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 variant strains thereof, 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;
                                       44
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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.
                                       45
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COVID-19 Recent Developments
In March 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 and its variant strains has brought
about many precautions at the state and local government levels to mitigate the
spread of the virus, including the closure of local government facilities and
parks, schools, restaurants, many businesses and other locations of public
assembly. During the first half of calendar year 2021, many of the restrictions
eased across the country; however, recently some jurisdictions have begun to
reimpose restrictions in response to variant strains of COVID-19. Furthermore,
the potential for future closures and other restrictions related to COVID-19 and
its variants remains.
The COVID-19 pandemic has significantly affected overall economic conditions in
the United States. The economic impact of these conditions materially impacted
our business and is expected to continue to adversely impact our strategic
verticals and our business in general. Our payment volume has fluctuated since
March 2020 as a result of the impacts of the COVID-19 pandemic. For example,
beginning in the second half of March 2020 and continuing into the current
period, we and our clients 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.
Further, 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
ongoing partial 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. Despite positive developments, such as the
availability of vaccines, there are no reliable estimates of how long the
pandemic will continue, how many people are likely to be affected by it or the
duration or types of restrictions that will be imposed. For that reason, we are
unable to predict the long-term impact of COVID-19 and its variant strains on
our business at this time.
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 June 30, 2021, we had $4.7 million of cash and cash equivalents and $157.2
million of available capacity under our Senior Secured Credit Facility subject
to our financial covenants. As of June 30, 2021, we were in compliance with
these covenants with a consolidated interest coverage ratio, total leverage
ratio and consolidated senior leverage ratio of 8.23x, 3.81x and 1.87x,
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
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
                                       46
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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 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
Acquisitions during the nine months ended June 30, 2021
On February 1, 2021, we completed the acquisition of substantially all of the
assets of Business Information Systems, GP, a Tennessee general partnership and
Business Information Systems, Inc., a Tennessee corporation (collectively "BIS")
to expand our software offerings, primarily in the Public Sector vertical. Total
purchase consideration was $95.5 million, including $52.5 million in cash on
hand and proceeds from the Company's revolving credit facility, 1,202,914 shares
of the Company's Class A Common Stock, and $7.8 million in contingent
consideration.
On November 17, 2020, we completed the acquisition of substantially all of the
assets of ImageSoft, Inc. ("ImageSoft") to expand our software offerings,
primarily in the Public Sector vertical. Total purchase consideration was $46.3
million, including $40.0 million in cash consideration, funded by proceeds from
our revolving credit facility, and $6.3 million in contingent consideration.
During the nine months ended June 30, 2021, we also completed the acquisition of
six other businesses to expand the Company's software offerings in the public
sector and Healthcare vertical markets, and to add proprietary technology that
will augment the Company's existing platform across several verticals. Total
purchase consideration was $65.4 million, including $57.0 million in cash
consideration, funded by proceeds from our revolving line of credit, and $8.4
million of contingent consideration.
Acquisitions during the nine months ended June 30, 2020
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.



