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 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 COVID-19 pandemic;
•our ability to meet our liquidity needs in light of the impacts of the COVID-19
pandemic;
•our ability to raise additional funds on terms acceptable to us, if at all,
whether 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;
•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;
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•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;
•risks related to laws, regulations and industry standards;
•operating and financial restrictions imposed by our Senior Secured Credit
Facility (as defined below);
•risks related to the accounting method for the Exchangeable Notes;
•our ability to raise the funds necessary to settle exchanges of the
Exchangeable Notes or to repurchase the Exchangeable Notes upon a fundamental
change;
•risks related to the conditional exchange feature of the Exchangeable Notes;
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. The spread of COVID-19 has caused several states
and cities to declare states of emergency or disaster proclamations. State and
local governments, together with public health officials, have recommended and
mandated 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. Although many of the restrictions have
eased across the
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country, the pandemic has yet to show substantial signs of decline in the U.S.
Some areas are re-imposing closures and other restrictions due to increased
rates of COVID-19 cases.
As a result, the COVID-19 pandemic is significantly affecting overall economic
conditions in the United States. 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,
beginning in the second half of March 2020 and continuing into the third quarter
of fiscal 2020, we and our clients have experienced a decline and subsequent
partial recovery in payment volume and the number of transactions processed, and
therefore, a decline and subsequent partial recovery in revenue in our strategic
verticals. Our payment volume was $0.8 billion, $1.0 billion and $1.2 billion
for the months of April, May and June 2020, respectively. Further, for the three
months ended June 30, 2020, a significant portion of our revenue 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. There are no reliable estimates of how
long the pandemic will last, how many people are likely to be affected by it or
the duration or types of restrictions that will be imposed. For that reason, we
are unable to predict the long-term impact of the pandemic on our business at
this time.
As previously disclosed, on April 3, 2020, we announced certain proactive
actions in response to the significant uncertainty around the severity and
duration of the COVID-19 pandemic, which included temporarily furloughing a
portion of our employees and a workforce reduction program that included 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 June 30, 2020, we had $9.1 million of cash and cash equivalents and $240.0
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 June 30, 2020, we
were in compliance with these covenants with a consolidated interest coverage
ratio, total leverage ratio and consolidated senior leverage ratio of 7.00x,
3.69x and 0.61x, 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 the remainder of the 2020 fiscal year.
During the third quarter of fiscal 2020, in response to the COVID-19 pandemic,
the Company conducted an interim goodwill impairment analysis using the
quantitative test for certain reporting units. The testing date was May 1, 2020.
The Company determined that none of the reporting units were impaired and fair
values of all of its reporting units substantially exceeded their carrying
values at the assessment date. There could be material changes to these
estimates as a result of ongoing COVID-19 developments in future periods. Actual
results could differ from those estimates. 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".
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
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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 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 $132.8 million in net
proceeds from the sale of the Exchangeable Notes, as determined by deducting
estimated offering expenses paid to third-parties from the aggregate principal
amount. i3 Verticals, LLC used a portion of the net proceeds of the Exchangeable
Notes offering to pay down outstanding borrowings under the Senior Secured
Credit Facility in connection with the effectiveness of the operative provisions
of the Amendment and to pay the cost of the note hedge transactions. For
additional information, see Note 5. "Long-Term Debt, Net" to our condensed
consolidated financial statements.
Acquisitions
A core component of our growth strategy includes a disciplined approach to
acquisitions of companies and technology, evidenced by numerous platform
acquisitions and tuck-in acquisitions since our inception in 2012. Our
acquisitions have opened new strategic vertical markets, increased the number of
businesses and organizations to whom we provide solutions and augmented our
existing payment and software solutions and capabilities.
Recent acquisitions
During the nine months ended June 30, 2020, we were active in executing our
acquisition strategy, though we 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.
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Subsequent to June 30, 2020, we completed the acquisition of two businesses. One
expands our geographic reach and software capabilities in the public sector
vertical. The other adds text-to-pay capabilities and other software solutions
in our non-profit vertical. Total purchase consideration included $16.4 million
in cash and revolving line of credit proceeds, and an amount of contingent
consideration, which is still being valued.
Acquisitions during the nine months ended June 30, 2019
On May 31, 2019, we acquired all the outstanding stock of Pace Payment Systems,
Inc. ("Pace"). We acquired Pace to expand our software offerings, primarily in
the public sector and education verticals. The total net purchase consideration
was $56.1 million, including $52.5 million in cash consideration, funded by
proceeds from our revolving line of credit, $3.3 million of contingent
consideration, $0.2 million of restricted Class A common stock in i3 Verticals
and potential additional consideration of up to $20.0 million to be paid based
upon the achievement of certain growth metrics related to the financial
performance of Pace in the 24 months from January 1, 2020 through December 31,
2021.
We also completed the acquisitions of additional unrelated businesses. These
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 for these businesses was $85.7
million, which included $78.7 million of cash consideration funded with proceeds
from our revolving line of credit and $7.0 million of contingent consideration.

