UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2019
OR
For the transition period from to
Commission file number: 001-38532
i3 Verticals, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
40 Burton Hills Blvd., Suite 415
Nashville, TN
(Address of principal executive offices)
82-4052852
(I.R.S. Employer Identification No.)
37215
(Zip Code)
Registrant’s telephone number, including area code: (615) 465-4487
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, $0.0001 Par Value
IIIV
Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 232.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendments of this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
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Accelerated filer
Smaller reporting company
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of March 31, 2019, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the Class A
common stock held by non-affiliates was approximately $187.1 million based on the number of shares of Class A common stock held by non-affiliates and the
closing price of the Class A common stock on the Nasdaq Global Select Market on such date. The determination of affiliate status for purposes of the foregoing
calculation is not necessarily a conclusive determination for any other purpose.
As of November 22, 2019, there were 14,482,489 outstanding shares of Class A common stock, $0.0001 par value per share, and 12,921,637 outstanding
shares of Class B common stock, $0.0001 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy materials for its 2020 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.
TABLE OF CONTENTS
PART I.
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II.
Item 5. Market Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III.
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV.
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
SIGNATURES
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NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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:
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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 successfully identify acquisition targets and thereafter to complete 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;
our indebtedness and potential increases in our indebtedness;
operating and financial restrictions imposed by our Senior Secured Credit Facility (as defined below); and
the risk factors included in Part I, Item 1A of this Annual Report on Form 10-K.
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
Annual Report on Form 10-K. The matters summarized in “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K 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.
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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.
Item 1. Business
PART I
i3 Verticals, Inc. was formed as a Delaware corporation on January 17, 2018 for the purpose of completing an initial public offering (“IPO”)
of its Class A common stock and other related transactions in order to carry on the business of i3 Verticals, LLC and its subsidiaries. The
Company’s headquarters are in Nashville, Tennessee, with operations throughout the United States. The terms “i3 Verticals,” the “Company,”
“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 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.
Our Company
Recognizing the convergence of software and payments, i3 Verticals was founded in 2012 with the purpose of delivering seamless
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.
We primarily focus on strategic vertical markets where we believe we can be a leader in vertically-focused, integrated payment and
software solutions. Our strategic vertical markets include:
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Education—We assist schools in completing payment processing functions such as accepting payments for school lunches (online, at
school, or at the point-of-sale (“POS”)) and school activities, selling products from the online student store while managing inventory,
ticket sales while tracking attendance at athletic and other events, enabling parents and students to complete forms electronically and
enabling parents to make installment payments on higher-priced items. Our education solutions, which utilize the payment facilitator
model, are self-serve payment and data collection software platforms that manage critical parent and student information via web,
mobile, and on-site transaction processing. Using our convenience-fee payment technology, our school clients in this vertical often
receive the full principal amount which alleviates reconciliation issues and processing costs.
Public Sector—We have products and solutions that create an efficient flow of information throughout a variety of public sector entities.
We also deliver integrated payment solutions in our public-sector vertical. These solutions allow our clients to process court, tax, utility
billing, bail, and other public-sector payments, typically utilizing the payment facilitator model. Convenience-fee payment technology is
also available to our public sector clients.
• Non-profit—We deliver an integrated solution for processing payments from donors to non-profit organizations. These solutions assist
non-profit organizations with ordinary course fundraising along with special one-time or “giving day” promotions that may include many
separate organizations seeking donations within a single marketing campaign. Our integrated solutions seamlessly integrate into the
business management system for each respective non-profit to allow for efficient data capture and reporting.
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Property Management—We assist landlords and property managers in the rent collection process by providing centralized reporting for
card and automated clearing house (“ACH”) payments, bank-level Payment Card Industry Data Security Standards (“PCI DSS”)
compliant security and solutions that integrate with third-party accounting software. Our instruction-based funding model, enabled by
our payment facilitator platform, accommodates complex fund distribution to multiple depository accounts, which is important to
property managers and landlords.
• Healthcare—We provide businesses in our healthcare vertical with an integrated solution for processing payments from patients for
various healthcare-related costs and fees. These payment solutions seamlessly integrate into our distribution partner independent
software vendor (“ISV”) software to provide clients and their customers a bundled card payment solution. These ISV relationships
promote our integrated payment solutions in a one-to-many fashion to prospective clients.
We target vertical markets where businesses and organizations tend to lack integrated payment functionality within their business
management systems and where we face less competition for our solutions. In many cases, we deliver our proprietary software solutions to
strategic vertical markets through the payment facilitator model, where we:
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enable superior data management by aggregating multiple small merchants under our “master” account, resulting in the collection and
management of data not historically readily available;
streamline and simplify merchant onboarding, often resulting in client approval in minutes or hours rather than days or weeks; and
provide ease of reporting and reconciliation, allowing our clients to accept electronic payments in a faster, more convenient fashion.
As more ISVs seek to differentiate their offerings by seamlessly integrating payment functionality into their software solutions, the payment
facilitator model has gained significant momentum. Before payment facilitators were an option, any business looking to accept credit cards was
required to establish an individual merchant account, which is often costly and time-consuming for small merchants.
We generate revenue primarily, but not exclusively, from volume-based fees generated by payment processing services provided to clients
throughout the United States. Our payment processing services enable clients to accept electronic payments, facilitating the exchange of funds
and transaction data between clients, financial institutions and payment networks. Services include merchant onboarding, risk and
underwriting, authorization, settlement, chargeback processing and other merchant support services. We also generate revenue from software
licensing subscriptions, ongoing support, and other POS-related solutions that we provide to our clients directly and through our distribution
partners. Due to our integrated payment and software solutions and our distribution network, we are able to derive significant scale from
operating efficiencies, which enable us to generate strong operating margins and profitability.
Our Segments
We have two reportable segments, Merchant Services and Proprietary Software and Payments, and an Other category. For additional
information on our segments, see Note 16 to our consolidated financial statements and “Management's Discussion and Analysis of Financial
Condition and Results of Operations.”
Merchant Services
Our Merchant Services segment provides comprehensive payment solutions to businesses and organizations. Our Merchant Services
segment includes third-party integrated payment solutions as well as traditional payment services across our strategic vertical markets.
Proprietary Software and Payments
Our Proprietary Software and Payments segment delivers embedded payment solutions to our clients through company-owned software.
Payments are delivered through both the payment facilitator model and the traditional merchant processing model. Our Proprietary Software
and Payments clients are primarily in the education, public sector and property management markets.
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Other
Our Other category includes corporate overhead expenses, when presenting reportable segment information.
Our Products, Solutions and Technology
We deliver to our clients and distribution partners a comprehensive suite of integrated payment technology and software solutions to
address the needs of SMBs and organizations in our strategic vertical markets. Our products and solutions are strategically aligned to support
new client growth and promote customer retention.
We have developed a suite of payment technology solutions that:
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integrate with a broad number of client business management systems;
perform a broad range of risk management, transaction processing and value-added services beneficial to our clients;
increase convenience to our clients;
provide ease of use and greater functionality for our clients;
offer validated point-to-point encryption (“P2PE”); and
offer PCI-compliant security and extensive reporting tools.
We offer our clients a single point of access through our powerful, simple and capable proprietary core platform (“Burton Platform”).
Combining a centralized environment for scalability, PCI Service Level Provider (“SLP”) Level 1 security and redundancy, Burton Platform offers
a broad suite of payment and software solutions, enabling omni-channel POS, spanning brick and mortar locations and electronic- and mobile-
commerce, including app-based payments. We employ project management, release management and product development lifecycle
methodologies that enable us to deploy initial downloads and upgrades in a quick and efficient manner via the cloud.
Burton Platform is the core of our technology suite. A platform designed to be highly scalable, built for minimal downtime and high
transaction volume, Burton Platform brings together common components of our vertical software technologies as well as several historically
disparate solutions.
Burton Platform includes an Application Programming Interface (“API”) suite that provides access to traditional merchant processing, ACH
processing and payment facilitator merchant processing capabilities. The platform APIs allow access to Europay, Mastercard and Visa (“EMV”)
devices as well as validated P2PE certified devices using an implementation that shields software providers from the requirements of PCI /
payment application data security standard (“PA-DSS”) certification.
We own multiple horizontal software solutions, including Burton Platform described above. In the business-to-business (“B2B”) market, we
provide payment solutions to clients in industries that include professional services (including law firms), manufacturing, contractor services,
construction, and other industries where a significant percentage of payments are received using a commercial, business, purchasing, or virtual
card. Our B2B payment solutions offer clients secure processing technology to authorize and settle transactions at reasonable card rates,
automate the pass-through of line item details, and enhance the automation of the accounts receivable process. Our distribution partners
include card issuers and industry associations, each of whom provides a predictable source of new client leads.
In addition, we provide payment processing solutions to many retail establishments using both an integrated and traditional merchant
account approach. For example, we have reseller arrangements, pursuant to which we re-sell integrated POS solutions that consist of both
hardware and software. We provide support services to these POS clients, most of which are in the restaurant and hospitality markets, and we
also cross-sell our payment processing solutions to this client base.
Our solutions are positioned to support new client growth and promote client retention both within and outside our existing verticals, but
most importantly to provide a stable and secure payment experience.
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Our Sales and Marketing
Our sales strategy leverages a broad network of distribution partners, comprised of ISVs, value-added resellers (“VARs”), independent
sales organizations (“ISOs”) and our referral partners which include financial institutions, trade associations, chambers of commerce and card
issuers. These distribution partners are a consistent and scalable source for new client acquisition. Leveraging our vertically focused suite of
products and services, we are able to maximize the performance and retention of current distribution partners while attracting new partners.
These one-to-many distribution partners accelerate penetration within our vertical markets in a cost-effective manner.
Our sales force includes both outside and inside representatives to manage each distribution partner relationship and deliver optimal
response times to new client referrals. Our product and partner marketing is delivered through a shared-services model which is coordinated
with each business unit. Marketing is tightly aligned with our sales efforts by providing event coordination, demand generation resources,
physical and electronic marketing campaigns and partner marketing collateral. Our enterprise marketing function establishes our overall
corporate marketing strategy to enhance brand awareness and demand generation. We use a broad variety of traditional and digital marketing
mediums to engage prospective clients.
Our direct sales team is responsible for selling our proprietary software and payment technology solutions to clients primarily through our
distribution and referral partner networks. The assigned sales team is the primary liaison for managing the partner relationship, coordinating
with marketing team efforts and engaging new client referral opportunities. We utilize our direct sales team to sell our proprietary software and
payment technology solutions directly to clients in our education, property management and public sector markets.
Our Operations
Our operations team is uniquely structured to optimize the experience of our clients and distribution partners. These regionally distributed
and vertically focused business support teams allow us to establish a level of expertise that delivers a scalable support structure and enables
us to align our services with the economic goals and specific expectations of the respective business unit. Each operations team is positioned
to support the functions of their respective client base and key performance indicators mark their progress toward achieving the goals
established by each business unit. Our client and partner databases provide visibility into each overall client relationship, tracking the status of
the relationship from initial contact through the lifecycle of that client or partner relationship. Our centralized technology department is
structured to rapidly enhance and effectively maintain our products and services.
Our operations team is structured to effectively support the individual needs of our clients and distribution partners. This support includes:
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client onboarding;
client support and retention;
client training and activations;
billing and financial review;
credit underwriting and risk management;
dispute and chargeback processing;
distribution partner support; and
customer support.
Our technical operations team oversees the execution of development, quality control, delivery and support for our payment processing
applications and the hosted user applications. Applications are developed and tested according to the software development lifecycle,
composed of iterative development and testing with a dedicated focus on planning and execution. Releases are modeled on continuous
deployment and added to the live environment on a routine basis. Each application stack is built with redundancy to foster resiliency and built to
be easily managed during a disaster recovery scenario. The entire solution is hosted within a managed, dedicated environment that is certified
PCI-compliant to protect all personal and transactional data.
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Our Competition
We compete with a variety of merchant acquirers that have different business models, go-to-market strategies and technical capabilities.
We believe the most significant competitive factors in our markets are:
trust, including a strong reputation for quality service and trusted distribution partners;
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2. convenience, such as speed in approving applications, client onboarding and dispute resolution;
3. service, including product functionality, value-added solutions and strong customer support; and
4. economics, including fees charged to clients and residuals and incentives offered to distribution partners.
Our competitors range from large and well established companies to smaller, earlier-stage businesses. See “Risk Factors—Risks Related
to Our Business and Industry—The payment processing industry is highly competitive. Such competition could adversely affect the fees we
receive, and as a result, our margins, business, financial condition and results of operations” in Part I, Item 1A of this Annual Report on Form
10-K.
Government Regulation
We operate in an increasingly complex legal and regulatory environment. Our business and the products and services that we offer are
subject to a variety of federal, state and local laws and regulations and the rules and standards of the payment networks that we utilize to
provide our electronic payment services, as more fully described below.
Dodd-Frank Act
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") and the related rules and regulations have
resulted in significant changes to the regulation of the financial services industry. Changes impacting the electronic payment industry include
providing merchants with the ability to set minimum dollar amounts for the acceptance of credit cards and to offer discounts or incentives to
entice consumers to pay with cash, checks, debit cards or credit cards, as the merchant prefers. New rules also contain certain prohibitions on
payment network exclusivity and merchant routing restrictions of debit card transactions. Additionally, the Durbin Amendment to the Dodd-
Frank Act provides that the interchange fees that certain issuers charge merchants for debit transactions will be regulated by the Federal
Reserve and must be “reasonable and proportional” to the cost incurred by the issuer in authorizing, clearing and settling the transactions.
Rules released by the Federal Reserve in July 2011 to implement the Durbin Amendment mandate a cap on debit transaction interchange fees
for issuers with assets of $10 billion or greater.