                                       47
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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.
Interchange and network fees. Interchange and network fees consist primarily of
pass-through fees that make up a portion of discount fee revenue. These include
assessment fees payable to card associations, which are a percentage of the
processing volume we generate from Visa and Mastercard. These fees are presented
net of revenue.
Expenses
Other costs of services. Other costs of services include costs directly
attributable to processing and bank sponsorship costs. These also include
related costs such as residual payments to our distribution partners, which are
based on a percentage of the net revenues (revenue less interchange and network
fees) generated from client referrals. Losses resulting from excessive
chargebacks against a client are included in other cost of services. The cost of
equipment sold is also included in cost of services. Interchange and other costs
of services are recognized at the time the client's transactions are processed.
Selling, general and administrative. Selling, general and administrative
expenses include salaries and other employment costs, professional services,
rent and utilities and other operating costs.
Depreciation and amortization. Depreciation expense consists of depreciation on
our investments in property, equipment and computer hardware and software.
Depreciation expense is recognized on a straight-line basis over the estimated
useful life of the asset. Amortization expense for acquired intangible assets
and internally developed software is recognized using a proportional cash flow
method. Amortization expense for internally developed software is recognized
over the estimated useful life of the asset. The useful lives of contract-based
intangible assets are equal to the terms of the agreement.
Interest expense, net. Our interest expense consists of interest on our
outstanding indebtedness under our Senior Secured Credit Facility and
Exchangeable Notes, and amortization of debt discount and issuance costs.
How We Assess Our Business
Merchant Services
Our Merchant Services segment provides comprehensive payment solutions to
businesses and organizations. Our Merchant Services segment provides third-party
integrated payment solutions as well as merchant of record payment services
across our strategic vertical markets.
                                       48
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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 the three months ended June 30, 2021 and 2020 was $5.1
billion and $3.0 billion, respectively, representing a period-to-period growth
rate of 72.3%. Our payment volume for the nine months ended June 30, 2021 and
2020 was $13.2 billion and $10.4 billion, respectively, representing a
period-to-period growth rate of 27.0%. Our payment volume has fluctuated since
March 2020 as a result of the impacts of the COVID-19 pandemic. 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 where payment technology is embedded within our own proprietary
software, a client's software or critical business process. We evaluate the
portion of our payment volume that is produced by integrated transactions
because we believe the convergence of software and payments is a significant
trend impacting our industry. We believe integrated payments create stronger
client relationships with higher payment volume retention and growth. Integrated
payments grew to 60% and 51% of our payment volume for the three months ended
June 30, 2021 and 2020, respectively. Integrated payments grew to 58% and 54%of
our payment volume for the nine months ended June 30, 2021 and 2020,
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. During the nine months ended June 30, 2021, our average
net volume attrition per month remained below 1%.
                                       49
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Results of Operations
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
The following table presents our historical results of operations for the
periods indicated:
                                                     Three months ended June 30,                         Change
(in thousands)                                         2021                  2020              Amount                %

Revenue                                          $       61,964          $  31,573          $  30,391                 96.3  %

Operating expenses
Other costs of services                                  16,064             10,001              6,063                 60.6  %
Selling, general and administrative                      37,296             18,133             19,163                105.7  %
Depreciation and amortization                             6,995              4,475              2,520                 56.3  %
Change in fair value of contingent
consideration                                             3,609             (1,473)             5,082                     n/m
Total operating expenses                                 63,964             31,136             32,828                105.4  %

(Loss) income from operations                            (2,000)               437             (2,437)                    n/m

Other expenses
Interest expense, net                                     2,704              2,423                281                 11.6  %
Other expenses                                                -                829               (829)                    n/m
Total other expenses                                      2,704              3,252               (548)               (16.9) %

Loss before income taxes                                 (4,704)            (2,815)            (1,889)                67.1  %

Benefit from income taxes                                  (110)                (5)              (105)                    n/m

Net (loss)                                               (4,594)            (2,810)            (1,784)                63.5  %

Net (loss) attributable to non-controlling
interest                                                 (1,286)            (2,454)             1,168                (47.6) %
Net income attributable to i3 Verticals,
Inc.                                             $       (3,308)         $    (356)         $  (2,952)                    n/m