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.
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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.
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 June 30, 2020 and 2019 was $3.0
billion and $3.4 billion, respectively, representing a period-to-period
contraction of 12.6%. Our payment volume for the nine months ended June 30, 2020
and 2019 was $10.4 billion and $9.3 billion, respectively, representing a
period-to-period growth rate of 11.9%. Our payment volume for thethree months
ended June 30, 2020 was adversely impacted by deteriorating economic conditions
as a result of the impacts of the COVID-19 pandemic. Our payment volume was $0.8
billion, $1.0 billion and $1.2 billion for the months of April, May and June
2020, respectively. 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 were 51% of our payment volume for both the three months ended June 30,
2020 and 2019 and were 54% and 49% of our payment volume for the nine months
ended June 30, 2020 and 2019, respectively.
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. During the nine months
ended June 30, 2020, our average net volume attrition per month remained below
1.6%.
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Results of Operations
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
The following table presents our historical results of operations for the
periods indicated:
                                                    Three months ended June 30,                                       Change
(in thousands)                                        2020                  2019              Amount                  %

Revenue                                         $      31,573           $  97,483          $ (65,910)                  (67.6) %

Operating expenses
Interchange and network fees(1)                                            63,263            (63,263)                       n/m
Other costs of services                                10,001              11,431             (1,430)                  (12.5) %
Selling, general and administrative                    18,133              17,587                546                     3.1  %
Depreciation and amortization                           4,475               4,425                 50                     1.1  %
Change in fair value of contingent
consideration                                          (1,473)               (417)            (1,056)                       n/m
Total operating expenses                               31,136              96,289            (65,153)                  (67.7) %

Income from operations                                    437               1,194               (757)                       n/m

Other expenses
Interest expense, net                                   2,423               1,918                505                    26.3  %
Other expense                                             829                   -                829                        n/m
Total other expenses                                    3,252               1,918              1,334                    69.6  %

Loss before income taxes                               (2,815)               (724)            (2,091)                  288.8  %

Benefit from income taxes                                  (5)               (131)               126                   (96.2) %

Net loss                                               (2,810)               (593)            (2,217)                       n/m

