.
Senior Secured Credit Facility
On October 30, 2017, we entered into a new credit facility (the "2017 Senior
Secured Credit Facility"). Bank of America Corporation served as administrative
agent with Bank of America Corporation, Wells Fargo & Co. and Fifth Third Bank
served as joint lead arrangers and joint bookrunners. The 2017 Senior Secured
Credit Facility consisted of $40.0 million in term loans and a $110.0 million
revolving line of credit. For a summary of the 2017 Senior Secured Credit
Facility, please refer to Note 5 to the accompanying condensed consolidated
financial statements and to "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" of Part
II, Item 7 of our Form 10-K.
On May 9, 2019, we amended and restated our existing 2017 Senior Secured Credit
Facility with a new credit agreement, which we amended on February 18, 2020, in
connection with our offering of Exchangeable Notes (the "Senior Secured Credit
Facility"). The Senior Secured Credit Facility 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.
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% (2.75% as of
March 31, 2020), 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) LIBOR plus
1.00%), plus an applicable margin of 0.25% to 1.25% (0.75% as of March 31,
2020), 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% (0.25% as of March 31, 2020) 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 maturity date of the Senior Secured Credit Facility is May 9, 2024. 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.
As of March 31, 2020, we were in compliance with these covenants, and there was
$256.0 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, dividends and
distributions, changes in the nature of our business, transactions with
affiliates and prepayment of other indebtedness; maintenance of certain
financial ratios; and certain non-financial covenants pertaining to our
activities during the period covered.
                                       55
--------------------------------------------------------------------------------

As a holding company, we depend on distributions or loans from i3 Verticals, LLC
to access funds earned by our operations. The covenants contained in the Senior
Secured Credit Facility may restrict i3 Verticals, LLC's ability to provide
funds to i3 Verticals, Inc.
Secondary Offering
On June 10, 2019, we completed the June 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 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 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 the Company, which it 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.
Exchangeable Notes
On February 18, 2020, i3 Verticals, LLC issued $138.0 million aggregate
principal amount of its 1.0% Exchangeable Notes due February 15, 2025. The
Exchangeable Notes bear interest at a fixed rate of 1.0% per year, payable
semiannually in arrears on February 15 and August 15 of each year, beginning on
August 15, 2020. The Exchangeable Notes are exchangeable into cash, shares of
the Company's Class A common stock, or a combination thereof, at i3 Verticals,
LLC's election. The Exchangeable Notes mature on February 15, 2025, unless
earlier exchanged, redeemed or repurchased. The net proceeds from the sale of
the Exchangeable Notes were approximately $132.7 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 and to pay the cost of the Note Hedge Transactions.
Contractual Obligations
The following table summarizes our contractual obligations and commitments as of
March 31, 2020 related to leases and borrowings:
                                                                              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)                    $  10,713          $   3,373

$ 5,540 $ 1,800 $ - Facility leases

                              13,890              2,632                 4,707                 3,455               3,096
Loan to third party sales
organization(2)                               3,500              3,500                     -                     -                   -
Senior Secured Credit Facility and
related interest(3)                          24,794              1,385                 2,770                20,639                   -
Exchangeable Notes and related
interest(4)                                 144,728              1,380                 2,760               140,588                   -
Contingent consideration(5)                  11,761              8,484                 3,277                     -                   -
Total                                     $ 209,386          $  20,754          $     19,054          $    166,482          $    3,096


                                       56

--------------------------------------------------------------------------------

__________________________


1.We have 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 have committed to a loan to a third party sales organization in multiple
increments, contingent upon the third party sales organization's achievement of
certain financial metrics. The amount reflected in this table includes the
maximum commitment for the loan.
3.We estimated interest payments through the maturity of our Senior Secured
Credit Facility by applying the interest rate of 3.92% in effect on the
outstanding balance as of March 31, 2020, plus the unused fee rate of 0.25% in
effect as of March 31, 2020.
4.We calculated interest payments through the maturity of our Exchangeable Notes
by applying the coupon interest rate of 1.00% on the principal balance as of
March 31, 2020 of $138.0 million.
5.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
material 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 6 of our condensed
consolidated financial statements. As a result of the Tax Receivable Agreement,
we have been required to establish a liability in our condensed consolidated
financial statements. That liability, which will increase upon the redemptions
or exchanges of Common Units for our Class A common stock, generally represents
85% of the estimated future tax benefits, if any, relating to the increase in
tax basis associated with the Common Units we received as a result of the
Reorganization Transactions and other redemptions or exchanges by holders of
Common Units. If this election is made, the accelerated payment will be based on
the present value of 100% of the estimated future tax benefits and, as a result,
the associated liability reported on our condensed consolidated financial
statements may be increased. We expect that the payments required under the Tax
Receivable Agreement will be substantial. The actual increase in tax basis, as
well as the amount and timing of any payments under the Tax Receivable
Agreement, will vary depending upon a number of factors, including the timing of
redemptions or exchanges by the holders of Common Units, the price of our
Class A common stock at the time of the redemption or exchange, whether such
redemptions or exchanges are taxable, the amount and timing of the taxable
income we generate in the future and the tax rate then applicable as well as the
portion of our payments under the Tax Receivable Agreement constituting imputed
interest. We intend to fund the payment of the amounts due under the Tax
Receivable Agreement out of the cash savings that we actually realize in respect
of the attributes to which Tax Receivable Agreement relates.
As of March 31, 2020, the total amount due under the Tax Receivable Agreement
was $25.8 million, and payments to the Continuing Equity Owners related to
exchanges through March 31, 2020 will range from $0 to $2.3 million per year and
are expected to be paid over the next 25 years. The amounts recorded as of March
31, 2020, 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.

                                       57
--------------------------------------------------------------------------------

Critical Accounting Policies
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. The impact of COVID-19 on
certain of our estimates, including goodwill and intangible assets, is uncertain
at this time. If general economic conditions continue to deteriorate or remain
uncertain for an extended period of time, the trading price of our common stock,
which has already declined in recent weeks, could decline further. If the stock
price continues to be depressed or decreases further, it may cause a triggering
event for impairment testing of fair-valued assets, including goodwill and
intangible assets.
Critical accounting policies are those that we consider the most critical to
understanding our financial condition and results of operations.
As of March 31, 2020, there have been no significant changes to our critical
accounting estimates disclosed in the Form 10-K filed with the SEC on November
22, 2019, except regarding the adoption of ASC 606 on October 1, 2019, and the
reduction in the valuation allowance on the deferred tax asset related to our
investment in partnership, as described in Note 2 to our condensed consolidated
financial statements.

Recently Issued Accounting Pronouncements
As of March 31, 2020, there have been no significant changes to our recently
issued accounting pronouncements disclosed in the Form 10-K filed with the SEC
on November 22, 2019, except as described in Note 2 to our condensed
consolidated financial statements.

Off-Balance Sheet Arrangements As of March 31, 2020, we did not have any off-balance sheet financing arrangements.

© Edgar Online, source Glimpses