The Dodd-Frank Act also created the Consumer Financial Protection Bureau (the “CFPB”), which has assumed responsibility for most
federal consumer protection laws, and the Financial Stability Oversight Council, which has the authority to determine whether any non-bank
financial company, such as us, should be supervised by the Board of Governors of the Federal Reserve System because it is systemically
important to the U.S. financial system. Any new rules or regulations implemented by the CFPB or the Financial Stability Oversight Council or in
connection with the Dodd-Frank Act that are applicable to us, or any changes that are adverse to us resulting from litigation brought by third
parties challenging such rules and regulations, could increase our cost of doing business or limit permissible activities.
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Privacy and Information Security Regulations
We provide services that may be subject to privacy laws and regulations of a variety of jurisdictions. Relevant federal privacy laws include
the Gramm-Leach-Bliley Act of 1999, which applies directly to a broad range of financial institutions and indirectly, or in some instances directly,
to companies that provide services to financial institutions. These laws and regulations restrict the collection, processing, storage, use and
disclosure of personal information, require notice to individuals of privacy practices and provide individuals with certain rights to prevent the use
and disclosure of certain nonpublic or otherwise legally protected information. These laws also impose requirements for safeguarding and
proper destruction of personal information through the issuance of data security standards or guidelines. Our business may also be subject to
the Fair Credit Reporting Act and the Fair and Accurate Credit Transactions Act of 2003, which regulate the use and reporting of consumer
credit information and also impose disclosure requirements on entities who take adverse action based on information obtained from credit
reporting agencies. In addition, there are state laws restricting the ability to collect and utilize certain types of personal information such as
Social Security and driver’s license numbers and imposing secure disposal requirements for personal data. Certain state laws mandate
businesses to implement reasonable data security measures. Massachusetts requires any business that processes the personal information of
a Massachusetts resident to adopt and implement a written information security program. States are increasingly legislating data protection
requirements for a broader list of personal data, such as biometric data, and are strengthening protections for students' personal information.
All fifty states, Puerto Rico, and the U.S. Virgin Islands have now enacted data breach notification laws requiring businesses that experience a
security breach of their computer databases that contain personal information to notify affected individuals, consumer reporting agencies and
governmental agencies that possess data. In June 2018, the State of California enacted the California Consumer Privacy Act of 2018 (the
“CCPA”), which will come into effect on January 1, 2020. The CCPA will require companies that process personal information of California
residents to make new disclosures to consumers about their data collection, use and sharing practices, will grant consumers specific access
rights to their data, will allow consumers to opt out of certain data sharing with or sales to third parties and will create a new cause of action for
data breaches. The CCPA has broadly defined personal information to include any information that is linked or reasonably linkable to a
consumer. Each privacy law and regulation that applies to us could increase our cost of doing business or limit permissible activities.
Anti-Money Laundering and Counter-Terrorism Regulation
Our business is subject to U.S. federal anti-money laundering laws and regulations, including the Bank Secrecy Act of 1970, as amended
by the USA PATRIOT Act of 2001, which we refer to collectively as the “BSA.” The BSA, among other things, requires money services
businesses to develop and implement risk-based anti-money laundering programs, report large cash transactions and suspicious activity and
maintain transaction records. We are also subject to certain economic and trade sanctions programs that are administered by the Office of
Foreign Assets Control (“OFAC”) that prohibit or restrict transactions to or from (or transactions dealing with) specified countries, their
governments and, in certain circumstances, their nationals, such as those who might be narcotics traffickers and terrorists or terrorist
organizations. Similar anti-money laundering, counter terrorist financing and proceeds of crime laws apply to movements of currency and
payments through electronic transactions and to dealings with persons specified on lists maintained by organizations similar to OFAC in several
other countries and which may impose specific data retention obligations or prohibitions on intermediaries in the payment process. We have
developed and continue to enhance compliance programs and policies to monitor and address related legal and regulatory requirements and
developments.
Unfair or Deceptive Acts or Practices
We and many of our clients are subject to Section 5 of the Federal Trade Commission Act prohibiting unfair or deceptive acts or practices.
In addition, laws prohibiting these activities and other laws, rules and or regulations, including the Telemarketing Sales Act, may directly impact
the activities of certain of our clients, and in some cases may subject us, as the client’s payment processor or provider of certain services, to
investigations, fees, fines and disgorgement of funds if we are deemed to have aided and abetted or otherwise provided the means and
instrumentalities to facilitate the illegal or improper activities of the client through our services. Various federal and state regulatory enforcement
agencies, including the Federal Trade Commission and the states attorneys general, have authority to take action against non-banks that
engage in unfair or deceptive acts or practices or violate other laws, rules and regulations and to the extent we are processing payments or
providing services for a client that may be in violation of laws, rules and regulations, we may be subject to enforcement actions and as a result
may incur losses and liabilities that may impact our business.
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In addition, the CFPB has recently attempted to extend certain provisions of the Dodd-Frank Act that prevent the employment of unfair,
deceptive or abusive acts or practices (“UDAAP”) to payment processors. Though there is still litigation involving whether payment processing
companies are subject to these requirements (and the extent of their application), these requirements may apply or be applicable in the future.
UDAAPs could involve omissions or misrepresentations of important information to consumers or practices that take advantage of vulnerable
consumers, such as elderly or low-income consumers.
Stored Value Services
Stored value cards, store gift cards and electronic gift certificates are subject to various federal and state laws and regulations, which may
include laws and regulations related to consumer and data protection, licensing, consumer disclosures, escheat, anti-money laundering,
banking, trade practices and competition and wage and employment. The clients who utilize the gift card processing products and services that
we may sell may be subject to these laws and regulations. In the future, if we seek to expand these stored value card products and services, or
as a result of regulatory changes, we may be subject to additional regulation and may be required to obtain additional licenses and registrations
which we may not be able to obtain.
The Credit Card Accountability Responsibility and Disclosure Act of 2009 (the “Card Act”) created new requirements applicable to general-
use prepaid gift cards, store gift cards and electronic gift certificates. The Card Act, along with the Federal Reserve’s amended Regulation E,
created new requirements with respect to these cards and electronic certificates. These include certain prohibited features and revised
disclosure obligations. Prepaid services may also be subject to the rules and regulations of Visa, Mastercard, Discover and American Express
and other payment networks with which our clients and the card issuers do business. The clients who utilize the gift card processing products
and services that we may sell are responsible for compliance with all applicable rules and requirements relating to their gift product program.
Additionally, the Financial Crimes Enforcement Network of the U.S. Department of the Treasury, or “FinCEN”, issued a final rule in July
2011 regarding the applicability of the BSA’s regulations to “prepaid access” products and services. This rulemaking clarifies the anti-money
laundering obligations for entities engaged in the provision and sale of prepaid services, such as prepaid gift cards. We are not registered with
FinCEN based on our determination that our current products and services do not constitute a “prepaid program” as defined in the BSA and we
are not a “provider” of prepaid access. We may in the future need to register with FinCEN as a “money services business-provider of prepaid
access” in accordance with the rule based on changes to our products or services.
Indirect Regulatory Requirements
Certain of our distribution partners are financial institutions that are directly subject to various regulations and compliance obligations
issued by the CFPB, the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation,
the National Credit Union Administration and other agencies responsible for regulating financial institutions, which includes state financial
institution regulators. While these regulatory requirements and compliance obligations do not apply directly to us, many of these requirements
materially affect the services we provide to our clients and us overall. The financial institution regulators have imposed requirements on
regulated financial institutions to manage their third-party service providers. Among other things, these requirements include performing
appropriate due diligence when selecting third-party service providers; evaluating the risk management, information security, and information
management systems of third-party service providers; imposing contractual protections in agreements with third-party service providers (such
as performance measures, audit and remediation rights, indemnification, compliance requirements, confidentiality and information security
obligations, insurance requirements, and limits on liability); and conducting ongoing monitoring, diligence and audits of the performance of
third-party service providers. Accommodating these requirements applicable to our clients imposes additional costs and risks in connection with
our financial institution relationships. We expect to expend significant resources on an ongoing basis in an effort to assist our clients in meeting
their legal requirements.
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Payment Network Rules and Standards
Payment networks establish their own rules and standards that allocate liabilities and responsibilities among the payment networks and
their participants. These rules and standards, including the PCI DSS, govern a variety of areas including how consumers and clients may use
their cards, the security features of cards, security standards for processing, data security and allocation of liability for certain acts or omissions
including liability in the event of a data breach. The payment networks may change these rules and standards from time to time as they may
determine in their sole discretion and with or without advance notice to their participants. These changes may be made for any number of
reasons, including as a result of changes in the regulatory environment, to maintain or attract new participants, or to serve the strategic
initiatives of the networks and may impose additional costs and expenses on or be disadvantageous to certain participants. Participants are
subject to audit by the payment networks to ensure compliance with applicable rules and standards. The networks may fine, penalize or
suspend the registration of participants for certain acts or omissions or the failure of the participants to comply with applicable rules and
standards.
An example of a recent standard is the “chip and pin” or “chip and signature” card requirement, known as EMV, which was mandated by
Visa, Mastercard, American Express and Discover to be supported by payment processors by April 2013 and by merchants by October 2015.
This mandate set new requirements and technical standards, including requiring integrated point of sale systems to be capable of accepting the
more secure “chip” cards that utilize the EMV standard and setting new rules for data handling and security. Processors and clients that do not
comply with the mandate or do not use systems that are EMV compliant risk fines and liability for fraud-related losses. We have invested
significant resources to ensure our systems’ compliance with the mandate, and to assist our clients in becoming compliant.
To provide our electronic payment services, we must be registered either indirectly or directly as a service provider with each of the
payment networks that we utilize. Because we are not a bank, we are not eligible for primary membership in certain payment networks,
including Visa and Mastercard, and are therefore unable to directly access these networks. The operating regulations of certain payment
networks, including Visa and Mastercard, require us to be sponsored by a member bank as a service provider. We are registered with certain
payment networks, including Visa and Mastercard, through various sponsor banks. The agreements with our bank sponsors give them
substantial discretion in approving certain aspects of our business practices including our solicitation, application and qualification procedures
for clients and the terms of our agreements with clients. We are also subject to network operating rules and guidelines promulgated by the
National Automated Clearing House Association (“NACHA”) relating to payment transactions we process using the ACH Network. Like the card
networks, NACHA may update its operating rules and guidelines at any time and we will be subject to these changes. These operating rules
and guidelines allocate responsibility and liabilities to the various participants in the payment network. Recently, NACHA has focused upon data
security and privacy responsibilities. We are subject to audit by our partner financial institutions for compliance with the rules and guidelines.
Our sponsor financial institutions have substantial discretion in approving certain aspects of our business practices, including the terms of our
agreements with our ACH processing clients.
Money Transmitter Regulation
We are subject to various U.S. federal, state, and foreign laws and regulations governing money transmission and the issuance and sale of
payment instruments, including some of the prepaid products we may sell.
In the United States, most states license money transmitters and issuers of payment instruments. These states not only regulate and
control money transmitters, but they also license entities engaged in the transmission of funds. Many states exercise authority over the
operations of our services related to money transmission and payment instruments and, as part of this authority, subject us to periodic
examinations. Many states require, among other things, that proceeds from money transmission activity and payment instrument sales be
invested in high-quality marketable securities before the settlement of the transactions or otherwise restrict the use and safekeeping of such
funds. Such licensing laws also may cover matters such as regulatory approval of consumer forms, consumer disclosures and the filing of
periodic reports by the licensee and require the licensee to demonstrate and maintain specified levels of net worth. Many states also require
money transmitters, issuers of payment instruments, and their agents to comply with federal and/or state anti-money laundering laws and
regulations.
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Other Regulation
We are subject to U.S. federal and state unclaimed or abandoned property (escheat) laws which require us to turn over to certain
government authorities the property of others we hold that has been unclaimed for a specified period of time such as account balances that are
due to a distribution partner or client following discontinuation of its relationship with us. The Housing Assistance Tax Act of 2008 requires
certain merchant acquiring entities and third-party settlement organizations to provide information returns for each calendar year with respect to
payments made in settlement of electronic payment transactions and third-party payment network transactions occurring in that calendar year.
Reportable transactions are also subject to backup withholding requirements.
The foregoing is not an exhaustive list of the laws and regulations to which we are subject and the regulatory framework governing our
business is changing continuously. See “Risk Factors—Risks Related to Our Business and Industry” in Part I, Item 1A of this Annual Report on
Form 10-K.
Our Intellectual Property
Certain of our products and services are based on proprietary software and related payment systems solutions. We rely on a combination
of copyright, trademark, and trade secret laws, as well as employee and third-party non-disclosure, confidentiality, and contractual
arrangements to establish, maintain, and enforce our intellectual property rights in our technology, including with respect to our proprietary
rights related to our products and services. In addition, we license technology from third parties that is integrated into some of our solutions.
We own a number of registered federal service marks, including i3 Verticals®, PaySchools® and Axia®. We also own a number of domain
names, including www.i3verticals.com.
Our Employees
As of September 30, 2019, we had 542 employees. None of our employees is represented by a labor union and we have experienced no
work stoppages. We consider our employee relations to be in good standing.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed
pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the Securities
and Exchange Commission (the “SEC”). We are subject to the informational requirements of the Exchange Act and file or furnish reports, proxy
statements and other information with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the SEC at www.sec.gov. We also maintain a website at www.i3verticals.com,
through which you may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or
furnished to, the SEC. Information contained on our website is not a part of this Annual Report on Form 10-K and the inclusion of our website
address in this report is an inactive textual reference only.
Item 1A. Risk Factors
Our business faces significant risks and uncertainties. If any of the following risks are realized, our business, financial condition and results
of operations could be materially and adversely affected. The following risk factors, some of which contain statements that constitute forward-
looking statements, should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our consolidated financial statements and related notes.
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Risks Related to Our Business and Industry
We have a history of operating losses and will need to generate significant revenues to attain and maintain profitability and positive
cash flow and continue our acquisition program.