Net (loss) income attributable to
non-controlling interest                               (2,454)                598             (3,052)                       n/m
Net loss attributable to i3 Verticals,
Inc.                                            $        (356)          $  (1,191)         $     835                        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 $65.9 million, or 67.6%, to $31.6 million for the three months
ended June 30, 2020 from $97.5 million for the three months ended June 30, 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 June 30, 2020 by the same
amount and had no effect on our income from operations. Our revenue was also
negatively impacted by an overall reduction in consumer spending as a result of
the COVID-19 pandemic.
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Revenue without the effect of the adoption of ASC 606 decreased $16.6 million,
or 17.0%, to $80.9 million for the three months ended June 30, 2020 from $97.5
million for the three months ended June 30, 2019. This decrease was principally
driven the impacts of the COVID-19 pandemic. Payment volume decreased $0.4
billion, or 12.6%, to $3.0 billion for the three months ended June 30, 2020 from
$3.4 billion for the three months ended June 30, 2019, principally driven by the
result of the COVID-19 pandemic.
Acquisitions completed during the 2019 fiscal year partially offset the impacts
of the COVID-19 pandemic on our revenue. Without the effect of the adoption of
ASC 606, these acquisitions contributed an incremental $6.2 million, net of
inter-segment eliminations, to our revenue for the three months ended June 30,
2020.
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 $1.1 million, or 36.8%, to $1.8 million for
the three months ended June 30, 2020 from $2.9 million for the three months
ended June 30, 2019. Excluding revenues from the Purchased Portfolios and the
effect of the adoption of ASC 606, revenue decreased $15.6 million, or 16.4%, to
$79.0 million for the three months ended June 30, 2020 from $94.6 million for
the three months ended June 30, 2019.
Without the effect of the adoption of ASC 606, revenue within Merchant Services
decreased $16.9 million, or 19.4%, to $70.3 million for the three months ended
June 30, 2020 from $87.3 million for the three months ended June 30, 2019. This
decrease was principally driven by a decrease in payments revenue of $15.2
million for the three months ended June 30, 2020, driven by a decrease in
payment volume due to the COVID-19 pandemic. In addition, other revenue
decreased $1.8 million for the three months ended June 30, 2020.
Without the effect of the adoption of ASC 606, revenue within Proprietary
Software and Payments increased $0.7 million, or 7.3%, to $11.0 million for the
three months ended June 30, 2020 from $10.2 million for the three months ended
June 30, 2019. This increase was principally driven by an increase in other
revenue of $2.6 million for the three months ended June 30, 2020, driven by
software and related services, which increased due to the incremental impact of
acquisitions completed during the 2019 fiscal year, despite overall decreases in
other revenue related to the COVID-19 pandemic. The increase in revenue within
Proprietary Software and Payments was partially offset by a decrease in payments
revenue of $1.9 million for the three months ended June 30, 2020, driven by
payment volume decreases related to the COVID-19 pandemic.
Interchange and Network Fees
Interchange and network fees decreased $63.3 million, or 100.0%, to $0.0 million
for the three months ended June 30, 2020 from $63.3 million for the three months
ended June 30, 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 June 30,
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
decreased $14.0 million, or 22.1%, to $49.3 million for the three months ended
June 30, 2020 from $63.3 million for the three months ended June 30, 2019. This
decrease was principally driven by the impacts of the COVID-19 pandemic.
Acquisitions completed during the 2019 fiscal year partially offset the impacts
of the COVID-19 pandemic on our interchange and network fees. Without the effect
of the adoption of ASC 606, these acquisitions contributed an incremental $2.6
million to our interchange and network fees for the three months ended June 30,
2020.
Without the effect of the adoption of ASC 606, interchange and network fees
related to the Purchased Portfolios decreased $0.5 million, or 35.3%, to $1.0
million for the three months ended June 30, 2020 from $1.5 million for the three
months ended June 30, 2019. Excluding interchange and network fees from these
Purchased Portfolios and the effect of the adoption of ASC 606, interchange and
network fees decreased $13.4 million, or 21.8%, to $48.3 million for the three
months ended June 30, 2020 from $61.8 million for the three months ended June
30, 2019.
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Without the effect of the adoption of ASC 606, interchange and network fees
within Merchant Services decreased $13.0 million, or 21.0%, to $48.8 million for
the three months ended June 30, 2020 from $61.7 million for the three months
ended June 30, 2019. Without the effect of the adoption of ASC 606, interchange
and network fees within Proprietary Software and Payments decreased $1.0
million, or 66.4%, to $0.5 million for the three months ended June 30, 2020 from
$1.5 million for the three months ended June 30, 2019. These decreases in
interchange and network fees for the three months ended June 30, 2020 were
driven by payment volume decreases related to the COVID-19 pandemic.
Other Costs of Services
Other costs of services decreased $1.4 million, or 12.5%, to $10.0 million for
the three months ended June 30, 2020 from $11.4 million for the three months
ended June 30, 2019. Our other costs of services decreased due to an overall
reduction in consumer spending as a result of the COVID-19 pandemic.
Acquisitions completed during the 2019 fiscal year partially offset the impacts
of the COVID-19 pandemic on our other costs of services. These acquisitions
contributed an incremental $0.9 million, net of inter-segment eliminations, to
our other costs of services for the three months ended June 30, 2020.
Other costs of services within Merchant Services decreased $1.1 million, or
10.8%, to $9.4 million for the three months ended June 30, 2020 from $10.5
million for the three months ended June 30, 2019.
Other costs of services within Proprietary Software and Payments increased $0.1
million, or 13.2%, to $1.0 million for the three months ended June 30, 2020 from
$0.9 million for the three months ended June 30, 2019, due to the incremental
impact of acquisitions completed during the 2019 fiscal year, despite overall
decreases in other costs of services related to the COVID-19 pandemic.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $0.5 million, or 3.1%, to
$18.1 million for the three months ended June 30, 2020 from $17.6 million for
the three months ended June 30, 2019. This increase was primarily driven by a
$1.2 million increase in employment expenses, primarily resulting from an
increase in headcount that resulted from acquisitions and an increase in stock
compensation expense. The majority of the remaining increase was comprised of
COVID-19 related expenses of $0.2 million and increases in software and
technological services of $0.2 million, partially offset by decreases in travel
expenses of $0.5 million, decreases in insurance and professional services of
$0.4 million and decreases in advertising and promotion of $0.3 million.
Depreciation and Amortization
Depreciation and amortization increased $0.1 million, or 1.1%, to $4.5 million
for the three months ended June 30, 2020 from $4.4 million for the three months
ended June 30, 2019. Amortization expense decreased $0.1 million to $4.0 million
for the three months ended June 30, 2020 from $4.1 million for the three months
ended June 30, 2019 primarily due to accelerated amortization on certain
merchant relationships resulting in decreased amortization in future periods.
Depreciation expense increased $0.2 million to $0.5 million for the three months
ended June 30, 2020 from $0.3 million for the three months ended June 30, 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 $1.5 million for the three months ended June 30,
2020 primarily due to some of our acquisitions achieving lower performance as a
direct result of the COVID-19 pandemic. The change in fair value of contingent
consideration for the three months ended June 30, 2019 was a benefit of $0.4
million.
Interest Expense, net
Interest expense, net, increased $0.5 million, or 26.3%, to $2.4 million for the
three months ended June 30, 2020 from $1.9 million for the three months ended
June 30, 2019. The increase is driven by the 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. We recorded $1.2 million in interest expense related to the
amortization of the debt discount during the three months ended June 30, 2020.
The increase is partially offset by a lower weighted average interest rate for
the three months ended June 30, 2020 as compared to the three months ended June
30, 2019.
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Other expense
Other expense was $0.8 million for the three months ended June 30, 2020,
primarily relating to a loss on retirement of debt due to the carrying value
exceeding the fair value of the repurchased portion of the Exchangeable Notes at
the dates of repurchases. There was no other expense for the three months ended
June 30, 2019.
Benefit from Income Taxes
The benefit from income taxes decreased to a benefit of $0.0 million for the
three months ended June 30, 2020 from a benefit of $0.1 million for the three
months ended June 30, 2019. The decrease is driven by the policy change to
allocate stock compensation expense to the Class B shareholders of i3 Verticals,
LLC, which resulted in a $0.6 million reduction in the benefit from income taxes
during the three months ended June 30, 2020. Our effective tax rate was 0% for
the three months ended June 30, 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.
Nine Months Ended June 30, 2020 Compared to Nine Months Ended June 30, 2019
The following table presents our historical results of operations for the
periods indicated:
                                                       Nine months ended June 30,                                            Change
(in thousands)                                        2020                       2019              Amount                   %

Revenue                                         $     111,862                $ 267,745          $ (155,883)                   (58.2) %

Operating expenses
Interchange and network fees(1)                                                173,777            (173,777)                        n/m
Other costs of services                                34,874                   31,414               3,460                     11.0  %
Selling, general and administrative                    58,206                   44,422              13,784                     31.0  %
Depreciation and amortization                          13,668                   11,875               1,793                     15.1  %
Change in fair value of contingent
consideration                                          (1,461)                   1,736              (3,197)                  (184.2) %
Total operating expenses                              105,287                  263,224            (157,937)                   (60.0) %

Income from operations                                  6,575                    4,521               2,054                     45.4  %

Other expenses
Interest expense, net                                   6,621                    3,987               2,634                     66.1  %
Other expense                                             829                        -                 829                         n/m
Total other expenses                                    7,450                    3,987               3,463                     86.9  %

Income before income taxes                               (875)                     534              (1,409)                  (263.9) %

Benefit from income taxes                              (1,918)                      (2)             (1,916)                        n/m

Net income                                              1,043                      536                 507                     94.6  %

Net income attributable to
non-controlling interest                                  811                    2,651              (1,840)                   (69.4) %
Net income (loss) attributable to i3
Verticals, Inc.                                 $         232                $  (2,115)         $    2,347                         n/m


n/m = not meaningful
                                       54

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__________________________


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 $155.9 million, or 58.2%, to $111.9 million for the nine
months ended June 30, 2020 from $267.7 million for the nine months ended June
30, 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 nine months ended June 30, 2020 by the
same amount and had no effect on our income from operations. Our revenue in the
month of March 2020 and in the three months ended June 30, 2020 was also
negatively impacted an overall reduction in consumer spending as a result of the
COVID-19 pandemic.
Revenue without the effect of the adoption of ASC 606 increased $25.7 million,
or 9.6%, to $293.5 million for the nine months ended June 30, 2020 from $267.7
million for the nine months ended June 30, 2019. This increase was principally
driven by acquisitions completed during the 2019 fiscal year. These acquisitions
contributed an incremental $37.5 million, net of inter-segment eliminations, to
our revenue for the nine months ended June 30, 2020. Excluding revenues from
these acquisitions, revenue without the adoption of ASC 606 decreased $11.8
million principally driven by the impact of the COVID-19 pandemic.
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 $3.2 million, or 32.3%, to $6.6 million for the nine months
ended June 30, 2020 from $9.8 million for the nine months ended June 30, 2019.
Excluding revenues from the Purchased Portfolios and the effect of the adoption
of ASC 606, revenue grew $28.9 million, or 11.2%, to $286.9 million for the nine
months ended June 30, 2020 from $258.0 million for the nine months ended June
30, 2019.
Without the effect of the adoption of ASC 606, revenue within Merchant Services
increased $8.6 million, or 3.6%, to $250.4 million for the nine months ended
June 30, 2020 from $241.8 million for the nine months ended June 30, 2019. This
increase was principally driven by an increase in payments revenue of $12.3
million, partially offset by a decrease in other revenue of $3.7 million for the
nine months ended June 30, 2020. The increase in payments revenue was primarily
due to the incremental impact of acquisitions completed during the 2019 fiscal
year, despite overall decreases in other revenue related to the COVID-19
pandemic.
Without the effect of the adoption of ASC 606, revenue within Proprietary
Software and Payments increased $18.5 million, or 71.3%, to $44.4 million for
the nine months ended June 30, 2020 from $25.9 million for the nine months ended
June 30, 2019. This increase was principally driven by an increase in other
revenue of $14.3 million for the three months ended June 30, 2020, driven by
software and related services. In addition, payments revenue increased $4.2
million for the nine months ended June 30, 2020, driven by increases in payment
volume. These increases in Proprietary Software and Payments revenue were
primarily due to the incremental impact of acquisitions completed during the
2019 fiscal year, despite overall decreases in other revenue related to the
COVID-19 pandemic.
Payment volume increased $1.1 billion, or 11.9%, to $10.4 billion for the nine
months ended June 30, 2020 from $9.3 billion for the nine months ended June 30,
2019. This increase was principally driven by acquisitions completed during the
2019 fiscal year and organic growth prior to the COVID-19 pandemic.
Interchange and Network Fees
Interchange and network fees decreased $173.8 million, or 100.0%, to $0.0
million for the nine months ended June 30, 2020 from $173.8 million for the nine
months ended June 30, 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 nine months ended June 30,
2020 by the same amount and had no effect on our income from operations.
                                       55
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Interchange and network fees without the effect of the adoption of ASC 606
increased $7.8 million, or 4.5%, to $181.6 million for the nine months ended
June 30, 2020 from $173.8 million for the nine months ended June 30, 2019.
Acquisitions completed during the 2019 fiscal year contributed an incremental
$13.8 million to our interchange and network fees for the nine months ended June
30, 2020. Excluding interchange and network fees from these acquisitions,
interchange and network fees without the adoption of ASC 606 decreased $5.9
million principally driven by the impact of the COVID-19 pandemic.
Without the effect of the adoption of ASC 606, interchange and network fees
related to the Purchased Portfolios decreased $1.4 million, or 29.4%, to $3.4
million for the nine months ended June 30, 2020 from $4.8 million for the nine
months ended June 30, 2019. Excluding interchange and network fees from the
Purchased Portfolios and the effect of the adoption of ASC 606, interchange and
network fees grew $9.2 million, or 5.5%, to $178.2 million for the nine months
ended June 30, 2020 from $169.0 million for the nine months ended June 30, 2019.
Without the effect of the adoption of ASC 606, interchange and network fees
within Merchant Services increased $7.2 million, or 4.3%, to $176.4 million for
the nine months ended June 30, 2020 from $169.2 million for the nine months
ended June 30, 2019. Without the effect of the adoption of ASC 606, interchange
and network fees within Proprietary Software and Payments increased $0.6
million, or 13.5%, to $5.2 million for the nine months ended June 30, 2020 from
$4.5 million for the nine months ended June 30, 2019.
Other Costs of Services
Other costs of services increased $3.5 million, or 11.0%, to $34.9 million for
the nine months ended June 30, 2020 from $31.4 million for the nine months ended
June 30, 2019. Acquisitions completed during the 2019 fiscal year contributed an
incremental $4.8 million, net of inter-segment eliminations, to our other costs
of services for the nine months ended June 30, 2020.
Other costs of services within Merchant Services increased $3.2 million, or
10.6%, to $32.8 million for the nine months ended June 30, 2020 from $29.6
million for the nine months ended June 30, 2019.
Other costs of services within Proprietary Software and Payments was increased
$1.7 million, or 94.0%, to $3.4 million for the nine months ended June 30, 2020
from $1.8 million for the nine months ended June 30, 2019.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $13.8 million, or 31.0%,
to $58.2 million for the nine months ended June 30, 2020 from $44.4 million for
the nine months ended June 30, 2019. The majority of the remaining increase was
comprised of increases in software and technological services of $0.8 million,
partially offset by decreases in travel expenses of $0.4 million.
Depreciation and Amortization
Depreciation and amortization increased $1.8 million, or 15.1%, to $13.7 million
for the nine months ended June 30, 2020 from $11.9 million for the nine months
ended June 30, 2019. Amortization expense increased $1.2 million to $12.3
million for the nine months ended June 30, 2020 from $11.0 million for the nine
months ended June 30, 2019 primarily due to acquisitions completed during the
prior fiscal year. Depreciation expense increased $0.6 million to $1.4 million
for the nine months ended June 30, 2020 from $0.8 million for the nine months
ended June 30, 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 $1.5 million for the nine months ended June 30,
2020 due to some of our acquisitions achieving lower performance as a direct
result of the COVID-19 pandemic. The change in fair value of contingent
consideration for the nine months ended June 30, 2019 was a charge of $1.7
million.
Interest Expense, net
Interest expense, net, increased $2.6 million, or 66.1%, to $6.6 million for the
nine months ended June 30, 2020 from $4.0 million for the nine months ended June
30, 2019. The increase is driven by the amortization of the debt discount, which
was the difference between the principal amount of the Exchangeable Notes and
the liability
                                       56
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component, recorded in connection with the issuance of the Exchangeable Notes.
We recorded $1.8 million in interest expense related to the amortization of the
debt discount during the nine months ended June 30, 2020. The increase also
reflects a higher average outstanding debt balance, but offset by a lower
weighted average interest rate for the nine months ended June 30, 2020 as
compared to the nine months ended June 30, 2019.
Other expense
Other expense was $0.8 million for the nine months ended June 30, 2020,
primarily relating to a loss on retirement of debt due to the carrying value
exceeding the fair value of the repurchased portion of the Exchangeable Notes at
the dates of repurchases. There was no other expense for the nine months ended
June 30, 2019.
Benefit from Income Taxes
The benefit from income taxes increased to a benefit of $1.9 million for the
nine months ended June 30, 2020 from a benefit of $0.0 million for the nine
months ended June 30, 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 increase in the benefit from income taxes,
partially offset by the policy change to allocate stock compensation expense to
the Class B shareholders of i3 Verticals, LLC, which resulted in a $0.6 million
reduction in the benefit from income taxes in the nine months ended June 30,
2020. Our effective tax rate was 219% for the nine months ended June 30, 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.

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 the COVID-19
pandemic 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 June 30, 2020, we had $9.1 million of cash and cash equivalents and available
borrowing capacity of $240.0 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.
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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 the COVID-19 pandemic. 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 disclosed, on April 3, 2020, we announced certain proactive
actions in response to the significant uncertainty around the severity and
duration of the COVID-19 pandemic, which included temporarily furloughing a
portion of our employees and a workforce reduction program that included 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.
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. During the three months
ended June 30, 2020, we repurchased $8.5 million in aggregate principal amount
of the Exchangeable Notes for an aggregate purchase price of approximately $6.8
million. We recorded a loss on retirement of debt of $0.8 million due to the
carrying value exceeding the fair value of the repurchased portion of the
Exchangeable Notes at the dates of repurchases. We may elect from time to time
to purchase our outstanding debt in open market purchases, privately negotiated
transactions or otherwise. Any such debt repurchases will depend upon prevailing
market conditions, our liquidity requirements, contractual restrictions,
applicable securities law and other factors.
As amended on February 18, 2020 in connection with our offering of Exchangeable
Notes, our Senior Secured Credit Facility requires us to maintain a consolidated
interest coverage ratio not less than 3.00 to 1.00, a total leverage ratio not
exceeding 5.00 to 1.00 and a consolidated senior secured leverage ratio not
exceeding 3.25 to 1.00, provided that for each of the four fiscal quarters
immediately following a qualified acquisition, the total leverage ratio and the
consolidated senior secured leverage ratio would increase by up to 0.25, subject
to certain limitations. As of June 30, 2020, we were in compliance with these
covenants with a consolidated interest coverage ratio, total leverage ratio and
consolidated senior leverage ratio of 7.00x, 3.69x and 0.61x, respectively.
Although we believe our liquidity position remains strong, there can be no
assurance that we will be able to raise additional funds, in the form of debt or
equity, or to amend our Senior Secured Credit Facility on terms acceptable to
us, if at all, even if we determined such actions were necessary in the future.
Any material adverse change in client demand and our ability to retain clients,
competitive market forces, or uncertainties caused by the COVID-19 pandemic, as
well as other factors listed under the heading "Note Regarding Forward-looking
Statements," and in our risk factors included herein 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.
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Cash Flows
The following table presents a summary of cash flows from operating, investing
and financing activities for the following comparative periods.
Nine Months Ended June 30, 2020 and 2019
                                                   Nine months ended June 30,
                                                   2020                    2019
                                                         (in thousands)
Net cash provided by operating activities    $     10,087              $   

16,297


Net cash used in investing activities        $     (5,744)             $ 

(131,705)


Net cash provided by financing activities    $      3,143              $  

117,296




Cash Flow from Operating Activities
Net cash provided by operating activities decreased $6.2 million to $10.1
million for the nine months ended June 30, 2020 from $16.3 million for the nine
months ended June 30, 2019. The decrease in net cash provided by operating
activities was partially offset by an increase in net income of $0.5 million.
The decrease in net cash provided by operating activities was further offset by
adjustments to net income including increases in equity-based compensation of
$3.3 million, depreciation and amortization expense of $1.8 million,
amortization of debt discount and issuance costs expense of $1.7 million and
loss on the repurchase of Exchangeable Notes of $0.8 million. The decrease in
net cash provided by operating activities was driven by a decrease in increases
in non-cash contingent consideration from original estimates of $3.2 million, an
increase in the benefit from deferred taxes of $2.8 million and a decrease in
operating assets and liabilities of $8.7 million. The decrease in operating
assets and liabilities was primarily driven by a $4.5 million increase in
accounts receivable, a $3.5 million decrease in contingent consideration paid in
excess of original estimates, a $2.3 million decrease in accrued liabilities and
a $1.5 million decrease in accounts payable, partially offset by a $2.2 million
increase in deferred revenue and a $1.0 million decrease in other assets for the
nine months ended June 30, 2020 compared to the nine months ended June 30, 2019.
Cash Flow from Investing Activities
Net cash used in investing activities decreased $126.0 million to $5.7 million
for the nine months ended June 30, 2020 from $131.7 million for the nine months
ended June 30, 2019. The largest driver of cash used in investing activities for
the nine months ended June 30, 2019 was cash used in acquisitions, net of cash
acquired. For the nine months ended June 30, 2019, we used $126.9 million of
cash for acquisitions, net of cash acquired. The decrease in cash used in
investing activities was further driven by a decrease in purchases of merchant
portfolios and residual buyouts of $1.0 million, partially offset by an increase
in expenditures for property and equipment of $1.3 million and an increase in
expenditures for capitalized software of $0.6 million.
Cash Flow from Financing Activities
Net cash provided by financing activities decreased $114.2 million to $3.1
million for the nine months ended June 30, 2020 from $117.3 million for the nine
months ended June 30, 2019. The decrease in net cash provided by financing
activities was primarily the result of an increase in payments on the revolving
credit facility of $216.4 million, payments for purchases of exchangeable senior
note hedges of $28.7 million during the nine months ended June 30, 2020, a
decrease in proceeds from the revolving credit facility of $24.9 million, a
decrease in proceeds from issuance of Class A common stock sold in the offering
in June 2019 of $21.7 million, an increase in payments for the repurchase of
Exchangeable Notes of $6.8 million and an increase in payments of debt issuance
costs of $5.1 million for the nine months ended June 30, 2020 compared to the
nine months ended June 30, 2019. The decrease in cash provided by financing
activities is partially offset by proceeds from borrowings on exchangeable notes
of $138.0 million and proceeds from the issuance of warrants of $14.7 million
during the nine months ended June 30, 2020, as well as a decrease in payments of
notes payable to banks of $35.0 million and a decrease in payments for required
distributions to members for tax obligations of $2.0 million for the three
months ended June 30, 2020 from the three months ended June 30, 2019.
                                       59
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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% (3.25% as of
June 30, 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% (1.25% as of June 30, 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% (0.30% as
of June 30, 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 June 30, 2020, we were in
compliance with these covenants, and there was $240.0 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.
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.
Follow-on 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
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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 $132.8 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 and to pay the cost of the Note Hedge Transactions.
Contractual Obligations
The following table summarizes our contractual obligations and commitments as of
June 30, 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)                    $   9,900          $   3,455

$ 5,320 $ 1,125 $ - Facility leases

                              13,229              2,647                 4,597                 3,248               2,737
Loan to third party sales
organization(2)                               2,500              2,500                     -                     -                   -
Senior Secured Credit Facility and
related interest(3)                          42,779              1,982                 3,964                36,833                   -
Exchangeable Notes and related
interest(4)                                 135,489              1,295                 2,590               131,604                   -
Contingent consideration(5)                   8,738              6,655                 2,083                     -                   -
Total                                     $ 212,635          $  18,534          $     18,554          $    172,810          $    2,737


__________________________
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 3.61% in effect on the
outstanding balance as of June 30, 2020, plus the unused fee rate of 0.30% in
effect as of June 30, 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
June 30, 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.


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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 June 30, 2020, the total amount due under the Tax Receivable Agreement was
$25.9 million, and payments to the Continuing Equity Owners related to exchanges
through June 30, 2020 will range from approximately $0 to $2.3 million per year
and are expected to be paid over the next 25 years. The amounts recorded as of
June 30, 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.

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 the COVID-19
pandemic 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 June 30, 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, the
reduction in the valuation allowance on the deferred tax asset related to our
investment in partnership and the policy change to allocate stock compensation
expense to the Class B shareholders of i3 Verticals, LLC, as described in Note 2
to our condensed consolidated financial statements.

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Recently Issued Accounting Pronouncements
As of June 30, 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 June 30, 2020, we did not have any off-balance sheet financing arrangements.

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