n/m = not meaningful

Revenue
Revenue increased $30.4 million, or 96.3%, to $62.0 million for the three months
ended June 30, 2021 from $31.6 million for the three months ended June 30, 2020.
This increase was principally driven by an increase in revenue from existing
businesses of $10.1 million, primarily due to an overall increase in consumer
spending as a result of recovery from the COVID-19 pandemic. Acquisitions
completed during the 2020 and 2021 fiscal years contributed an incremental $20.3
million, net of intercompany eliminations, to our revenue for the three months
ended June 30, 2021.
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 $0.1 million,
or 5.4%, to $0.8 million for the three months ended June 30, 2021 from $0.9
million for the three months ended June 30, 2020. Excluding revenues from the
Purchased Portfolios, revenue grew $30.4 million, or 99.1%, to $61.2 million for
the three months ended June 30, 2021 from $30.7 million for the three months
ended June 30, 2020.
                                       50
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Revenue within Merchant Services increased $7.7 million, or 34.6%, to $29.9
million for the three months ended June 30, 2021 from $22.2 million for the
three months ended June 30, 2020.
Revenue within Proprietary Software and Payments increased $22.8 million, or
233.9%, to $32.6 million for the three months ended June 30, 2021 from $9.8
million for the three months ended June 30, 2020. This increase was principally
driven by acquisitions completed during the 2020 and 2021 fiscal years, in
addition to an overall increase in consumer spending, as a result of recovery
from the COVID-19 pandemic.
Payment volume increased $2.2 billion, or 72%, to $5.1 billion for the three
months ended June 30, 2021 from $3.0 billion for the three months ended June 30,
2020. Acquisitions completed during the 2020 and 2021 fiscal years contributed
an incremental $0.3 billion to payment volume for the three months ended June
30, 2021.
Other Costs of Services
Other costs of services increased $6.1 million, or 60.6%, to $16.1 million for
the three months ended June 30, 2021 from $10.0 million for the three months
ended June 30, 2020. This increase was primarily driven by an increase in other
cost of services within the Merchant Services segment driven by the increase in
payment volume.
Other costs of services within Merchant Services increased $4.8 million, or
50.4%, to $14.2 million for the three months ended June 30, 2021 from $9.4
million for the three months ended June 30, 2020.
Other costs of services within Proprietary Software and Payments increased $1.4
million, or 147.4%, to $2.4 million for the three months ended June 30, 2021
from $1.0 million for the three months ended June 30, 2020.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $19.2 million, or 105.7%,
to $37.3 million for the three months ended June 30, 2021 from $18.1 million for
the three months ended June 30, 2020. This increase was primarily driven by a
$16.6 million increase in employment expenses, primarily resulting from an
increase in headcount that resulted from acquisitions and an increase in stock
compensation expense.
Depreciation and Amortization
Depreciation and amortization increased $2.5 million, or 56.3%, to $7.0 million
for the three months ended June 30, 2021 from $4.5 million for the three months
ended June 30, 2020. Amortization expense increased $2.4 million to $6.4 million
for the three months ended June 30, 2021 from $4.0 million for the three months
ended June 30, 2020 primarily due to acquisitions completed during the 2020 and
2021 fiscal years. Depreciation expense increased $0.1 million to $0.6 million
for the three months ended June 30, 2021 from $0.5 million for the three months
ended June 30, 2020.
Change in Fair Value of Contingent Consideration
Change in fair value of contingent consideration to be paid in connection with
acquisitions was a charge of $3.6 million for the three months ended June 30,
2021 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 June 30, 2020 was a benefit of $1.5 million.
Interest Expense, net
Interest expense, net, increased $0.3 million, or 11.6%, to $2.7 million for the
three months ended June 30, 2021 from $2.4 million for the three months ended
June 30, 2020. The increase reflects a higher average outstanding debt balance
for the three months ended June 30, 2021, as compared to the three months ended
June 30, 2020.
Other Expense
There was no other expense for the three months ended June 30, 2021. We had $0.8
million other expense 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.
                                       51
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Benefit from Income Taxes
The benefit from income taxes decreased to a benefit of $0.1 million for the
three months ended June 30, 2021 from a nominal benefit for the three months
ended June 30, 2020. Our effective tax rate was 2.3% for the three months ended
June 30, 2021. 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.

Nine Months Ended June 30, 2021 Compared to Nine Months Ended June 30, 2020
The following table presents our historical results of operations for the
periods indicated:
                                                      Nine months ended June 30,                         Change
(in thousands)                                         2021                  2020              Amount                %

Revenue                                          $      153,140          $ 111,862          $  41,278                 36.9  %

Operating expenses
Other costs of services                                  41,044             34,874              6,170                 17.7  %
Selling, general and administrative                      92,769             58,206             34,563                 59.4  %
Depreciation and amortization                            17,938             13,668              4,270                 31.2  %
Change in fair value of contingent
consideration                                             5,835             (1,461)             7,296                     n/m
Total operating expenses                                157,586            105,287             52,299                 49.7  %

(Loss) income from operations                            (4,446)             6,575            (11,021)                    n/m

Other expenses
Interest expense, net                                     7,092              6,621                471                  7.1  %
Other (income) expense                                   (2,353)               829             (3,182)                    n/m
Total other expenses                                      4,739              7,450             (2,711)               (36.4) %

(Loss) income before income taxes                        (9,185)              (875)            (8,310)                    n/m

Benefit from income taxes                                  (416)            (1,918)             1,502                (78.3) %

Net (loss) income                                        (8,769)             1,043             (9,812)                    n/m

Net (loss) income attributable to
non-controlling interest                                 (3,328)               811             (4,139)                    n/m
Net (loss) income attributable to i3
Verticals, Inc.                                  $       (5,441)         $     232          $  (5,673)                    n/m


n/m = not meaningful

                                       52

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Revenue


Revenue increased $41.3 million, or 36.9%, to $153.1 million for the nine months
ended June 30, 2021 from $111.9 million for the nine months ended June 30, 2020.
This increase was principally driven by acquisitions completed during the 2020
and 2021 fiscal years. These acquisitions contributed an incremental $37.4
million, net of intercompany eliminations, to our revenue for the nine months
ended June 30, 2021. In addition, revenue from existing businesses increased
$3.9 million, primarily due to an overall increase in consumer spending as a
result of recovery from 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 $0.7 million,
or 22.1%, to $2.5 million for the nine months ended June 30, 2021 from $3.2
million for the nine months ended June 30, 2020. Excluding revenues from the
Purchased Portfolios, revenue grew $42.0 million, or 38.6%, to $150.6 million
for the nine months ended June 30, 2021 from $108.6 million for the nine months
ended June 30, 2020.
Revenue within Merchant Services increased $4.7 million, or 6.1%, to $80.9
million for the nine months ended June 30, 2021 from $76.2 million for the nine
months ended June 30, 2020.
Revenue within Proprietary Software and Payments increased $36.9 million, or
99.7%, to $73.9 million for the nine months ended June 30, 2021 from $37.0
million for the nine months ended June 30, 2020. This increase was principally
driven by acquisitions completed during the 2020 and 2021 fiscal years, in
addition to an overall increase in consumer spending, as a result of recovery
from the COVID-19 pandemic.
Payment volume increased $2.8 billion, or 27.0%, to $13.2 billion for the nine
months ended June 30, 2021 from $10.4 billion for the nine months ended June 30,
2020. Acquisitions completed during the 2020 and 2021 fiscal years contributed
an incremental $0.5 billion to payment volume for the nine months ended June 30,
2021.
Other Costs of Services
Other costs of services increased $6.2 million, or 17.7%, to $41.0 million for
the nine months ended June 30, 2021 from $34.9 million for the nine months ended
June 30, 2020. This increase was partially driven by acquisitions completed
during the 2020 and 2021 fiscal years, as well as an increase in other cost of
services within the Merchant Services segment driven by the increase in payment
volume.
Other costs of services within Merchant Services increased $3.9 million, or
11.7%, to $36.8 million for the nine months ended June 30, 2021 from $33.0
million for the nine months ended June 30, 2020.
Other costs of services within Proprietary Software and Payments increased $2.6
million, or 80.3%, to $5.9 million for the nine months ended June 30, 2021 from
$3.3 million for the nine months ended June 30, 2020, due to the incremental
impact of acquisitions completed during the 2020 and 2021 fiscal years.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $34.6 million, or 59.4%,
to $92.8 million for the nine months ended June 30, 2021 from $58.2 million for
the nine months ended June 30, 2020. This increase was primarily driven by a
$30.5 million increase in employment expense, primarily resulting from an
increase in headcount that resulted from acquisitions and an increase in stock
compensation expense. Increases in insurance and professional services and
software and technological services comprised the majority of the remainder of
the increase.
Depreciation and Amortization
Depreciation and amortization increased $4.3 million, or 31.2%, to $17.9 million
for the nine months ended June 30, 2021 from $13.7 million for the nine months
ended June 30, 2020. Amortization expense increased $4.0 million to $16.3
million for the nine months ended June 30, 2021 from $12.3 million for the nine
months ended June 30, 2020, primarily due to acquisitions completed during the
2020 and 2021 fiscal years. Depreciation expense increased $0.3 million to $1.7
million for the nine months ended June 30, 2021 from $1.4 million for the nine
months ended June 30, 2020.
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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 $5.8 million for the nine months ended June 30,
2021, primarily due to the performance of some of our acquisitions exceeding our
expectations. The change in fair value of contingent consideration for the nine
months ended June 30, 2020 was a benefit of $1.5 million.
Interest Expense, net
Interest expense, net, increased $0.5 million, or 7.1%, to $7.1 million for the
nine months ended June 30, 2021 from $6.6 million for the nine months ended June
30, 2020. 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 $3.3 million and $1.8 million in interest
expense related to the amortization of the debt discount during the nine months
ended June 30, 2021 and 2020, respectively. The increase in amortization of debt
discount was partially offset by a debt extinguishment charge of $0.1 million
for the write-off of deferred financing costs during the nine months ended June
30, 2020 and also reflects a lower average interest rate for the nine months
ended June 30, 2021 as compared to the nine months ended June 30, 2020 due to
the presence of the 1% Exchangeable Senior Notes.
Other Income
Other income was $2.4 million for the nine months ended June 30, 2021. During
the nine months ended June 30, 2021, the Company became aware of an observable
price change in the AxiaMed equity investment, due to a planned third party
acquisition of AxiaMed. This resulted in an increase of $2.4 million to the fair
value of the AxiaMed investment, which the Company recognized in other income.
We had $0.8 million other expense 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.
Benefit from Income Taxes
The benefit from income taxes decreased to a benefit of $0.4 million for the
nine months ended June 30, 2021 from a benefit of $1.9 million for the nine
months ended June 30, 2020. During the nine months ended June 30, 2020, we had a
reduction in the valuation allowance recorded on a deferred tax asset, which
resulted in a $2.7 million reduction in the valuation allowance on the deferred
tax asset related to our investment in partnership and a corresponding reduction
in our income tax expense in the nine months ended June 30, 2021. Our effective
tax rate was 4.5% for the nine months ended June 30, 2021. 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


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We have historically financed our operations and working capital through net
cash from operating activities. As of June 30, 2021, we had $4.7 million of cash
and cash equivalents and available borrowing capacity of $157.2 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 June 30, 2021, we had
borrowings outstanding of $117.8 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.
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.
Nine Months Ended June 30, 2021 and 2020
                                                   Nine months ended June 30,
                                                       2021                  2020
                                                         (in thousands)
Net cash provided by operating activities    $        36,081              $

10,087


Net cash used in investing activities        $      (156,946)             $

(5,744)


Net cash provided by financing activities    $       115,519              $

3,143





Cash Flow from Operating Activities
Net cash provided by operating activities increased $26.0 million to $36.1
million for the nine months ended June 30, 2021 from $10.1 million for the nine
months ended June 30, 2020. While our net income declined from net income of
$1.0 million for the nine months ended June 30, 2020 to a net loss of $8.8
million for the nine months ended June 30, 2021, 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 $15.7 million,
which are impacted by the timing of collections and payments. Other changes
include an increase in non-cash contingent consideration of $7.3 million, an
increase in equity-based compensation of $5.2 million, an increase in
depreciation and amortization of $4.3 million, an unrealized gain on an
investment of $2.4 million, an increase in amortization of debt discount and
issuance costs of $1.8 million, and an increase in non-cash lease expense of
$2.3 million for the nine months ended June 30, 2021 compared to the nine months
ended June 30, 2020.
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Cash Flow from Investing Activities
Net cash used in investing activities increased $151.2 million to $156.9 million
for the nine months ended June 30, 2021 from $5.7 million for the nine months
ended June 30, 2020. The largest driver of cash used in investing activities for
the nine months ended June 30, 2021 was cash used in acquisitions, net of cash
acquired. For the nine months ended June 30, 2021, we used $149.5 million of
cash for acquisitions, net of cash acquired.
Cash Flow from Financing Activities
Net cash provided by financing activities increased $112.4 million to $115.5
million cash provided by financing activities for the nine months ended June 30,
2021 from $3.1 million cash provided by financing activities for the nine months
ended June 30, 2020. The increase in net cash provided by financing activities
was primarily the result of an increase in proceeds from the revolving credit
facility of $137.2 million, a decrease in payments on the revolving credit
facility of $86.8 million, a decrease in payments for purchase of exchangeable
notes of $28.7 million and a decrease in payments of debt issuance costs of $5.2
million for the nine months ended June 30, 2021 from the nine months ended June
30, 2020. These increases in cash provided by financing activities were
partially offset by decreases in the proceeds from borrowings on exchangeable
notes of $138.0 million and proceeds from issuance of warrants of $14.7 million
for the nine months ended June 30, 2021 from the nine months ended June 30,
2020.
Senior Secured Credit Facility
On May 9, 2019, we replaced our 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 the London Inter Bank
Offered Rate ("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, 2021), 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, 2021), in each case depending upon the consolidated
total leverage ratio, as defined in the agreement. Interest is payable at the
end of the selected interest period, but no less frequently than quarterly.
Additionally, the Senior Secured Credit Facility requires us to pay unused
commitment fees of 0.15% to 0.30% (0.30% as of June 30, 2021) on any undrawn
amounts under the revolving credit facility and letter of credit fees of up to
3.25% on the maximum amount available to be drawn under each letter of credit
issued under the agreement. The 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, 2021, we were in
compliance with these covenants, and there was $157.2 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.
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Follow-on Offering
On September 15, 2020, we completed 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 it 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. 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.
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Contractual Obligations
The following table summarizes our contractual obligations and commitments as of
June 30, 2021 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)                   $   6,520          $   2,705          $       3,815          $           -          $        -
Facility leases                             17,930              4,025                  6,337                  4,071               3,497
Loan to third party sales
organization(2)                                750                750                      -                      -                   -
Senior Secured Credit Facility and
related interest(3)                        130,609              4,266                126,343                      -                   -
Exchangeable Notes and related
interest(4)                                121,241              1,170                  2,340                117,731                   -
Contingent consideration(5)                 34,750             19,878                 14,872                      -                   -
Total                                    $ 311,800          $  32,794          $     153,707          $     121,802          $    3,497


__________________________
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 3.52% in effect on the
outstanding balance as of June 30, 2021, plus the unused fee rate of 0.30% in
effect as of June 30, 2021.
4.We calculated interest payments through the maturity of our Exchangeable Notes
by applying the coupon interest rate of 1.0% on the principal balance as of June
30, 2021 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 June 30, 2021, the total amount due under the Tax Receivable Agreement was
$39.6 million, and payments to the Continuing Equity Owners related to exchanges
through June 30, 2021 will range from $0 to $3.2 million per year and are
expected to be paid over the next 25 years. The amounts recorded as of June 30,
2021, approximate the current estimate of expected tax savings and are subject
to change after the filing of the Company's U.S. federal and state income tax
returns. Future payments under the Tax Receivable Agreement with respect to
subsequent exchanges would be in addition to these amounts.

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.
Critical accounting policies are those that we consider the most critical to
understanding our financial condition and results of operations.
As of June 30, 2021, 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.

Recently Issued Accounting Pronouncements
As of June 30, 2021, 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 June 30, 2021, we did not have any off-balance sheet financing arrangements.


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