Since inception in 2012, we have been engaged in growth activities and have made a significant number of acquisitions that grew our
business. This acquisition activity requires substantial capital and other expenditures. As a result, 2017 was the first fiscal year for which we
attained profitability, and we incurred net losses attributable to i3 Verticals, Inc. in each of the last two fiscal years, and we may incur losses
again in the future. A substantial portion of our historical revenue growth has resulted from acquisitions. For the year ended September 30,
2019, revenues attributable to the acquisitions we completed in 2018 and 2019 were $65.8 million, or 17.5% of our total revenues. We expect
our cash needs to increase significantly for the next several years as we:
• make additional acquisitions;
• market our products and services;
•
•
•
expand our client support and service operations;
hire additional marketing, client support and administrative personnel; and
implement new and upgraded operational and financial systems, procedures and controls.
As a result of these continuing costs and expenses, we need to generate significant revenues to attain and maintain profitability and
positive cash flow. To date, our operations have been supported by equity and debt financings. If we do not continue to increase our revenues,
our business, results of operations and financial condition could be materially and adversely affected.
The payment processing industry is highly competitive. Such competition could adversely affect the fees we receive, and as a result,
our margins, business, financial condition and results of operations.
The market for payment processing services is highly competitive and has relatively low barriers to entry. Other providers of payment
processing services have established a sizable market share in the merchant acquiring sector and service more clients than we do. Our growth
will depend, in part, on a combination of the continued growth of the electronic payment market and our ability to increase our market share.
Our payment and software solutions compete against many forms of financial services and payment systems, including electronic, mobile
and integrated payment platforms as well as cash and checks. Our competitors include traditional merchant acquirers such as financial
institutions, affiliates of financial institutions and well-established payment processing companies that target our existing clients and potential
clients directly, including Bank of America Merchant Services, Chase Paymentech, Elavon, Inc. (a subsidiary of U.S. Bancorp), Fiserv, Inc.,
Global Payments, Inc. and Fidelity National Information. In addition, we compete with vendors that are specifically targeting ISVs and VARs as
distribution partners for their merchant acquiring services, such as Stripe, Inc., Square, Inc., Toast, Inc., PayPal Holdings, Inc., Braintree
(owned by PayPal), Adyen, Ltd., and OpenEdge (a division of Global Payments).
Many of our competitors have substantially greater financial, technological, management and marketing resources than we have.
Accordingly, if these competitors specifically target our business model, they may be able to offer more attractive fees or payment terms and
advances to our clients and more attractive compensation to our distribution partners. They also may be able to offer and provide products and
services that we do not offer. There are also a large number of small providers of processing services that provide various ranges of services to
our clients and our potential clients. This competition may effectively limit the prices we can charge and requires us to control costs
aggressively in order to maintain acceptable profit margins. Further, if the use of payment cards other than Visa or Mastercard grows, or if there
is increased use of certain debit cards, our average profit per transaction could be reduced. Competition could also result in a loss of existing
distribution partners and clients and greater difficulty attracting new distribution partners and clients. One or more of these factors could have a
material adverse effect on our business, financial condition and results of operations.
13
In addition, we are also subject to risks as a result of changes in business habits of our vendors and customers as they adjust to the
competitive marketplace. Because our standing arrangements and agreements with our vendors and customers typically contain no purchase
or sale obligations and are terminable by either party upon no or relatively short notice, we are subject to significant risks associated with the
loss or change at any time in the business habits and financial condition of key vendors as they adapt to changes in the market. For example,
NCR Corporation has disclosed that part of its strategy is shifting its business model to become a software and services led enterprise provider,
along with providing cloud and mobile solutions. Such a change could adversely impact the amount or timing of receipt of revenue from such
arrangements as a result of a shift in our fees from revenues from sales of the Company’s combined hardware and software to revenues from a
SaaS model.
To acquire and retain clients, we depend in part on distribution partners that generally do not serve us exclusively, may not
aggressively market our products and services, are subject to attrition and are not under our control.
We rely heavily on the efforts of our distribution partners to market our products and services to existing clients and potential clients.
Generally, our agreements with distribution partners are not exclusive and these partners retain the right to refer potential clients to other
merchant acquirers. Gaining and maintaining loyalty or exclusivity may require financial concessions to maintain current distribution partners or
to attract potential distribution partners from our competitors who may be offering significantly more enticing pricing terms, such as increased
signing bonuses or residuals payable to our referral partners, which could have a negative impact on our results of operations. If these
distribution partners switch to another merchant acquirer, focus more heavily on promoting the products and services of one or more other
merchant acquirers, cease operations or become insolvent, we may no longer receive new referrals from them or may receive fewer new
referrals from them, and we also risk losing existing clients with whom the distribution partner has a relationship. Additionally, some of our
distribution partners are subject to the requirements imposed by our bank sponsors, which may result in fines to them for non-compliance and
may, in some cases, result in these entities ceasing to market our products and services. If we are unable to maintain our existing base of
distribution partners or develop relationships with new distribution partners, our business, financial condition and results of operations would be
materially adversely affected. Further, we may be named in legal proceedings in connection with the actions of our distribution partners where it
is alleged that our distribution partners have intentionally or negligently misrepresented pricing or other contractual terms to clients or potential
clients related to our processing solutions or related products. Our distribution partners are independent businesses and we have no control
over their day-to-day business activities, including their client marketing and solicitation practices. While in some cases we may have
indemnification rights against our distribution partners for these activities, there is no guarantee that we will be able to successfully enforce
those indemnification rights or that our distribution partners are adequately capitalized in a manner necessary to satisfy their indemnification
obligations to us. If one or more judgments or settlements in any litigation or other investigation, plus related defense and investigation costs,
significantly exceed our insurance coverage and we are unable to enforce our indemnification rights against a distribution partner or partners,
our business, financial condition and results of operations could materially suffer.
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If we cannot keep pace with rapid developments and changes in our industry, the use of our products and services could decline,
causing a reduction in our revenues.
The electronic payments market is subject to constant and significant changes. This market is characterized by rapid technological
evolution, new product and service introductions, evolving industry standards, changing client needs and the entrance of non-traditional
competitors, including products and services that enable card networks and banks to transact with consumers directly. To remain competitive,
we continually pursue initiatives to develop new products and services to compete with these new market entrants. These projects carry risks,
such as cost overruns, delays in delivery, performance problems and lack of client acceptance. In addition, new products and offerings may not
perform as intended or generate the business or revenue growth expected. Additionally, we look for acquisition opportunities, investments and
alliance relationships with other businesses that will increase our market penetration and enhance our technological capabilities, product
offerings and distribution capabilities. Any delay in the delivery of new products and services or the failure to differentiate our products and
services or to accurately predict and address market demand could render our products and services less desirable, or even obsolete, to our
clients and to our distribution partners. Furthermore, even though the market for integrated payment processing products and services is
evolving, it may develop too rapidly or not rapidly enough for us to recover the costs we have incurred in developing new products and services
targeted at this market. Any of the foregoing could have a material and adverse effect on our operating results and financial condition.
The continued growth and development of our payment processing activities will depend on our ability to anticipate and adapt to changes in
consumer behavior. For example, consumer behavior may change regarding the use of payment card transactions, including the relative
increased use of cash, crypto-currencies, other emerging or alternative payment methods and payment card systems that we or our processing
partners do not adequately support or that do not provide adequate commissions to parties like us. Any failure to timely integrate emerging
payment methods into our software, to anticipate consumer behavior changes or to contract with processing partners that support such
emerging payment technologies could cause us to lose traction among our customers or referral sources, resulting in a corresponding loss of
revenue, if those methods become popular among end-users of their services.
The products and services we deliver are designed to process complex transactions and provide reports and other information on those
transactions, all at very high volumes and processing speeds. Our technology offerings must also integrate with a variety of network, hardware,
mobile and software platforms and technologies, and we need to continuously modify and enhance our products and services to adapt to
changes and innovation in these technologies. Any failure to deliver an effective, reliable and secure service or any performance issue that
arises with a new product or service could result in significant processing or reporting errors or other losses. If we do not deliver a promised
new product or service to our clients or distribution partners in a timely manner or the product or service does not perform as anticipated, our
development efforts could result in increased costs and a loss in business that could reduce our earnings and cause a loss of revenue. We also
rely in part on third parties, including some of our competitors and potential competitors, for the development of and access to new
technologies, including software and hardware. Our future success will depend in part on our ability to develop or adapt to technological
changes and evolving industry standards. If we are unable to develop, adapt to or access technological changes or evolving industry standards
on a timely and cost-effective basis, our business, financial condition and results of operations would be materially adversely affected.
15
Unauthorized disclosure, destruction or modification of data or disruption of our services could expose us to liability, protracted and
costly litigation and damage our reputation.
We are responsible both for our own business and to a significant degree for acts and omissions by certain of our distribution partners and
third-party vendors under the rules and regulations established by the payment networks, such as Visa and Mastercard, Discover and
American Express, and the debit networks. We and other third parties collect, process, store and transmit sensitive data, such as names,
addresses, social security numbers, credit or debit card numbers and expiration dates, drivers’ license numbers and bank account numbers,
and we have ultimate liability to the payment networks and member financial institutions that register us with the payment networks for our
failure, or the failure of certain distribution partners and third parties with whom we contract, to protect this data in accordance with payment
network requirements. The loss, destruction or unauthorized modification of client or cardholder data could result in significant fines, sanctions
and proceedings or actions against us by the payment networks, governmental bodies, consumers or others, which could have a material
adverse effect on our business, financial condition and results of operations. Any such sanction, fine, proceeding or action could damage our
reputation, force us to incur significant expenses in defense of these proceedings, disrupt our operations, distract our management, increase
our costs of doing business and may result in the imposition of monetary liability.
We could be subject to breaches of security by hackers. Although we proactively employ multiple measures to defend our systems against
intrusions and attacks and to protect the data we collect, our measures may not prevent unauthorized access or use of sensitive data.
Recently, several municipalities have been the victims of cyberattacks, and in some cases, ransomware, through which an attacker gains
access to the organization’s computer files, renders them temporarily inaccessible and threatens to permanently delete them if a cash ransom
is not paid by a specified deadline. While we or, to our knowledge, our distribution partners, third-party vendors or clients have not been subject
to a material ransomware or cyber-extortion attack impacting us, if such an event were to occur it could significantly disrupt our operations,
adversely impact our reputation or subject us to material losses or liability. We may be required to expend significant additional resources in our
efforts to modify or enhance our protective measures against evolving threats. A breach of our system or a third-party system upon which we
rely may subject us to material losses or liability, including payment network fines, assessments and claims for unauthorized purchases with
misappropriated credit, debit or card information, impersonation or other similar fraud claims. A misuse of such data or a cybersecurity breach
could harm our reputation and deter our clients and potential clients from using electronic payments generally and our products and services
specifically, thus reducing our revenue. In addition, any such misuse or breach could cause us to incur costs to correct the breaches or failures,
expose us to uninsured liability, increase our risk of regulatory scrutiny, subject us to lawsuits and result in the imposition of material penalties
and fines under state and federal laws or by the payment networks. While we maintain insurance coverage that may, subject to policy terms
and conditions, cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses. A significant cybersecurity
breach could also result in payment networks prohibiting us from processing transactions on their networks or the loss of our financial institution
sponsorship that facilitates our participation in the payment networks, either of which could materially impede our ability to conduct business.
Although we generally require that our agreements with our distribution partners and service providers who have access to client and
customer data include confidentiality obligations that restrict these parties from using or disclosing any client or customer data except as
necessary to perform their services under the applicable agreements, there can be no assurance that these contractual measures will prevent
the unauthorized disclosure of business or client data, nor can we be sure that such third parties would be willing or able to satisfy liabilities
arising from their breach of these agreements. Any failure by such third parties to adequately take these protective measures could result in
protracted or costly litigation.
In addition, our agreements with our bank sponsors (as well as payment network requirements) require us to take certain protective
measures to ensure the confidentiality of business and consumer data. Any failure to adequately comply with these protective measures could
result in fees, penalties, litigation or termination of our bank sponsor agreements.
Any significant unauthorized disclosure of sensitive data entrusted to us would cause significant damage to our reputation, impair our ability
to attract new integrated technology and distribution partners and may cause parties with whom we already have such agreements to terminate
them.
16
If we fail to comply with the applicable requirements of the Visa and Mastercard payment networks, those payment networks could
seek to fine us, suspend us or terminate our registrations through our bank sponsors.
We do not directly access the payment card networks, such as Visa and Mastercard, that enable our acceptance of credit cards and debit
cards, including some types of prepaid cards. Accordingly, we must rely on banks or other payment processors to process transactions and
must pay fees for the services. To provide our merchant acquiring services, we are registered through our bank sponsors with the Visa and
Mastercard networks as service providers for member institutions. The majority of our $13.1 billion in payment volume in fiscal year 2019 was
attributable to transactions processed on the Visa and Mastercard networks. As such, we, our bank sponsors and many of our clients are
subject to complex and evolving payment network rules. The payment networks routinely update and modify requirements applicable to
merchant acquirers, including rules regulating data integrity, third-party relationships (such as those with respect to bank sponsors and ISOs),
merchant chargeback standards and PCI DSS. The rules of the card networks are set by their boards, which may be influenced by card
issuers, some of which offer competing transaction processing services.
If we or our bank sponsors fail to comply with the applicable rules and requirements of the Visa or Mastercard payment networks, Visa or
Mastercard could suspend or terminate our registration. Further, our transaction processing capabilities, including with respect to settlement
processes, could be delayed or otherwise disrupted, and recurring non-compliance could result in the payment networks seeking to fine us, or
suspend or terminate our registrations which allow us to process transactions on their networks, which would make it impossible for us to
conduct our business on its current scale.
We may also be subject to penalties from the payment card networks if we fail to detect that our clients are engaging in activities that are
illegal, contrary to the payment card network operating rules, or considered “high-risk.” We must either prevent high-risk merchants from using
our products and services or register such merchants with the payment card networks and conduct additional monitoring with respect to such
merchants. Such penalties could be material and could result in termination of registration or could require changes in our process for
regsitering new clients. This could materially and adversely affect our business.
Under certain circumstances specified in the payment network rules, we may be required to submit to periodic audits, self-assessments or
other assessments of our compliance with the PCI DSS. Such activities may reveal that we have failed to comply with the PCI DSS. In addition,
even if we comply with the PCI DSS, there is no assurance that we will be protected from a security breach. The termination of our registration
with the payment networks, or any changes in payment network or issuer rules that limit our ability to provide merchant acquiring services,
could have an adverse effect on our payment processing volumes, revenues and operating costs. If we are unable to comply with the
requirements applicable to our settlement activities, the payment networks may no longer allow us to provide these services, which would
require us to spend additional resources to obtain settlement services from a third-party provider. In addition, if we were precluded from
processing Visa and Mastercard electronic payments, we would lose substantially all of our revenues.
We are also subject to the operating rules of NACHA, a self-regulatory organization which administers and facilitates private-sector
operating rules for ACH payments and defines the roles and responsibilities of financial institutions and other ACH network participants. The
NACHA Rules and Operating Guidelines impose obligations on us and our partner financial institutions. These obligations include audit and
oversight by the financial institutions and the imposition of mandatory corrective action, including termination, for serious violations. If an audit
or self-assessment under PCI DSS or NACHA identifies any deficiencies that we need to remediate, the remediation efforts may distract our
management team and be expensive and time consuming.
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If our bank sponsorships are terminated and we are not able to secure or successfully migrate client portfolios to new bank
sponsors, we will not be able to conduct our business.
If the banks that sponsor us with the Visa and Mastercard networks stop sponsoring us, we would need to find other financial institutions to
provide those services, which could be difficult and expensive. If we were unable to find a replacement financial institution to provide
sponsorship, we could no longer provide processing services to affected clients, which would negatively impact our revenues and earnings.
Furthermore, some agreements with our bank sponsors give them substantial discretion in approving certain aspects of our business practices,
including our solicitation, application and qualification procedures for clients and the terms of our agreements with clients. Our bank sponsors’
discretionary actions under these agreements could have a material adverse effect on our business, financial condition, and results of
operations.
We have faced, and may in the future face, significant chargeback liability if our clients refuse or cannot reimburse chargebacks
resolved in favor of their customers, and we may not accurately anticipate these liabilities.
We have potential liability for chargebacks associated with our clients’ processing transactions. In most circumstances, if a billing dispute
between a client and a cardholder is not ultimately resolved in favor of our client, the disputed transaction is “charged back” to the client’s bank
and credited to the account of the cardholder. Anytime our client is unable to satisfy a chargeback, we are responsible for that chargeback.
If we are unable to collect the chargeback from the client’s account or reserve account (if applicable), or if the client refuses or is financially
unable due to bankruptcy or other reasons to reimburse us for the chargeback, we bear the loss for the amount of the refund paid to the
cardholder’s bank. We incurred chargeback losses of $0.1 million, or less than 0.1% of revenues, in our 2019 fiscal year and $0.3 million, or
0.1% of revenues, in our 2018 fiscal year. Any increase in chargebacks not paid by our clients could have a material adverse effect on our
business, financial condition and results of operations.
We are potentially liable for losses caused by fraudulent credit card transactions. Card fraud occurs when a client’s customer uses a stolen
card (or a stolen card number in a card-not-present transaction) to purchase merchandise or services. In a traditional card-present transaction,
if the client swipes the card, receives authorization for the transaction from the card issuing bank and verifies the signature on the back of the
card against the paper receipt signed by the customer, the card issuing bank remains liable for any loss. In a fraudulent card-not-present
transaction, even if the client receives authorization for the transaction, the client is liable for any loss arising from the transaction. Many of the
SMB clients that we serve are small and transact a substantial percentage of their sales over the Internet or in response to telephone or mail
orders. Because their sales are card-not-present transactions, these clients are more vulnerable to customer fraud than larger clients. Because
we target these SMB clients, we experience chargebacks arising from cardholder fraud more frequently than providers of payment processing
services that service larger businesses and organizations.
Business fraud occurs when a business or organization, rather than a cardholder, knowingly uses a stolen or counterfeit card or card
number to record a false sales transaction, or intentionally fails to deliver the merchandise or services sold in an otherwise valid transaction.
Business fraud also occurs when employees of businesses change the business demand deposit accounts to their personal bank account
numbers, so that payments are improperly credited to the employee’s personal account. We have established systems and procedures to
detect and reduce the impact of business fraud, but there can be no assurance that these measures are or will be effective. Incidents of fraud
could increase in the future. Failure to effectively manage risk and prevent fraud could increase our chargeback liability and other liability, which
could have a material adverse effect on our business, financial condition and results of operations.
18
On occasion, we experience increases in interchange and sponsorship fees; if we cannot pass these increases along to our clients,
our profit margins will be reduced.
We pay interchange fees or assessments to issuing banks through the card associations for each transaction that is processed using their
credit and debit cards. From time to time, the card associations increase the interchange fees that they charge processors and the sponsoring
banks. At their sole discretion, our sponsoring banks have the right to pass any increases in interchange fees on to us. In addition, our
sponsoring banks may seek to increase their sponsorship fees charged to us, all of which are based upon the dollar amount of the payment
transactions we process. If we are not able to pass these fee increases along to clients through corresponding increases in our processing
fees, our profit margins will be reduced.
Our systems and our third-party providers’ systems may fail, or our third-party providers may discontinue providing their services or
technology generally or to us specifically, which in either case could interrupt our business, cause us to lose business and increase
our costs.
We rely on third parties for specific services, software and hardware used in providing our products and services. Some of these
organizations and service providers are our competitors or provide similar services and technology to our competitors, and we may not have
long-term contracts with them. If these contracts are canceled or we are unable to renew them on commercially reasonable terms, or at all, our
business, financial condition and results of operation could be adversely impacted. The termination by our service or technology providers of
their arrangements with us or their failure to perform their services efficiently and effectively may adversely affect our relationships with our
clients and, if we cannot find alternate providers quickly, may cause those clients to terminate their processing agreements with us.
We also rely in part on third parties for the development and access to new technologies, or for updates to existing products and services
for which they provide ongoing support. Failure by these third-party providers to devote an appropriate level of attention to our products and
services could result in delays in introducing new products or services, or delays in resolving any issues with existing products or services for
which third-party providers provide ongoing support.
Our systems and operations or those of our third-party technology vendors could be exposed to damage or interruption from, among other
things, fire, natural disaster, power loss, telecommunications failure, unauthorized entry, computer viruses, denial-of-service attacks, acts of
terrorism, human error, vandalism or sabotage, financial insolvency and similar events. Our property and business interruption insurance may
not be adequate to compensate us for all losses or failures that may occur. Likewise, while we have disaster recovery policies and
arrangements in place, they have not been tested under actual disasters or similar events. Defects in our systems or those of third parties,
errors or delays in the processing of payment transactions, telecommunications failures or other difficulties could result in:
•
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•
•
•
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•
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loss of revenues;
loss of clients;
loss of client and cardholder data;
fines imposed by payment networks;
harm to our business or reputation resulting from negative publicity;
exposure to fraud losses or other liabilities;
additional operating and development costs; or
diversion of management, technical and other resources, among other consequences.
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We are subject to economic and political risk, the business cycles of our clients and distribution partners and changes in the overall
level of consumer and commercial spending, which could negatively impact our business, financial condition and results of
operations.
The electronic payment industry depends heavily on the overall level of consumer and commercial spending. We are exposed to general
economic conditions that affect consumer confidence, consumer spending, consumer discretionary income and changes in consumer
purchasing habits. A sustained deterioration in general economic conditions, particularly in the United States, or increases in interest rates,
could adversely affect our financial performance by reducing the number or aggregate volume of transactions made using electronic payments.
A reduction in the amount of consumer or commercial spending could result in a decrease in our revenue and profits. If our clients make fewer
purchases or sales of products and services using electronic payments, or consumers spend less money through electronic payments, we will
have fewer transactions to process at lower dollar amounts, resulting in lower revenue.
A weakening in the economy could have a negative impact on our clients, as well as their customers who purchase products and services
using the payment processing systems to which we provide access, which could, in turn, negatively affect our business, financial condition and
results of operations. In addition, a weakening in the economy could force SMBs to close at higher than historical rates in part because many of
them are not as well capitalized as larger organizations, which could expose us to potential credit losses and future transaction declines.
Further, credit card issuers may reduce credit limits and become more selective in their card issuance practices. We also have a certain
amount of fixed and semi-fixed costs, including rent, debt service and salaries, which could limit our ability to quickly adjust costs and respond
to changes in our business and the economy.
A decline in the use of cards and ACH as payment mechanisms for consumers and businesses or adverse developments in the
electronic payment industry in general could adversely affect our business, financial condition and operating results.
If consumers and businesses do not continue to use cards or ACH as payment mechanisms for their transactions or if the mix of payments
among the types of cards and ACH changes in a way that is adverse to us, it could have a material adverse effect on our business, financial
condition and results of operations. Regulatory changes may also result in our clients seeking to charge their customers additional fees for use
of credit or debit cards. Additionally, in recent years, increased incidents of security breaches have caused some consumers to lose confidence
in the ability of businesses to protect their information, causing certain consumers to discontinue use of electronic payment methods. Security
breaches could result in financial institutions canceling large numbers of credit and debit cards, or consumers or businesses electing to cancel
their cards following such an incident.
We may not be able to continue to expand our share of our existing vertical markets or expand into new vertical markets, which
would inhibit our ability to grow and increase our profitability.
Our future growth and profitability depend, in part, upon our continued expansion within the vertical markets in which we currently operate,
the emergence of other vertical markets for electronic payments and our integrated solutions, and our ability to penetrate new vertical markets
and our current distribution partners’ customer base. As part of our strategy to expand into new vertical markets, we look for acquisition
opportunities and partnerships with other businesses that will allow us to increase our market penetration, technological capabilities, product
offerings and distribution capabilities. We may not be able to successfully identify suitable acquisition or partnership candidates in the future,
and if we do, they may not provide us with the benefits we anticipated.
Our expansion into new vertical markets also depends upon our ability to adapt our existing technology or to develop new technologies to
meet the particular needs of each new vertical market. We may not have adequate financial or technological resources to develop effective and
secure services or distribution channels that will satisfy the demands of these new vertical markets. Penetrating these new vertical markets
may also prove to be more challenging or costly or take longer than we may anticipate. If we fail to expand into new vertical markets and
increase our penetration into existing vertical markets, we may not be able to continue to grow our revenues and earnings.
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We may not be able to successfully execute our strategy of growth through acquisitions.
A significant part of our growth strategy is to enter into new vertical markets through platform acquisitions of vertically-focused integrated
payment and software solutions providers and to expand within our existing vertical markets through selective tuck-in acquisitions.
Although we expect to continue to execute our acquisition strategy:
• we may not be able to identify suitable acquisition candidates or acquire additional assets on favorable terms;
• we may compete with others to acquire assets, which competition may increase, and any level of competition could result in decreased
availability or increased prices for acquisition candidates;
• we may compete with others for select acquisitions and our competition may consist of larger, better-funded organizations with more
resources and easier access to capital;
• we may experience difficulty in anticipating the timing and availability of acquisition candidates;
• we may not be able to obtain the necessary financing, on favorable terms or at all, to finance any of our potential acquisitions; and
• we may not be able to generate cash necessary to execute our acquisition strategy.
The occurrence of any of these factors could adversely affect our growth strategy.
Revenues and profits generated via acquisition may be less than anticipated, the integration process could experience delays or
difficulties, and we may fail to uncover all liabilities of acquisition targets through the due diligence process prior to an acquisition,
resulting in unanticipated costs, losses or a decline in profits, as well as potential impairment charges.
In evaluating and determining the purchase price for a prospective acquisition, we estimate the future revenues and profits from that
acquisition based largely on historical financial performance. Following an acquisition, we may experience some attrition in the number of
clients serviced by an acquired provider of payment processing services or included in an acquired portfolio of merchant accounts. Should the
rate of post-acquisition client attrition exceed the rate we forecasted, the revenues and profits from the acquisition may be less than we
estimated, which could result in losses or a decline in profits, as well as potential impairment charges.
We perform a due diligence review of each of our acquisition partners. This due diligence review, however, may not adequately uncover all
of the contingent or undisclosed liabilities we may incur as a consequence of the proposed acquisition, exposing us to potentially significant,
unanticipated costs, as well as potential impairment charges. An acquisition may also subject us to additional regulatory burdens that affect our
business in potentially unanticipated and significantly negative ways.
The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more of our combined
businesses and the possible loss of key personnel. For example, on May 31, 2019, we completed the acquisition of Pace Payment Systems,
Inc. for an aggregate estimated purchase price of $65.4 million. The diversion of management’s attention and any delays or difficulties
encountered in connection with acquisitions and the integration of the two companies’ operations could have an adverse effect on our
business, results of operations, financial condition or prospects.
We may encounter delays, operational difficulties and non-recurring costs in completing the necessary transfer of data processing
functions and connecting systems links required by an acquisition, resulting in increased costs for, and a delay in the realization of
revenues from, that acquisition.
The acquisition of a provider of payment processing services, as well as a portfolio of merchant accounts, requires the transfer of various
data processing functions and connecting links to our systems and those of our third-party service providers. If the transfer of these functions
and links does not occur rapidly and smoothly, payment processing delays and errors may occur, resulting in a loss of revenues, increased
client attrition and increased expenditures to correct the transitional problems, which could preclude our attainment of, or reduce, our
anticipated revenue and profits.
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In connection with some acquisitions, we may incur non-recurring severance expenses, restructuring charges or change of control
payments. These expenses, charges or payments, as well as the initial costs of integrating the personnel and facilities of an acquired business
with those of our existing operations, may adversely affect our operating results during the initial financial periods following an acquisition. In
addition, the integration of newly acquired companies may lead to diversion of management attention from other ongoing business concerns.
A decrease in the quality of the products and services we offer, including support services, could adversely impact our ability to
attract and retain clients and distribution partners.
Our clients expect a consistent level of quality in the provision of our products and services. The support services that we provide are also
a key element of the value proposition to our clients. If the reliability or functionality of our products and services is compromised or the quality
of those products or services is otherwise degraded, or if we fail to continue to provide a high level of support, we could lose existing clients
and find it harder to attract new clients and distribution partners.
Changes in tax laws or their interpretations, or becoming subject to additional U.S., state or local taxes that cannot be passed
through to our clients, could negatively affect our business, financial condition and results of operations.
We are subject to extensive tax liabilities, including federal and state and transactional taxes such as excise, sales/use, payroll, franchise,
withholding, and ad valorem taxes. Changes in tax laws or their interpretations could increase our tax burden and decrease the amount of
revenues we receive, the value of any tax loss carryforwards and tax credits recorded on our balance sheet and the amount of our cash flow,
and have a material adverse impact on our business, financial condition and results of operations. Some of our tax liabilities are subject to
periodic audits by the respective taxing authority which could increase our tax liabilities. Furthermore, companies in the payment processing
industry, including us, may become subject to incremental taxation in various tax jurisdictions. Taxing jurisdictions have not yet adopted uniform
positions on this topic. If we are required to pay additional taxes and are unable to pass the tax expense through to our clients, our costs would
increase and our net income would be reduced, which could have a material adverse effect on our business, financial condition and results of
operations.
Many of our clients are SMBs, which can be more difficult and costly to retain than larger enterprises and may increase the effect of
economic fluctuations on us.
Many of our clients are SMBs. To continue to grow our revenue, we must add new SMB clients, sell additional products and services to
existing SMB clients and encourage existing SMB clients to continue doing business with us. However, retaining SMB clients can be more
difficult than retaining large enterprises because SMBs often have higher rates of business failures and more limited resources and are typically
less able to make technology-related decisions based on factors other than price.
SMBs are typically more susceptible to the adverse effects of economic fluctuations. Adverse changes in the economic environment or
business failures of our SMB clients may have a greater impact on us than on our competitors who do not focus on SMBs to the extent that we
do. As a result, we may need to onboard new clients at an accelerated rate or decrease our expenses to reduce negative impacts on our
business, financial condition and results of operations.
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We may not be able to successfully manage our intellectual property.
Our intellectual property is critical to our future success, particularly in our strategic verticals where we may offer proprietary software
solutions to our clients. We rely on a combination of contractual license rights and copyright, trademark and trade secret laws to establish and
protect our proprietary technology. Third parties may challenge, invalidate, circumvent, infringe or misappropriate our intellectual property or the
intellectual property of our third-party licensors, or such intellectual property may not be sufficient to permit us to take advantage of current
market trends or otherwise to provide competitive advantages, which could result in costly redesign efforts, discontinuance of certain service
offerings or other competitive harm. Others, including our competitors, may independently develop similar technology, duplicate our products
and services, design around or reverse engineer our intellectual property, and in such cases neither we nor our third-party licensors may be
able to assert intellectual property rights against such parties. Further, our contractual license arrangements may be subject to termination or
renegotiation with unfavorable terms to us, and our third-party licensors may be subject to bankruptcy, insolvency and other adverse business
dynamics, any of which might affect our ability to use and exploit the products licensed to us by these third-party licensors. We may have to
litigate to enforce or determine the scope and enforceability of our intellectual property rights (including litigation against our third-party
licensors), which is expensive, could cause a diversion of resources and may not prove successful. The loss of intellectual property protection
or the inability to obtain third-party intellectual property could harm our business and ability to compete.
We may be subject to infringement claims.
We may be subject to costly litigation if our products or services are alleged to infringe upon or otherwise violate a third party’s proprietary
rights. Third parties may have, or may eventually be issued, patents that could be infringed by our products and services. Any of these third
parties could make a claim of infringement against us with respect to our products and services. We may also be subject to claims by third
parties for patent infringement, breach of copyright, trademark, license usage or other intellectual property rights. Any claim from third parties
may result in a limitation on our ability to use the intellectual property subject to these claims. Additionally, in recent years, individuals and
groups have been purchasing intellectual property assets for the sole purpose of making claims of infringement and attempting to extract
settlements from companies like ours. Even if we believe that intellectual property related claims are without merit, defending against such
claims is time consuming and expensive and could result in the diversion of the time and attention of our management and employees. Claims
of intellectual property infringement also might require us to redesign affected products or services, enter into costly settlement or license
agreements, pay costly damage awards for which we may not have insurance, or face a temporary or permanent injunction prohibiting us from
marketing or selling certain of our products or services. Even if we have an agreement for indemnification against such costs, the indemnifying
party, if any in such circumstances, may be unable to uphold its contractual obligations. If we cannot or do not license the infringed technology
on reasonable terms or substitute similar technology from another source, our revenue and earnings could be materially and adversely
affected.
Some of our solutions contain "open-source" software, and any failure to comply with the terms of one or more of applicable open-
source licenses could negatively affect our business.
We use certain software licensed under open-source licenses and may continue to use such software in the future. Some open-source
licenses require us to make available source code for modifications or derivative works that we create based upon the open-source software,
and that we license such modifications or derivative works pursuant to a particular open source license or other license allowing further use by
third parties. Some open-source licenses could require us to release the source code of our proprietary software if we combine our proprietary
software with the open-source software subject to that license. Additionally, the terms of many open-source licenses have not been interpreted
by United States or other courts, and there is a risk that these licenses could be construed in a manner that imposes unanticipated conditions
or restrictions on our ability to commercialize our solutions. Using open-source software can also be riskier than using software subject to a
more restrictive license because open-source licenses generally do not contain such protections as warranties. Many of the risks associated
with using open-source software cannot be eliminated and using such software could adversely affect us.
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If we lose key personnel, or if their reputations are damaged, our business, financial condition and results of operations may be
adversely affected, and proprietary information of our company could be shared with our competitors.
We depend on the ability and experience of a number of our key personnel, particularly Messrs. Daily, Whitson, Stanford and Bertke, who
have substantial experience with our operations, the rapidly changing payment processing industry and the vertical markets in which we offer
our products and services. Many of our key personnel have worked for us for a significant amount of time or were recruited by us specifically
due to their experience. Our success depends in part upon the reputation and influence within the industry of our senior managers who have,
over the years, developed long standing and favorable relationships with our vendors, card associations, bank sponsors and other payment
processing and service providers. It is possible that the loss of the services of one or a combination of our senior executives or key managers
could have a material adverse effect on our business, financial condition and results of operations. In addition, contractual obligations related to
confidentiality and assignment of intellectual property rights may be ineffective or unenforceable, and departing employees may share our
proprietary information with competitors in ways that could adversely impact us.
In a dynamic industry like ours, our success and growth depend on our ability to attract, recruit, retain and develop qualified
employees.
Our business functions at the intersection of rapidly changing technological, social, economic and regulatory developments that require a
wide-ranging set of expertise and intellectual capital. For us to continue to successfully compete and grow, we must attract, recruit, develop and
retain the necessary personnel who can provide the needed expertise across the entire spectrum of our intellectual capital needs. While we
have a number of key personnel who have substantial experience with our operations, we must also develop our personnel to provide
succession plans capable of maintaining continuity in the midst of the inevitable unpredictability of human capital. The market for qualified
personnel is competitive, and we may not succeed in recruiting additional personnel or may fail to effectively replace current personnel who
depart with qualified or effective successors. Our effort to retain and develop personnel may also result in significant additional expenses, which
could adversely affect our profitability. We can make no assurances that qualified employees will continue to be employed or that we will be
able to attract and retain qualified personnel in the future. Failure to retain or attract key personnel could have a material adverse effect on our
business, financial condition and results of operations.
Our operating results and operating metrics are subject to seasonality and volatility, which could result in fluctuations in our
quarterly revenues and operating results or in perceptions of our business prospects.
We have experienced in the past, and expect to continue to experience, seasonal fluctuations in our revenues as a result of consumer
spending patterns. Historically our revenues have been strongest in our first, third and fourth fiscal quarters and weakest in our second fiscal
quarter. This is due to the increase in the number and amount of electronic payment transactions related to seasonal retail events, such as
holiday and vacation spending. The number of business days in a month or quarter also may affect seasonal fluctuations. We also experience
volatility in certain other metrics, such as clients, transactions and dollar volume. Volatility in our key operating metrics or their rates of growth
could have a negative impact on our financial results and investor perceptions of our business prospects.
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We are a decentralized company, which presents certain risks, including the risk that we may be slower or less able to identify or
react to problems affecting a key business unit than we would in a more centralized environment, which could materially and
adversely affect our business, financial condition and results of operations.
We are a decentralized company. While we believe this structure has catalyzed our growth and enabled us to remain responsive to
opportunities and to our clients’ needs, it necessarily places significant control and decision-making powers in the hands of local management.
This presents various risks, including the risk that we may be slower or less able to identify or react to problems affecting a key business unit
than we would in a more centralized environment. In addition, it means that we may be slower to detect compliance related problems and that
“company-wide” business initiatives, such as the integration of disparate information technology systems, are often more challenging and costly
to implement, and their risk of failure higher, than they would be in a more centralized environment. Depending on the nature of the problem or
initiative in question, such failure could materially and adversely affect our business, financial condition or results of operations.
We are the subject of various claims and legal proceedings and may become the subject of claims, litigation or investigations which
could have a material adverse effect on our business, financial condition or results of operations.
In the ordinary course of business, we are the subject of various claims and legal proceedings and may become the subject of claims,
litigation or investigations, including commercial disputes and employee claims, such as claims of age discrimination, sexual harassment,
gender discrimination, immigration violations or other local, state and federal labor law violations, and from time to time may be involved in
governmental or regulatory investigations or similar matters arising out of our current or future business. Any claims asserted against us or our
management, regardless of merit or eventual outcome, could harm our reputation or the reputation of our management and have an adverse
impact on our relationship with our clients, distribution partners and other third parties and could lead to additional related claims. In light of the
potential cost and uncertainty involved in litigation, we have in the past and may in the future settle matters even when we believe we have a
meritorious defense. Certain claims may seek injunctive relief, which could disrupt the ordinary conduct of our business and operations or
increase our cost of doing business. Our insurance or indemnities may not fully cover all claims that may be asserted against us. Furthermore,
there is no guarantee that we will be successful in defending ourselves in pending or future litigation or similar matters under various laws. Any
judgments or settlements in any pending litigation or future claims, litigation or investigation could have a material adverse effect on our
business, financial condition and results of operations.
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Risks Related to Regulation
We are subject to extensive government regulation, and any new laws and regulations, industry standards or revisions made to
existing laws, regulations or industry standards affecting the electronic payments industry, or our actual or perceived failure to
comply with such obligations, may have an unfavorable impact on our business, financial condition and results of operations.
We are subject to numerous federal and state regulations that affect the electronic payments industry. Regulation of our industry has
increased significantly in recent years and is constantly evolving. Changes to statutes, regulations or industry standards, including
interpretation and implementation of statutes, regulations or standards, could increase our cost of doing business or affect the competitive
balance. We are also subject to U.S. financial services regulations, numerous consumer protection laws, escheat regulations and privacy and
information security regulations, among other laws, rules and regulations. Failure to comply with regulations may have an adverse effect on our
business, including the limitation, suspension or termination of services provided to, or by, third parties, and the imposition of penalties or fines.
To the extent these regulations negatively impact the business, operations or financial condition of our clients, our business and results of
operations could be materially and adversely affected because, among other matters, our clients could have less capacity to purchase products
and services from us, could decide to avoid or abandon certain lines of business, or could seek to pass on increased costs to us by negotiating
price reductions. We could be required to invest a significant amount of time and resources to comply with additional regulations or oversight or
to modify the manner in which we contract with or provide products and services to our clients; and those regulations could directly or indirectly
limit how much we can charge for our services. We may not be able to update our existing products and services, or develop new ones, to
satisfy our clients’ needs. Any of these events, if realized, could have a material adverse effect on our business, results of operations and
financial condition.
These and other laws and regulations, even if not directed at us, may require us to make significant efforts to change our products and
services and may require that we incur additional compliance costs and change how we price our products and services to our clients and
distribution partners. Implementing new compliance efforts is difficult because of the complexity of new regulatory requirements, and we are
devoting and will continue to devote significant resources to ensure compliance. Furthermore, regulatory actions may cause changes in
business practices by us and other industry participants which could affect how we market, price and distribute our products and services, and
which could materially adversely affect our business, financial condition and results of operations. In addition, even an inadvertent failure to
comply with laws and regulations, as well as rapidly evolving social expectations of corporate fairness, could damage our business or our
reputation.
Compliance with the Dodd-Frank Act and other federal and state regulations may increase our compliance costs, limit our revenues
and otherwise negatively affect our business.
Since the enactment of the Dodd-Frank Act, there have been substantial reforms to the supervision and operation of the financial services
industry, including numerous new regulations that have imposed compliance costs and, in some cases, limited revenue sources for us and our
financial institution partners and clients. Among other things, the Dodd-Frank Act established the Consumer Financial Protection Bureau
(“CFPB”), which is empowered to conduct rule-making and supervision related to, and enforcement of, federal consumer financial protection
laws. The CFPB has issued guidance that applies to “supervised service providers,” which the CFPB has defined to include service providers,
like us, to CFPB supervised banks and nonbanks. In addition, federal and state agencies have recently proposed or enacted cybersecurity
regulations, such as the Cybersecurity Requirements for Financial Services Companies issued by the New York State Department of Financial
Services and the Advance Notice of Proposed Rulemaking on Enhanced Cyber Risk Management Standards issued by The Board of
Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation in
October 2016. Such cybersecurity regulations are applicable to large bank holding companies and their subsidiaries, as well as to service
providers to those organizations. Any new rules and regulations implemented by the CFPB, state or other authorities or in connection with the
Dodd-Frank Act could, among other things, slow our ability to adapt to a rapidly changing industry, require us to make significant additional
investments to comply with them, redirect time and resources to compliance obligations, modify our products or services or the manner in
which they are provided, or limit or change the amount or types of revenue we are able to generate.
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Interchange fees, which the payment processor typically pays to the card issuer in connection with credit and debit card transactions, are
subject to increasingly intense legal, regulatory and legislative scrutiny. In particular, the Dodd-Frank Act regulates and limits debit card fees
charged by certain card issuers and allows businesses and organizations to set minimum dollar amounts for the acceptance of credit cards.
Specifically, under the so-called “Durbin Amendment” to the Dodd-Frank Act, the interchange fees that certain issuers charge businesses and
organizations for debit transactions are regulated by the Federal Reserve and must be “reasonable and proportional” to the cost incurred by the
issuer in authorizing, clearing and settling the transactions. Rules released by the Federal Reserve in July 2011 to implement the Durbin
Amendment mandate a cap on debit transaction interchange fees for card issuers with assets of $10 billion or greater. Since October 2011, a
payment network may not prohibit a card issuer from contracting with any other payment network for the processing of electronic debit
transactions involving the card issuer’s debit cards, and card issuers and payment networks may not inhibit the ability of businesses and
organizations to direct the routing of debit card transactions over any payment networks that can process the transactions.
Rules implementing the Dodd-Frank Act also contain certain prohibitions on payment network exclusivity and merchant routing restrictions.
These restrictions could negatively affect the number of debit transactions processed, and prices charged per transaction, which would
negatively affect our business.
If we violate the Family Educational Rights and Privacy Act (“FERPA”) and the Protection of Pupil Rights Amendment (“PPRA”), it
could result in a material breach of contract with one or more of our clients in our education vertical and could harm our reputation.
Further, if we disclose student information in violation of FERPA or PPRA, our access to student information could be suspended.
Our systems and solutions must also comply, in certain circumstances, with FERPA and PPRA, as well as with rapidly emerging state
student data privacy laws that require schools to protect student data and to adopt privacy policies which can significantly vary from one state
to another. FERPA generally prohibits an educational institution from disclosing personally identifiable information from a student’s education
records without a parent’s consent unless certain statutory exceptions apply. Our school clients and their students disclose to us, and we may
store, certain information that originates from or comprises a student education record under FERPA. PPRA puts limits on “survey, analysis or
evaluations” that may come into play when schools employ internet-based educational services. Schools are required to develop policies that
address, among other things, the collection, disclosure or use of personal information collected from students for the purpose of marketing or
selling that information, and can place restrictions on third parties’ use of that data. As an entity that provides services to educational
institutions, we are indirectly subject to FERPA’s and PPRA’s privacy requirements, and we may not transfer or otherwise disclose or use any
personally identifiable information from a student record to another party other than on a basis and in a manner permitted under the statutes. If
we violate FERPA or PPRA, it could result in a material breach of contract with one or more of our clients and could reduce our revenues or
harm our reputation. Further, if we disclose student information in violation of FERPA or PPRA, our access to student information could be
suspended, thus inhibiting our business operations.
We must comply with laws and regulations prohibiting unfair or deceptive acts or practices, and any failure to do so could materially
and adversely affect our business.
We and many of our clients are subject to Section 5 of the Federal Trade Commission Act prohibiting unfair or deceptive acts or practices.
In addition, provisions of the Dodd-Frank Act that prohibit unfair, deceptive or abusive acts or practices (“UDAAP”), the Telemarketing Sales Act
and other laws, rules and or regulations, may directly impact the activities of certain of our clients, and in some cases may subject us, as the
electronic payment processor or provider of certain services, to investigations, fees, fines and disgorgement of funds if we were deemed to
have improperly aided and abetted or otherwise provided the means and instrumentalities to facilitate the illegal or improper activities of the
client through our services. Various federal and state regulatory enforcement agencies including the Federal Trade Commission and state
attorneys general have authority to take action against non-banks that engage in UDAAP, or violate other laws, rules and regulations. To the
extent we are processing payments or providing products and services for a client that may be in violation of laws, rules and regulations, we
may be subject to enforcement actions and as a result may incur losses and liabilities that may adversely affect our business.
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Numerous other federal laws affect our business, and any failure to comply with those laws could harm our business.
Our payment facilitator solutions present certain regulatory challenges, principally those relating to money transmitter issues. To address
these challenges we, along with our third-party service providers, use structural arrangements designed to prevent us from receiving or
controlling our client’s funds and therefore remove our activities from the scope of money transmitter regulation. There can be no assurance
that these structural arrangements will remain effective as money transmitter laws continue to evolve or that the applicable regulatory bodies,
particularly state agencies, will view our payment facilitator activities as compliant.
Our business may also be subject to the Fair Credit Reporting Act (the “FCRA”), which regulates the use and reporting of consumer credit
information and imposes disclosure requirements on entities that take adverse action based on information obtained from credit reporting
agencies. We could be liable if our practices under the FCRA do not comply with the FCRA or regulations under it.
The Housing Assistance Tax Act of 2008 included an amendment to the Internal Revenue Code of 1986, as amended, or the “Code,” that
requires information returns to be made for each calendar year by payment processing entities and third-party settlement organizations with
respect to payments made in settlement of electronic payment transactions and third-party payment network transactions occurring in that
calendar year. Reportable transactions are also subject to backup withholding requirements. We could be liable for penalties if our information
returns are not in compliance with these regulations.
Our solutions may be required to conform, in certain circumstances, to requirements set forth in the Health Insurance Portability and
Accountability Act of 1996, which governs the privacy and security of “protected health information.”
Depending on how our products and services evolve, we may be subject to a variety of additional laws and regulations, including those
governing money transmission, gift cards and other prepaid access instruments, electronic funds transfers, anti-money laundering, counter-
terrorist financing, restrictions on foreign assets, gambling, banking and lending, U.S. Safe Harbor regulations, and import and export
restrictions. Additionally, we are contractually required to comply with certain anti-money laundering regulations in connection with our payment
processing activities. These regulations are generally governed by FinCEN and OFAC. Our efforts to comply with these laws and regulations
could be costly and result in diversion of management time and effort and may still not guarantee compliance. Regulators continue to increase
their scrutiny of compliance with these obligations, which may require us to further revise or expand our compliance program, including the
procedures we use to verify the identity of our clients and our clients’ customers, and to monitor transactions. If we are found to be in violation
of any such legal or regulatory requirements, we may be subject to monetary fines or other penalties such as a cease and desist order, or we
may be required to make product changes, any of which could have an adverse effect on our business and financial results.
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Changing laws and governmental rules and regulations designed to protect or limit access to or use of personal information could
adversely affect our ability to effectively provide our products and services, and actual or perceived failure to comply with such legal
and regulatory obligations may negatively impact our business, financial condition and results of operations.
In addition to those regulations discussed previously that are imposed by the card networks and NACHA, governmental bodies in the
United States have adopted, or are considering the adoption of, laws and regulations restricting the use, collection, storage, transfer and
disposal of, and requiring safeguarding of, personal information. Our operations are subject to certain provisions of these laws. Relevant
federal privacy laws include, in addition to FERPA and PPRA described above, the Gramm-Leach-Bliley Act of 1999, which applies directly to a
broad range of financial institutions and indirectly, or in some instances directly, to companies that provide services to financial institutions. The
U.S. Children’s Online Privacy Protection Act also regulates the collection of information by operators of websites and other electronic solutions
that are directed to children under 13 years of age. These laws and regulations restrict the collection, processing, storage, use and disclosure
of personal information, require notice to individuals of privacy practices and provide individuals with certain rights to prevent the use and
disclosure of protected information. These laws also impose requirements for safeguarding and proper destruction of personal information
through the issuance of data security standards or guidelines. In addition, there are state laws restricting the ability to collect and utilize certain
types of information such as Social Security and driver’s license numbers. Certain state laws impose similar privacy obligations as well as
obligations to provide notification of security breaches of computer databases that contain personal information to affected individuals, state
officers and consumer reporting agencies and businesses and governmental agencies that own data.
In connection with providing products and services to our clients, we are required by regulations, government-required standards, and by
our client contracts with them and with our financial institution distribution partners to provide assurances regarding the confidentiality and
security of non-public consumer information. These contracts may require periodic audits by independent companies regarding our compliance
with applicable standards. The compliance standards relate to the security of our infrastructure, and include components and operational
procedures designed to safeguard the confidentiality and security of individuals’ non-public personal information that our clients share with us.
Our ability to maintain compliance with these standards and satisfy these audits will affect our ability to attract, grow and maintain business in
the future. If we fail to comply with the laws and regulations relating to data privacy and information security, we could be exposed to legal
claims and actions or to regulatory enforcement proceedings. In addition, our relationships and reputation could be harmed, which could inhibit
our ability to retain existing clients and distribution partners and obtain new clients and distribution partners.
Legal requirements relating to the collection, storage, handling and transfer of personal data continue to evolve. For example, in June
2018, the State of California enacted the CCPA, which will go into effect on January 1, 2020. The CCPA will require companies that collect
personal information of California residents to make new disclosures to consumers about their data collection, use and sharing practices, will
grant consumers specific access rights to their data, will allow consumers to opt out of certain data sharing with or sales to third parties, and will
create a new private cause of action for data breaches. In addition, on October 10, 2019, the California Attorney General's Office issued
proposed rules and regulations governing business's compliance obligations under the CCPA. Such proposed rules and regulations are
currently open for public comment and may be subsequently modified. Further, the CCPA itself has already undergone several amendments.
Therefore, it remains unclear what, if any, modifications will be made to the proposed regulations or how the CCPA, as amended, and the
proposed regulations will be interpreted by regulators and courts. Several other states have introduced similar legislation, including Nevada,
which passed Senate Bill 220 amending Nevada's existing law governing required privacy notices for websites and online services and which
became effective October 1, 2019. It remains to be seen whether any such laws will be passed. Any adopted legislation may impose varying
standards and requirements on our data collection, use and processing activities, which may be inconsistent with those of the CCPA and other
laws. Additionally, the Federal Trade Commission and many state attorneys general are interpreting federal and state consumer protection laws
to impose standards for the online collection, use, dissemination and security of data.
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Government regulators, industry groups and class action attorneys are increasingly scrutinizing how companies collect, process, use,
store, share and transmit personal data. Regulators and courts may expand interpretations of existing laws, thereby further impacting our
business. If more restrictive privacy laws or rules and/or inconsistent legal requirements are adopted by authorities in the future on the federal
or state level, or regulators' enforcement priorities shift, our compliance costs may increase and our ability to perform due diligence on, and
monitor the risk of, our current and potential clients may decrease, which could create liability for us. Additionally, if we suffer a data breach,
other privacy or cybersecurity regulatory compliance failures or are subject to fines, sanctions or proceedings as a result of actual or perceived
compliance failures, or any similar event causing reputational harm, our opportunities for growth may be curtailed, and our potential liability for
security breaches may increase, all of which could have a material adverse effect on our business, financial condition and results of operations.
Our indebtedness could adversely affect our financial health and competitive position.
Risks Related to Our Indebtedness
On May 9, 2019, we replaced our existing senior secured credit facility with a new 2019 senior secured credit facility (the “Senior Secured
Credit Facility”). The Senior Secured Credit Facility consists of a $300.0 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 up to 3.25%, 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 up to 1.25% 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 the Company to pay unused commitment fees of up to 0.30% 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. As of September 30, 2019, we had $141.1 million of indebtedness outstanding under our Senior Secured Credit Facility, consisting
entirely of a revolving loan. Although we may enter into interest rate swap agreements in the future, we and our subsidiaries are exposed to
interest rate increases on the floating portion of our Senior Secured Credit Facility that are not covered by interest rate swaps. For additional
information about our Senior Secured Credit Facility, see “Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Liquidity and Capital Resources” in Part II, Item 7 of this Annual Report on Form 10-K, and “Quantitative and Qualitative
Disclosure About Market Risk” in Part II, Item 7A of this Annual Report on Form 10-K.
To service this debt and any additional debt we may incur in the future, we need to generate cash. Our ability to generate cash is subject, to
a certain extent, to our ability to successfully execute our business strategy, including acquisition activity, as well as general economic,
financial, competitive, regulatory and other factors beyond our control. There can be no assurance that our business will be able to generate
sufficient cash flow from operations or that future borrowings or other financing will be available to us in an amount sufficient to enable us to
service our debt and fund our other liquidity needs. To the extent we are required to use our cash flow from operations or the proceeds of any
future financing to service our debt instead of funding working capital, capital expenditures, acquisition activity or other general corporate
purposes, we will be less able to plan for, or react to, changes in our business, industry and in the economy generally. This will place us at a
competitive disadvantage compared to our competitors that have less debt. There can be no assurance that we will be able to refinance any of
our debt on commercially reasonable terms or at all, or that the terms of that debt will allow any of the above alternative measures or that these
measures would satisfy our scheduled debt service obligations. If we are unable to generate sufficient cash flow to repay or refinance our debt
on favorable terms, it could significantly adversely affect our financial condition and the value of our outstanding debt. Our ability to restructure
or refinance our debt will depend on the condition of the capital markets and our financial condition. Any refinancing of our debt could be at
higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations.
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In addition, the credit agreement governing our Senior Secured Credit Facility contains, and any agreements evidencing or governing other
future debt may contain, certain restrictive covenants that limit our ability, among other things, to engage in certain activities that are in our
long-term best interests, including our ability to:
incur liens on property, assets or revenues;
incur or assume additional debt or amend our debt and other material agreements;
declare or make distributions and redeem or repurchase equity interests or issue preferred stock;
prepay, redeem or repurchase debt;
•
•
•
•
• make investments;
•
•
•
enter into any sale-and-leaseback of property;
engage in certain business activities; and
engage in mergers and asset sales.
The restrictive covenants in our Senior Secured Credit Facility also require us to maintain specified financial ratios. While we have not
previously breached and are not in breach of any of these covenants, there can be no guarantee that we will not breach these covenants in the
future. Our ability to comply with these covenants and restrictions may be affected by events and factors beyond our control. Our failure to
comply with any of these covenants or restrictions could result in an event of default under our Senior Secured Credit Facility. An event of
default would permit the lending banks under the facility to take certain actions, including terminating all outstanding commitments and
declaring all amounts outstanding under our credit facility to be immediately due and payable, including all outstanding borrowings, accrued
and unpaid interest thereon, and all other amounts owing or payable with respect to such borrowings and any terminated commitments. In
addition, the lenders would have the right to proceed against the collateral we granted to them, which includes substantially all of our assets.
We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs.
In the future, we may require additional capital to respond to business opportunities, challenges, acquisitions or unforeseen circumstances,
and may determine to engage in equity or debt financings or enter into credit facilities or refinance existing debt for other reasons. We may not
be able to timely secure additional debt or equity financing on favorable terms, or at all. As discussed above, the credit agreement governing
our Senior Secured Credit Facility contains restrictive covenants that limit our ability to incur additional debt and engage in other capital-raising
activities. Any debt financing we obtain in the future could involve covenants that further restrict our capital raising activities and other financial
and operational matters, which may make it more difficult for us to operate our business, obtain additional capital and pursue business
opportunities, including potential acquisitions. Furthermore, if we raise additional funds by issuing equity or convertible debt or other equity-
linked securities, our then-existing stockholders could suffer significant dilution. If we are unable to obtain adequate financing or financing on
terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could
be significantly limited.
Disruptions in the financial and credit markets may materially and adversely impact consumer spending patterns and affect the
availability and cost of credit.
Our ability to make scheduled payments or to refinance our debt and to obtain financing for acquisitions or other general corporate and
commercial purposes will depend on our operating and financial performance, which in turn is subject to prevailing economic conditions and to
financial, business and other factors beyond our control, including global credit markets and the financial services industry. These factors may
adversely impact the availability of credit already arranged, and the availability and cost of credit in the future. There can be no assurance that
we will be able to arrange credit on terms we believe are acceptable or that permit us to finance our business with historical margins.
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Despite our current level of debt, we may be able to incur more debt, including secured debt, and undertake additional financial
obligations. Incurring such debt or undertaking such additional financial obligations could further exacerbate the risk our
indebtedness poses to our financial condition.
We may be able to incur significant additional debt, including secured debt, in the future. Although the credit agreement governing our
Senior Secured Credit Facility restricts our ability to incur additional debt, these restrictions are subject to a number of significant qualifications
and exceptions, and debt we incur in compliance with these restrictions could be substantial. These restrictions also do not prevent us from
incurring obligations that do not constitute “indebtedness” or “debt” under the various instruments governing our debt, may be waived by certain
votes of lenders and, if we refinance existing debt, such refinanced debt may contain fewer restrictions on our activities. To the extent we
increase our debt above our currently anticipated debt levels, the related risks that we face could intensify.
Risks Related to Our Organizational Structure and Our Company
We are a holding company with no operations of our own, and our principal asset is our controlling membership interest in i3
Verticals, LLC. Accordingly, we depend on distributions from i3 Verticals, LLC to pay our taxes and other expenses.
We are a holding company with no operations of our own and currently have no significant assets other than our ownership of common
units of i3 Verticals, LLC. We currently have no independent means of generating revenue. Consequently, our ability to obtain operating funds
depends upon distributions from i3 Verticals, LLC. Furthermore, i3 Verticals, LLC is treated as a partnership for U.S. federal income tax
purposes and, as such, is not itself subject to U.S. federal income tax. Instead, its net taxable income is generally allocated to its members,
including us, pro rata according to the number of membership interests each member owns. Accordingly, we incur income taxes on our
proportionate share of any net taxable income of i3 Verticals, LLC in addition to expenses related to our operations, and our ability to obtain
funds to pay these income taxes currently depends upon distributions from i3 Verticals, LLC. We intend to cause i3 Verticals, LLC to distribute
cash to us in an amount at least equal to the amount necessary to cover our respective tax liabilities, if any, with respect to our allocable share
of the net income of i3 Verticals, LLC and to cover dividends, if any, we declare, as well as any payments due under the Tax Receivable
Agreement (the “Tax Receivable Agreement”) by and among i3 Verticals, Inc., i3 Verticals, LLC and each of the holders, other than i3 Verticals,
Inc., of common units in i3 Verticals, LLC (the “Continuing Equity Owners”). See the detailed discussion under “Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Senior Secured Credit Facility” in Part II, Item
7 of this Annual Report on Form 10-K for a discussion of the restrictive covenants, including i3 Verticals, LLC’s obligations to maintain specific
financial ratios, that may limit its ability to make certain distributions to us.
To the extent that we need funds to pay our taxes or other liabilities or to fund our operations, and i3 Verticals, LLC is restricted from
making distributions to us under applicable agreements under which it is bound, including its financing agreements, laws or regulations, does
not have sufficient cash to make these distributions or is otherwise unable to provide such funds, we may have to borrow funds to meet these
obligations and operate our business, and our liquidity and financial condition could be materially adversely affected. To the extent that we are
unable to make payments under the Tax Receivable Agreement for any reason, such payments will be deferred and will accrue interest until
paid.
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The interests of the other Continuing Equity Owners in our business may conflict with the interests of holders of shares of our Class
A common stock.
The Continuing Equity Owners, who currently collectively hold approximately 48% of the combined voting power of our common stock, may
receive payments from us under the Tax Receivable Agreement upon a redemption or exchange of their common units in i3 Verticals, LLC,
including the issuance of shares of our Class A common stock upon any such redemption or exchange. As a result, the interests of the
Continuing Equity Owners may conflict with the interests of holders of shares of our Class A common stock. For example, the Continuing
Equity Owners may have different tax positions from us which could influence their decisions regarding whether and when to dispose of assets,
whether and when to incur new or refinance existing indebtedness, and whether and when we should terminate the Tax Receivable Agreement
and accelerate our obligations thereunder. In addition, the structuring of future transactions may take into consideration tax or other
considerations of the Continuing Equity Owners even in situations where no similar considerations are relevant to us.
Any payments made under the Tax Receivable Agreement to our equity holders that are parties to such agreement could be
significant and will reduce the amount of overall cash flow that would otherwise be available to us.
As a result of any redemptions or exchanges of common units with us or i3 Verticals, LLC for shares of our Class A common stock or, at
our option, cash to be paid from i3 Verticals, LLC, we expect to become entitled to the tax benefits attributable to tax basis adjustments
involving an amount generally equal to the difference between the value of the shares of Class A common stock we issue in such redemption
or exchange or the cash purchase price for the acquired Class A units, and the equity holder’s share of the tax basis in i3 Verticals, LLC’s
tangible and intangible assets that is attributable to the acquired Class A units. We have agreed in the Tax Receivable Agreement entered into
with i3 Verticals, LLC and certain of our Continuing Equity Owners to pay to each such holder (either directly or indirectly by contributing such
payment to i3 Verticals, LLC for remittance to the Continuing Equity Owners) with respect to a redemption or exchange by that holder
approximately 85% of the amount, if any, by which our U.S. federal and state income tax payments are reduced as a result of tax benefits
attributable to the redemption or exchange by that holder for the period beginning with the remainder of the tax year in which the applicable
redemption or exchange occurs and continuing for each succeeding tax year generally beginning on or before the fifteenth anniversary of the
date of such redemption or exchange.
The tax basis adjustments, 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 any redemptions or exchanges between us (or i3 Verticals, LLC) and each holder, the amount
and timing of our income and the amount and timing of the amortization and depreciation deductions and other tax benefits attributable to the
tax basis adjustments. The payment obligations under the Tax Receivable Agreement ultimately are obligations of i3 Verticals, Inc., and we
expect that the payments required under the Tax Receivable Agreement will be substantial and will reduce the overall cash flow that would be
available to us.
We may not be able to realize all or a portion of the tax benefits that are expected to result from future redemptions or exchanges of
common units by holders.
Our organizational structure, including the Tax Receivable Agreement, confers certain benefits upon the Continuing Equity Owners that will
not benefit the holders of our Class A common stock to the same extent as it will benefit the Continuing Equity Owners. Under the Tax
Receivable Agreement, we are entitled to retain (a) 15% of the U.S. federal and state income tax savings we realize as a result of increases in
tax basis created by any future redemptions or exchanges of common units held by our equity holders that are parties to the Tax Receivable
Agreement for shares of our Class A common stock or cash for the tax years following a redemption or exchange covered by the Tax
Receivable Agreement, and (b) all of the U.S. federal and state income tax savings we realize from such redemptions or exchanges for tax
periods ending after those covered by the Tax Receivable Agreement. Our ability to realize, and benefit from, these tax savings depends on
several assumptions, including that we will earn sufficient taxable income each year during the period over which the deductions arising from
any such basis increases and payments are available and that there are no adverse changes in applicable law or regulations. If our actual
taxable income were insufficient or there were adverse changes in applicable law or regulations, we may be unable to realize all or a portion of
these expected benefits, and our cash flows and stockholders’ equity could be negatively affected.
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In certain cases, payments under the Tax Receivable Agreement to the Continuing Equity Owners may be accelerated or significantly
exceed the actual benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement.
The Tax Receivable Agreement provides that upon certain mergers, asset sales, other forms of business combinations or other changes of
control or if, at any time, we elect an early termination of the Tax Receivable Agreement, then our obligations, or our successor’s obligations,
under the Tax Receivable Agreement to make payments thereunder would be based on certain assumptions, including an assumption that we
would have sufficient taxable income to fully use all potential future tax benefits that are subject to the Tax Receivable Agreement.
As a result of the foregoing, (a) we could be required to make payments under the Tax Receivable Agreement that are greater than the
specified percentage of the actual benefits we ultimately realize in respect of the tax benefits that are subject to the Tax Receivable Agreement
and (b) if we elect to terminate the Tax Receivable Agreement early, we would be required to make an immediate cash payment equal to the
present value of the anticipated future tax benefits that are the subject of the Tax Receivable Agreement, which payment may be made
significantly in advance of the actual realization, if any, of such future tax benefits. In these situations, our obligations under the Tax Receivable
Agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain
mergers, asset sales, other forms of business combinations or other changes of control. There can be no assurance that we will be able to fund
or finance our obligations under the Tax Receivable Agreement.
In certain circumstances, i3 Verticals, LLC will be required to make distributions to us and the Continuing Equity Owners, and the
distributions that i3 Verticals, LLC will be required to make may be substantial.
Funds used by i3 Verticals, LLC to satisfy its tax distribution obligations will not be available for reinvestment in our business. Moreover, the
tax distributions that i3 Verticals, LLC will be required to make may be substantial, and will likely exceed (as a percentage of i3 Verticals, LLC’s
net income) the overall effective tax rate applicable to a similarly situated corporate taxpayer.
As a result of potential differences in the amount of net taxable income allocable to us and to the Continuing Equity Owners, as well as the
use of an assumed tax rate in calculating i3 Verticals, LLC’s distribution obligations, we may receive distributions significantly in excess of our
tax liabilities and obligations to make payments under the Tax Receivable Agreement. To the extent, as currently expected, we do not distribute
such cash balances as dividends on our Class A common stock and instead, for example, hold such cash balances or lend them to i3 Verticals,
LLC, the Continuing Equity Owners would benefit from any value attributable to such accumulated cash balances as a result of their ownership
of Class A common stock following a redemption or exchange of their common units.
We will not be reimbursed for any payments made to the Continuing Equity Owners under the Tax Receivable Agreement if any tax
benefits are disallowed.
Payments under the Tax Receivable Agreement will be based on the tax reporting positions that we determine, and the Internal Revenue
Service (the “IRS”) or another tax authority may challenge all or part of the tax basis increases, as well as other related tax positions we take,
and a court could sustain such challenge. We will not be reimbursed for any cash payments previously made to the Continuing Equity Owners
under the Tax Receivable Agreement if any tax benefits we initially claimed and for which we made a payment to a Continuing Equity Owner
are subsequently challenged by a taxing authority and are ultimately disallowed. Instead, any excess cash payments we make to a Continuing
Equity Owner will be netted against any future cash payments that we might otherwise be required to make to such Continuing Equity Owner
under the terms of the Tax Receivable Agreement. However, we might not determine that we have effectively made an excess cash payment to
a Continuing Equity Owner for a number of years following the initial time of such payment and, if any of our tax reporting positions are
challenged by a taxing authority, we will not be permitted to reduce any future cash payments under the Tax Receivable Agreement until any
such challenge is finally settled or determined. As a result, we could make payments under the Tax Receivable Agreement in excess of the tax
savings that we realize in respect of the tax attributes with respect to the Continuing Equity Owners that are the subject of the Tax Receivable
Agreement.
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The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract
and retain qualified board members.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-
Oxley Act”) and Nasdaq rules. The requirements of these rules and regulations have increased our legal and financial compliance costs, made
some activities more difficult, time-consuming or costly and have increased demand on our systems and resources. The Exchange Act
requires, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition. The
Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control for
financial reporting. To maintain the effectiveness of our disclosure controls and procedures, we may need to commit significant resources,
retain or hire staff and maintain sufficient management oversight. As a publicly-traded company, we are required to maintain substantial control
systems, policies and procedures to satisfy requirements applicable to public companies, including periodic reporting with the SEC and Nasdaq
obligations. Failure to maintain such control systems, policies and procedures could jeopardize our status as a public company, and the loss of
such status may materially and adversely affect us and our stockholders. In addition, failure to comply with any laws or regulations applicable to
us as a public company may result in legal proceedings and/or regulatory investigations, and may cause reputational damage.
Our failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act
could have a significant and adverse effect on our business, financial condition, results of operations and reputation.
Since the completion of our IPO, we have been subject to a requirement, pursuant to Section 404 of the Sarbanes-Oxley Act, to conduct an
annual review and evaluation of our internal control over financial reporting and furnish a report by management on, among other things, our
assessment of the effectiveness of our internal control over financial reporting each fiscal year beginning with the year following our first annual
report required to be filed with the SEC. However, because we are an emerging growth company, our independent registered public accounting
firm is not required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the earlier
of the fifth year following our first annual report required to be filed with the SEC or the date we are no longer an emerging growth company.
Ensuring that we have adequate internal control over financial reporting in place so that we can produce accurate financial statements on a
timely basis is a costly and time-consuming effort that must be evaluated frequently. Establishing and maintaining these internal controls is and
will continue to be costly and may divert management’s attention.
When evaluating our internal control over financial reporting, we may identify material weaknesses that we may not be able to remediate in
time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act. In
addition, if we fail to achieve and maintain the adequacy of our internal control over financial reporting, as such standards are modified,
supplemented or amended from time to time, we may not be able to ensure that we can conclude, on an ongoing basis, that we have effective
internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. We cannot be certain as to the timing of
completion of our evaluation, testing and any remediation actions or the impact of the same on our operations. If we have not adequately
implemented or complied with the requirements of Section 404 of the Sarbanes-Oxley Act, we may be subject to sanctions or investigation by
regulatory authorities, such as the SEC, or suffer other adverse regulatory consequences, including penalties for violation of Nasdaq rules. As
a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. A
loss of confidence in the reliability of our financial statements also could occur if we or our independent registered public accounting firm were
to report one or more material weaknesses in our internal control over financial reporting. In addition, we may be required to incur costs in
improving our internal control system, including the costs of the hiring of additional personnel. Any such action could negatively affect our
business, financial condition, results of operations and cash flows and could also lead to a decline in the price of our Class A common stock.
35
Certain provisions of Delaware law and anti-takeover provisions in our organizational documents could delay or prevent a change of
control.
Certain provisions of Delaware law and our amended and restated certificate of incorporation and amended and restated bylaws may have
an anti-takeover effect and may delay, defer, or prevent a merger, acquisition, tender offer, takeover attempt, or other change of control
transaction that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price
for the shares held by our stockholders.
These provisions provide for, among other things:
•
•
•
prohibiting the use of cumulative voting for the election of directors;
advance notice for nominations of directors by stockholders and for stockholders to include matters to be considered at our annual
meetings; and
certain limitations on convening special stockholder meetings.
In addition, while we have opted out of Section 203 of the Delaware General Corporation Law, or the “DGCL,” our amended and restated
certificate of incorporation contains similar provisions providing that we may not engage in certain “business combinations” with any “interested
stockholder” for a three-year period following the time that the stockholder became an interested stockholder, unless:
•
•
•
prior to such time, our board of directors (“Board of Directors”) approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder;
upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the votes of our voting stock outstanding at the time the transaction commenced, excluding certain shares; or
at or subsequent to that time, the business combination is approved by our Board of Directors and by the affirmative vote of holders of
at least 66 2/3% of the votes of our outstanding voting stock that is not owned by the interested stockholder.
Generally, a “business combination” includes a merger, asset or stock sale or other transaction resulting in a financial benefit to the
interested stockholder. Subject to certain exceptions, an “interested stockholder” is a person who, together with that person’s affiliates and
associates, owns, or within the previous three years owned, 15% or more of the votes of our outstanding voting stock. For purposes of this
provision, “voting stock” means any class or series of stock entitled to vote generally in the election of directors.
Under certain circumstances, this provision will make it more difficult for a person who would be an “interested stockholder” to effect
various business combinations with our company for a three-year period. This provision may encourage companies interested in acquiring our
company to negotiate in advance with our Board of Directors because the stockholder approval requirement would be avoided if our Board of
Directors approves either the business combination or the transaction that results in the stockholder becoming an interested stockholder. These
provisions also may have the effect of preventing changes in our Board of Directors and may make it more difficult to accomplish transactions
that stockholders may otherwise deem to be in their best interests.
These provisions in our amended and restated certificate of incorporation and amended and restated bylaws may discourage, delay or
prevent a transaction involving a change in control of our company that is in the best interest of our minority stockholders. Even in the absence
of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our Class A common stock if they
are viewed as discouraging future takeover attempts. These provisions could also make it more difficult for stockholders to nominate directors
for election to our Board of Directors and take other corporate actions.
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We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could
otherwise adversely affect holders of our Class A common stock, which could depress the price of our Class A common stock.
Our amended and restated certificate of incorporation authorizes us to issue one or more series of preferred stock. Our Board of Directors
has the authority to determine the preferences, limitations and relative rights of the shares of preferred stock and to fix the number of shares
constituting any series and the designation of such series, without any further vote or action by our stockholders. Our preferred stock can be
issued with voting, liquidation, dividend and other rights superior to the rights of our Class A common stock. The potential issuance of preferred
stock may delay or prevent a change in control of us, discourage bids for our Class A common stock at a premium to the market price, and
materially and adversely affect the market price and the voting and other rights of the holders of our Class A common stock.
Risks Related to Ownership of Our Class A Common Stock
The Continuing Equity Owners own common units in i3 Verticals, LLC, and the Continuing Equity Owners have the right to redeem
their common units in i3 Verticals, LLC pursuant to the terms of the i3 Verticals LLC Agreement for shares of Class A common stock
or cash.
As of September 30, 2019, we have an aggregate of 140,887,958 shares of Class A common stock authorized but unissued, including
12,921,637 shares of Class A common stock issuable, at our election, upon redemption of i3 Verticals, LLC common units that are held by the
Continuing Equity Owners. Subject to certain restrictions contained in the i3 Verticals LLC Agreement the Continuing Equity Owners are
entitled to have their common units redeemed from time to time at each of their options (subject in certain circumstances to time-based and
service-based vesting requirements and other limitations) for newly-issued shares of our Class A common stock on a one-for-one basis or a
cash payment equal to a volume weighted average market price of one share of Class A common stock for each Common Unit redeemed, in
each case, in accordance with the terms of the i3 Verticals LLC Agreement. At our election, however, we may effect a direct exchange by i3
Verticals, Inc. of such Class A common stock or such cash, as applicable, for such common units in lieu of redemption. The Continuing Equity
Owners may exercise such redemption right for as long as their common units remain outstanding. We have also entered into a Registration
Rights Agreement pursuant to which the shares of Class A common stock issued to certain Continuing Equity Owners upon such redemption
and the shares of Class A common stock issued to certain Continuing Equity Owners in connection with the Reorganization Transactions will
be eligible for resale registration, subject to certain limitations set forth in the Registration Rights Agreement.
We cannot predict the size of future issuances of our Class A common stock or the effect, if any, that future issuances and sales of shares
of our Class A common stock may have on the market price of our Class A common stock. Sales or distributions of substantial amounts of our
Class A common stock, including shares issued in connection with an acquisition, or the perception that such sales or distributions could occur,
may cause the market price of our Class A common stock to decline.
Holders of our Class A common stock may be diluted by future issuances of preferred stock or additional Class A common stock or
common units in connection with our incentive plans, acquisitions or otherwise; future sales of such shares in the public market, or
the expectations that such sales may occur, could lower our stock price.
Our amended and restated certificate of incorporation authorizes us to issue shares of our Class A common stock and options, rights,
warrants and appreciation rights relating to our Class A common stock for the consideration and on the terms and conditions established by our
Board of Directors in its sole discretion. We could issue a significant number of shares of Class A common stock in the future in connection with
investments or acquisitions. Any of these issuances could dilute our existing stockholders, and such dilution could be significant. Moreover,
such dilution could have a material adverse effect on the market price for the shares of our Class A common stock.
The future issuance of shares of preferred stock with voting rights may adversely affect the voting power of the holders of shares of our
Class A common stock, either by diluting the voting power of our Class A common stock if the preferred stock votes together with the common
stock as a single class, or by giving the holders of any
37
such preferred stock the right to block an action on which they have a separate class vote, even if the action were approved by the holders of
our shares of our Class A common stock.
The future issuance of shares of preferred stock with dividend or conversion rights, liquidation preferences or other economic terms
favorable to the holders of preferred stock could adversely affect the market price for our Class A common stock by making an investment in
the Class A common stock less attractive. For example, investors in the Class A common stock may not wish to purchase Class A common
stock at a price above the conversion price of a series of convertible preferred stock because the holders of the preferred stock would
effectively be entitled to purchase Class A common stock at the lower conversion price, causing economic dilution to the holders of Class A
common stock.
Sales of shares of our Class A common stock in connection with the Registration Rights Agreement, or the prospect of any such
sales, could materially affect the market price of our Class A common stock and could impair our ability to raise capital through
future sales of equity securities.
In connection with the completion of our IPO, we entered into a Registration Rights Agreement with certain Continuing Equity Owners. Any
sales in connection with the Registration Rights Agreement, or the prospect of any such sales, could materially and adversely impact the
market price of our Class A common stock and could impair our ability to raise capital through future sales of equity securities.
In the future, we may also issue additional securities if we need to raise capital, including, but not limited to, in connection with acquisitions,
which could constitute a material portion of our then-outstanding shares of Class A common stock.
We do not anticipate paying any cash dividends on our Class A common stock in the foreseeable future.
We currently intend to retain our future earnings, if any, for the foreseeable future, to repay indebtedness and to fund the development and
growth of our business. We do not intend to pay any dividends to holders of our Class A common stock in the foreseeable future. Any decision
to declare and pay dividends in the future will be made at the discretion of our Board of Directors taking into account various factors, including
our business, operating results and financial condition, current and anticipated cash needs, plans for expansion, any legal or contractual
limitations on our ability to pay dividends under our Senior Secured Credit Facility or otherwise. As a result, if our Board of Directors does not
declare and pay dividends, the capital appreciation in the price of our Class A common stock, if any, will be the only source of gain on an
investment in our Class A common stock, and holders of our Class A common stock may have to sell some or all of their shares to generate
cash flow from their investment.
In addition, even if we decide in the future to pay any dividends, we are a holding company with no independent operations of our own, and
we depend on distributions from i3 Verticals, LLC to pay taxes, make payments under the Tax Receivable Agreement or pay any cash
dividends on our Class A common stock. Deterioration in the financial conditions, earnings or cash flow of i3 Verticals, LLC and its subsidiaries
for any reason could limit or impair its ability to pay cash distributions or other distributions to us, thereby rendering us unable to pay dividends.
If we fail to meet industry analyst expectations, or analysts downgrade their recommendations regarding our Class A common stock,
its trading price and volume could decline.
Our Class A common stock is traded publicly and various securities analysts follow our company and issue reports on us. These reports
include information about our historical financial results as well as the analysts’ estimates of our future performance. The analysts’ estimates
are based upon their own independent opinions and may be different from our own estimates or expectations. If our operating results are below
the estimates or expectations of public market analysts and investors, the trading price of our Class A common stock could decline. If one or
more of securities and industry analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the
financial markets, which in turn could cause our stock price or trading volume to decline and our Class A common stock to be less liquid.
Moreover, if one or more of the analysts who cover us downgrades our stock or publishes inaccurate or unfavorable research about our
business, or if our results of operations do not meet their expectations, our stock price could decline.
38
Taking advantage of the reduced disclosure requirements applicable to “emerging growth companies” may make our Class A
common stock less attractive to investors.
We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). An
emerging growth company may take advantage of certain reduced disclosure and other requirements that are otherwise generally applicable to
public companies. We have chosen to take advantage of each of these exemptions. The JOBS Act permits an emerging growth company to
take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have
elected not to opt out of such extended transition period, which means that when an accounting standard is issued or revised and it has
different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the
time private companies adopt the new or revised standard. This may make it difficult or impossible because of the potential differences in
accounting standards used to compare our financial statements with the financial statements of a public company that is not an emerging
growth company, or the financial statements of an emerging growth company that has opted out of using the extended transition period. We
could be an emerging growth company until the last day of the fiscal year following the fifth anniversary of our IPO. We cannot predict if
investors will find our Class A common stock less attractive because we elected to rely on these exemptions, or if taking advantage of these
exemptions will result in less active trading or more volatility in the price of our Class A common stock.
Item 1B. Unresolved Staff Comments
None.
39
Item 2. Properties
Our properties consist primarily of office space and call centers. The locations include our corporate headquarters in Nashville, Tennessee
with approximately 10,000 square feet, offices in Murfreesboro, Tennessee with approximately 8,000 square feet, and additional properties in
the following cities, all of which are leased.
Property
Corporate Headquarters
Offices
Offices
Offices
Offices
Offices
Offices
Offices
Offices
Offices
Offices
Offices
Offices
Call Center
Offices
Offices
Call Center
Offices
Offices
Offices
Offices
Offices
Offices
Offices
Offices
Call Center
Location
Nashville, Tennessee
Alexandria, Virginia
Atlanta, Georgia
Canton, Georgia
Canton, Ohio
Cincinnati, Ohio
Gainesville, Florida
Honolulu, Hawaii
Houston, Texas
Jacksonville, Florida
Lake Mary, Florida
Long Beach, California
Madison, Wisconsin
Murfreesboro, Tennessee
New York, New York
Owensboro, Kentucky
San Diego, California
Santa Barbara, California
Shamokin Dam, Pennsylvania
Shreveport, Louisiana
Stevenson Ranch, California
Sulphur Springs, Texas
Tukwila, Washington
Wellington, Florida
Wixom, