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, 2020 ("Form 10-K"), filed with the SEC on November 23, 2020.
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, where appropriate, its subsidiaries, and (2) after the
Reorganization Transactions to i3 Verticals, Inc. and, where appropriate, its
subsidiaries.
Note Regarding Forward-looking Statements
This Quarterly Report on Form 10-Q includes statements that express our
opinions, expectations, beliefs, plans, objectives, assumptions or projections
regarding future events or future results and therefore are, or may be deemed to
be, "forward-looking statements" within the meaning of the federal securities
laws. All statements other than statements of historical facts contained in this
report may be forward-looking statements. These forward-looking statements can
generally be identified by the use of forward-looking terminology, including the
terms "believes," "estimates," "pro forma," "continues," "anticipates,"
"expects," "seeks," "projects," "intends," "plans," "may," "will," "would" or
"should" or, in each case, their negative or other variations or comparable
terminology.
By their nature, forward-looking statements involve risks and uncertainties
because they relate to events and depend on circumstances that may or may not
occur in the future. These factors include, but are not limited to, the
following:
•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 or otherwise;
•our ability to generate revenues sufficient to maintain profitability and
positive cash flow;
•competition in our industry and our ability to compete effectively;
•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 small- and medium-sized
businesses ("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;
•risks related to the accounting method for i3 Verticals, LLC's 1.0%
Exchangeable Notes due February 15, 2025 (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;
•risks related to the cessation or modification of the London Inter-Bank Offered
Rate ("LIBOR"); 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 and in subsequent filings could
cause our actual results to differ significantly from those contained in our
forward-looking statements. In addition, even if our results of operations,
financial condition and liquidity, and industry developments are consistent with
the forward-looking statements contained in this filing, those results or
developments may not be indicative of results or developments in subsequent
periods.
In light of these risks and uncertainties, we caution you not to place undue
reliance on these forward-looking statements. Any forward-looking statement that
we make in this filing speaks only as of the date of such statement, and we
undertake no obligation to update any forward-looking statement or to publicly
announce the results of any revision to any of those statements to reflect
future events or developments, except as required by applicable law. Comparisons
of results for current and any prior periods are not intended to express any
future trends or indications of future performance, unless specifically
expressed as such, and should only be viewed as historical data.


Executive Overview
Recognizing the convergence of software and payments, i3 Verticals was founded
in 2012 with the purpose of delivering seamlessly integrated payment and
software solutions to SMBs and organizations in strategic vertical markets.
Since commencing operations, we have built a broad suite of payment and software
solutions that address the specific needs of SMBs and other organizations in our
strategic vertical markets, and we believe our suite of solutions differentiates
us from our competition. Our primary strategic vertical markets include
education, non-profit, public sector and healthcare.
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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 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, $1.2 billion,
$1.2 billion, $1.5 billion, $1.3 billion, $1.3 billion, $1.2 billion and
$1.3 billion for the months of April, May, June, July, August, September,
October, November and December 2020, respectively. Further, for April through
December 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.
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. A portion of those furloughed have since returned to work.
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.
At December 31, 2020, we had $10.9 million of cash and cash equivalents and
$225.7 million of available capacity under our Senior Secured Credit Facility,
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 December 31, 2020, we were in compliance with these covenants
with a consolidated interest coverage ratio, total leverage ratio and
consolidated senior leverage ratio of 16.48x, 3.67x and 0.92x, respectively. For
additional information about our Senior Secured Credit Facility and Exchangeable
Notes, see the section entitled "Liquidity and Capital Resources" below.
Public Equity Offering
On September 15, 2020, we completed a public offering (the "September 2020
Public Offering") of 3,737,500 shares of our Class A common stock, at a public
offering price of $23.50 per share, which included a full exercise of the
underwriters' option to purchase 487,500 additional shares of Class A Common
Stock from us. We received approximately $83.4 million of net proceeds, after
deducting underwriting discounts and commissions, but before offering expenses.
We used the net proceeds to purchase (1) 3,250,000 Common Units directly from i3
Verticals, LLC, and (2) 487,500 Common Units pursuant to the exercise of the
underwriters' option to purchase additional shares in full and an equivalent
number of Class B common stock (which shares were then canceled) from certain
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Continuing Equity Owners, in each case at a price per Common Unit equal to the
price per share paid by the underwriters for shares of the Company's Class A
common stock in the offering. i3 Verticals, LLC received $72.0 million in net
proceeds from the sale of Common Units to the Company, which we used to repay
outstanding indebtedness. In connection with this offering, we recognized an
additional deferred tax asset of $3.0 million related to the Tax Receivable
Agreement and a corresponding liability of $2.5 million.
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
Recent acquisitions
Subsequent to December 31, 2020, we completed the acquisition of substantially
all the assets of Business Information Systems, GP, a Tennessee general
partnership ("BIS GP") and Business Information Systems, Inc., a Tennessee
corporation (collectively, "BIS"), a business based in east Tennessee that
provides software and electronic payment solutions in a variety of states. BIS
will fit within our public sector vertical. The aggregate purchase consideration
was $87.7 million, consisting of $52.5 million in cash on hand and revolving
line of credit proceeds, 1,202,914 shares of Class A common stock in i3
Verticals (equivalent to approximately $35.2 million) and an amount of
contingent consideration, which is still being valued. The transaction includes
contingent consideration of up to $16.0 million, subject to the achievement of
specified financial performance targets over established time periods.
Acquisitions during the quarter ended December 31, 2020
On November 17, 2020, we completed the acquisition of substantially all of the
assets of ImageSoft, Inc. to expand our software offerings, primarily in the
public sector vertical. Total purchase consideration was $47.0 million,
including $40.0 million in cash consideration, funded by proceeds from our
revolving credit facility, and $7.0 million in contingent consideration.
During the three months ended December 31, 2020, we also completed the
acquisition of three other businesses to expand the Company's software offerings
in the public sector and healthcare vertical markets, and to add proprietary
technology that will augment the Company's existing platform across several
verticals. Total purchase consideration was $23.0 million, including $19.6
million in cash and revolving line of credit proceeds and $3.4 million of
contingent consideration.

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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.
Expenses
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.
Other costs of services. Other costs of services include costs directly
attributable to processing and bank sponsorship costs. These also include
related costs such as residual payments to our distribution partners, which are
based on a percentage of the net revenues (revenue less interchange and network
fees) generated from client referrals. Losses resulting from excessive
chargebacks against a client are included in other cost of services. The cost of
equipment sold is also included in cost of services. Interchange and other costs
of services are recognized at the time the client's transactions are processed.
Selling, general and administrative. Selling, general and administrative
expenses include salaries and other employment costs, professional services,
rent and utilities and other operating costs.
Depreciation and amortization. Depreciation expense consists of depreciation on
our investments in property, equipment and computer hardware and software.
Depreciation expense is recognized on a straight-line basis over the estimated
useful life of the asset. Amortization expense for acquired intangible assets
and internally developed software is recognized using a proportional cash flow
method. Amortization expense for internally developed software is recognized
over the estimated useful life of the asset. The useful lives of contract-based
intangible assets are equal to the terms of the agreement.
Interest expense, net. Our interest expense consists of interest on our
outstanding indebtedness under our Senior Secured Credit Facility and
Exchangeable Notes, and amortization of debt discount and issuance costs.
How We Assess Our Business
Merchant Services
Our Merchant Services segment provides comprehensive payment solutions to
businesses and organizations. Our Merchant Services segment provides third-party
integrated payment solutions as well as merchant of record payment services
across our strategic vertical markets.
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Proprietary Software and Payments
Our Proprietary Software and Payments segment delivers embedded payment
solutions to our clients through proprietary software. Payments are delivered
through both the payment facilitator model and the traditional merchant
processing model. We have Proprietary Software and Payments clients across all
of our strategic vertical markets.
Other
Our Other category includes corporate overhead expenses, when presenting
reportable segment information.
Effective July 1, 2020, we realigned one component from the Proprietary Software
and Payments segment to the Merchant Services segment. Prior periods have been
retroactively adjusted to reflect the Company's current segment presentation.
For additional information on our segments, see Note 12 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 both the three months ended December 31, 2020 and 2019
was $3.8 billion, inclusive of a period-to-period decline of 1.0%. For April
through December 2020, our payment volume 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, $1.2 billion,
$1.2 billion, $1.5 billion, $1.3 billion, $1.3 billion, $1.2 billion and
$1.3 billion for the months of April, May, June, July, August, September,
October, November and December 2020, respectively. We focus on volume, because
it is a reflection of the scale and economic activity of our client base and
because a significant part of our revenue is derived as a percentage of our
clients' dollar volume receipts. Payment volume reflects the addition of new
clients and same store payment volume growth of existing clients, partially
offset by client attrition during the period.
Integrated payments represent payment transactions that are generated in
situations where payment technology is embedded within our own proprietary
software, a client's software or critical business process. We evaluate the
portion of our payment volume that is produced by integrated transactions
because we believe the convergence of software and payments is a significant
trend impacting our industry. We believe integrated payments create stronger
client relationships with higher payment volume retention and growth. Integrated
payments grew to 56% of our payment volume for the three months ended December
31, 2020 from 55% for the three months ended December 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. During the three months ended December 31, 2020, our
average net volume attrition per month remained below 2%.

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

Revenue                                          $   43,313          $  41,111          $   2,202                    5.4  %

Operating expenses
Other costs of services                              13,666             12,918                748                    5.8  %
Selling general and administrative                   24,962             19,287              5,675                   29.4  %
Depreciation and amortization                         5,092              4,655                437                    9.4  %
Change in fair value of contingent
consideration                                         1,904                154              1,750                1,136.4  %
Total operating expenses                             45,624             37,014              8,610                   23.3  %

(Loss) income from operations                        (2,311)             4,097             (6,408)                      n/m

Interest expense, net                                 2,029              2,014                 15                    0.7  %

(Loss) income before income taxes                    (4,340)             2,083             (6,423)                      n/m

(Benefit from) provision for income taxes              (219)               149               (368)                      n/m

Net (loss) income                                    (4,121)             1,934             (6,055)                      n/m

Net (loss) income attributable to
non-controlling interest                             (1,549)             2,083             (3,632)                      n/m
Net loss attributable to i3 Verticals,
Inc.                                             $   (2,572)         $    (149)         $  (2,423)                      n/m


n/m = not meaningful
Revenue
Revenue increased $2.2 million, or 5.4%, to $43.3 million for the three months
ended December 31, 2020 from $41.1 million for the three months ended December
31, 2019. This increase was principally driven by acquisitions completed during
the 2020 and 2021 fiscal years. These acquisitions contributed an incremental
$7.5 million, net of intercompany eliminations, to our revenue for the three
months ended December 31, 2020, partially offset by a decrease in revenue of
$5.3 million, primarily due to a decrease in payment volume driven by an overall
reduction in consumer spending as a result of the COVID-19 pandemic.
Revenue related to a subset of merchant contracts purchased in 2014 and 2017
("Purchased Portfolios"), which have a higher rate of revenue attrition and
payment volume attrition than the rest of our business, decreased $0.4 million,
or 29.9%, to $0.9 million for the three months ended December 31, 2020 from $1.3
million for the three months ended December 31, 2019. Excluding revenues from
the Purchased Portfolios, revenue grew $2.6 million, or 6.5%, to $42.4 million
for the three months ended December 31, 2020 from $39.8 million for the three
months ended December 31, 2019.
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Revenue within Merchant Services decreased $3.3 million, or 11.6%, to $25.0
million for the three months ended December 31, 2020 from $28.2 million for the
three months ended December 31, 2019. This decrease was comprised of a decrease
in payments revenue of $2.2 million and a decrease in other revenue of
$1.1 million for the three months ended December 31, 2020. The decrease in
payments revenue was primarily due to a decrease in payment volume.
Revenue within Proprietary Software and Payments increased $5.5 million, or
41.4%, to $18.8 million for the three months ended December 31, 2020 from $13.3
million for the three months ended December 31, 2019. This increase was
principally driven by acquisitions completed during the 2020 and 2021 fiscal
years, partially offset by an overall reduction in consumer spending,
particularly within the education vertical, as a result of the COVID-19
pandemic.
Payment volume decreased 1.0% but remained at $3.8 billion for the three months
ended December 31, 2020 and the three months ended December 31, 2019.
Other Costs of Services
Other costs of services increased $0.7 million, or 5.8%, to $13.7 million for
the three months ended December 31, 2020 from $12.9 million for the three months
ended December 31, 2019. This increase was driven by acquisitions completed
during the 2021 and 2020 fiscal years. These acquisitions contributed an
incremental $2.4 million to our other costs of services for the three months
ended December 31, 2020.
Other costs of services within Merchant Services decreased $1.3 million, or
10.9%, to $10.8 million for the three months ended December 31, 2020 from $12.2
million for the three months ended December 31, 2019.
Other costs of services within Proprietary Software and Payments increased $2.1
million, or 182.2%, to $3.3 million for the three months ended December 31, 2020
from $1.2 million for the three months ended December 31, 2019. This increase
was primarily driven by acquisitions completed during the 2020 and 2021 fiscal
years, which contributed an incremental $2.4 million, net of intercompany
eliminations, to our other costs of services within Proprietary Software and
Payments for the three months ended December 31, 2020.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $5.7 million, or 29.4%,
to $25.0 million for the three months ended December 31, 2020 from $19.3 million
for the three months ended December 31, 2019. This increase was primarily driven
by an increase in employment costs of $4.5 million due to an increase in stock
compensation expense and an increase in headcount resulting from acquisitions.
The majority of the remaining increase was comprised of increases in
professional services of $1.1 million.
Depreciation and Amortization
Depreciation and amortization increased $0.4 million, or 9.4%, to $5.1 million
for the three months ended December 31, 2020 from $4.7 million for the three
months ended December 31, 2019. Amortization expense increased $0.3 million to
$4.6 million for the three months ended December 31, 2020 from $4.2 million for
the three months ended December 31, 2019 primarily due to acquisitions completed
during the three months ended December 31, 2020. Depreciation expense increased
$0.1 million to $0.5 million for the three months ended December 31, 2020 from
$0.4 million for the three months ended December 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 $1.9 million for the three months ended December
31, 2020 primarily due to the performance of some of our acquisitions exceeding
our expectations. The change in fair value of contingent consideration for the
three months ended December 31, 2019 was a charge of $0.2 million.
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Interest Expense, net
Interest expense, net, remained flat at $2.0 million for both the three months
ended December 31, 2020 and 2019. Interest expense, net, included $1.1 million
during the three months ended December 31, 2020 related to 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. However, the increase in amortization of
debt discount was offset by a higher average debt balance during the three
months ended December 31, 2019 as compared to the three months ended December
31, 2020.
Provision for Income Taxes
The provision for income taxes was a benefit of $0.2 million for the three
months ended December 31, 2020 as compared to a provision of $0.1 million for
the three months ended December 31, 2019. Our effective tax rate was 5% for the
three months ended December 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 majority 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. i3 Verticals, Inc. is subject to federal, state and local income
taxes with respect to its allocable share of any taxable income of i3 Verticals,
LLC and is taxed at the prevailing corporate tax rates.
Seasonality
We have experienced in the past, and may continue to experience, seasonal
fluctuations in our revenues as a result of consumer and business spending
patterns. Revenues during the first quarter of the calendar year, which is our
second fiscal quarter, tend to decrease in comparison to the remaining three
quarters of the calendar year on a same store basis. This decrease is due to the
relatively higher number and amount of electronic payment transactions related
to seasonal retail events, such as holiday and vacation spending in their
second, third and fourth quarters of the calendar year. The number of business
days in a month or quarter also may affect seasonal fluctuations. Revenue in our
education vertical fluctuates with the school calendar. Revenue for our
education clients is typically strongest in August, September, October, January
and February, at the start of each semester, and generally weakens throughout
the semester, with little revenue in the summer months of June and July.
Operating expenses show less seasonal fluctuation, with the result that net
income is subject to the same seasonal factors as our revenues. The growth in
our business may have partially overshadowed seasonal trends to date, and
seasonal impacts on our business may be more pronounced in the future.
Furthermore, we are not able to predict the impact that the COVID-19 pandemic
may have on the seasonality of our business.

Liquidity and Capital Resources
We have historically financed our operations and working capital through net
cash from operating activities. As of December 31, 2020, we had $10.9 million of
cash and cash equivalents and available borrowing capacity of $225.7 million
under our Senior Secured Credit Facility, subject to the financial covenants. We
usually minimize cash balances by making payments on our revolving line of
credit to minimize borrowings and interest expense. As of December 31, 2020, we
had borrowings outstanding of $49.3 million under the Senior Secured Credit
Facility.
Our primary cash needs are to fund working capital requirements, invest in our
technology infrastructure, fund acquisitions and related contingent
consideration, make scheduled principal and interest payments on our outstanding
indebtedness and pay tax distributions to members. We consistently have positive
cash flow provided by operations and expect that our cash flow from operations,
current cash and cash equivalents and available borrowing capacity under the
Senior Secured Credit Facility will be sufficient to fund our operations and
planned capital expenditures and to service our debt obligations for at least
the next twelve months and foreseeable future. Our growth strategy includes
acquisitions. We expect to fund acquisitions through a combination of net cash
from operating activities, borrowings under our Senior Secured Credit Facility
and through the issuance of equity and debt securities. As a holding company, we
depend on distributions or loans 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.
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
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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. A portion of those furloughed have since
returned to work.
Our liquidity profile reflects our completed offering in February 2020 of an
aggregate principal amount of $138.0 million in 1.0% Exchangeable Senior Notes
due 2025, with substantially all the proceeds being used to pay down outstanding
borrowings under our Senior Secured Credit Facility, as well as our September
2020 Public Offering as described under the heading "Follow-on Offering". During
the year ended September 30, 2020, we repurchased $21.0 million in aggregate
principal amount of the Exchangeable Notes for an aggregate purchase price of
approximately $17.4 million. We recorded a loss on retirement of debt of $2.3
million due to the carrying value exceeding the fair value of the repurchased
portion of the Exchangeable Notes at the dates of repurchases. We may elect from
time to time to purchase our outstanding debt in open market purchases,
privately negotiated transactions or otherwise. Any such debt repurchases will
depend upon prevailing market conditions, our liquidity requirements,
contractual restrictions, applicable securities law and other factors.
Cash Flows
The following table presents a summary of cash flows from operating, investing
and financing activities for the following comparative periods.
Three Months Ended December 31, 2020 and 2019
                                                                 Three months ended December 31,
                                                                     2020                2019
                                                                          (in thousands)
Net cash provided by operating activities                       $    11,954          $    7,484
Net cash used in investing activities                           $   (61,329)         $   (1,782)
Net cash provided by (used in) financing activities             $    48,222

$ (6,635)




Cash Flow from Operating Activities
Net cash provided by operating activities increased $4.5 million to $12.0
million for the three months ended December 31, 2020 from $7.5 million for the
three months ended December 31, 2019. While our net income declined from $1.9
million for the three months ended December 31, 2019 to a net loss of $4.1
million for the three months ended December 31, 2020, most of this reduction was
driven by non-cash expenses that do not impact cash flows from operating
activities. The primary driver of the increase in cash provided by operating
activities was increases in operating assets and liabilities of $5.2 million,
which are impacted by the timing of collections and payments. Other changes
include an increase in non-cash contingent consideration of $1.8 million, an
increase in equity-based compensation of $1.3 million, an increase in
amortization of debt discount and issuance costs of $1.2 million and an increase
in non-cash lease expense of $0.7 million for the three months ended December
31, 2020 compared to the three months ended December 31, 2019.
Cash Flow from Investing Activities
Net cash used in investing activities increased $59.5 million to $61.3 million
for the three months ended December 31, 2020 from $1.8 million for the three
months ended December 31, 2019. The largest driver of cash used in investing
activities for the three months ended December 31, 2020 was cash used in
acquisitions, net of cash acquired. For the three months ended December 31,
2020, we used $59.6 million of cash for acquisitions, net of cash acquired.
Cash Flow from Financing Activities
Net cash provided by financing activities increased $54.9 million to $48.2
million net cash provided by financing activities for the three months ended
December 31, 2020 from $6.6 million net cash used in financing activities for
the three months ended December 31, 2019. The increase in net cash provided by
financing activities was primarily the result of an increase in proceeds from
the revolving credit facility of $57.0 million, partially offset by an increase
in cash paid for contingent consideration of $1.7 million for the three months
ended December 31, 2020 compared to the three months ended December 31, 2019.
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Senior Secured Credit Facility
On May 9, 2019, we replaced our existing senior secured credit facility with a
new credit agreement (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 (subject to the receipt of additional commitments for any such
incremental loan amounts).
The Senior Secured Credit Facility accrues interest at LIBOR (based upon an
interest period of one, two, three or six months or, under some circumstances,
up to twelve months) plus an applicable margin of 2.25% to 3.25% (2.75% as of
December 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 December 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 December 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 December 31, 2020, we were in compliance with these covenants, and there
was $225.7 million available for borrowing under the revolving credit facility,
subject to the financial covenants.
The Senior Secured Credit Facility is secured by substantially all of our
assets. The lenders under the Senior Secured Credit Facility hold senior rights
to collateral and principal repayment over all other creditors.
The provisions of the Senior Secured Credit Facility place certain restrictions
and limitations upon us. These include, among others, restrictions on liens,
investments, indebtedness, fundamental changes and dispositions; maintenance of
certain financial ratios; and certain non-financial covenants pertaining to our
activities during the period covered.
As a holding company, we depend on distributions or loans 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 September 15, 2020, we completed a public offering (the "September 2020
Public Offering") of 3,737,500 shares of our Class A common stock, at a public
offering price of $23.50 per share, which included a full exercise of the
underwriters' option to purchase 487,500 additional shares of Class A Common
Stock from us. We received approximately $83.4 million of net proceeds, after
deducting underwriting discounts and commissions, but before offering expenses.
We used the net proceeds to purchase (1) 3,250,000 Common Units directly from i3
Verticals, LLC, and (2) 487,500 Common Units pursuant to the exercise of the
underwriters' option to purchase additional shares in full and an equivalent
number of Class B common stock (which shares were then canceled) from certain
Continuing Equity Owners, in each case at a price per Common Unit equal to the
price per share paid by the underwriters for shares of the Company's Class A
common stock in the offering. i3 Verticals, LLC received $72.0 million in net
proceeds from the sale of Common Units to the Company, which we used to repay
outstanding indebtedness. In connection with this offering, we recognized an
additional deferred tax asset of $3.0 million related to the Tax Receivable
Agreement and a corresponding liability of $2.5 million.
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.
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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
December 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)                   $   8,385          $   3,130          $       5,255          $           -          $        -
Facility leases                             12,899              3,457                  5,356                  2,931               1,155
Loan to third party sales
organization(2)                              2,500              2,500                      -                      -                   -
Senior Secured Credit Facility and
related interest(3)                         56,983              2,216                  4,432                 50,335                   -
Exchangeable Notes and related
interest(4)                                121,826              1,170                  2,340                118,316                   -
Contingent consideration(5)                 19,527              9,644                  9,883                      -                   -
Total                                    $ 222,120          $  22,117          $      27,266          $     171,582          $    1,155


__________________________
1.We have non-exclusive agreements with several processors to provide us
services related to transaction processing and transmittal, transaction
authorization and data capture, and access to various reporting tools. Certain
of these agreements require us to submit a minimum monthly number of
transactions for processing. If we submit a number of transactions that is lower
than the minimum, we are required to pay to the processor the fees it would have
received if we had submitted the required minimum number of transactions.
2.We 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 3.35% in effect on the
outstanding balance as of December 31, 2020, plus an unused fee rate of 0.25% in
effect as of December 31, 2020.
4.We calculated interest payments through the maturity of our Exchangeable Notes
by applying the coupon interest rate of 1.0% on the outstanding principal
balance as of December 31, 2020 of $117.0 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
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 December 31, 2020, the total amount due under the Tax Receivable Agreement
was $34.3 million, and payments to the Continuing Equity Owners related to
exchanges through December 31, 2020 will range from $0 to $2.8 million per year
and are expected to be paid over the next 25 years. The amounts recorded as of
December 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.

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 December 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 23, 2020, except regarding the adoption of ASC 842 on October 1, 2020,
as described in Note 2 to our condensed consolidated financial statements.

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Recently Issued Accounting Pronouncements
As of December 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 23, 2020, except as described in Note 2 to our condensed
consolidated financial statements.

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

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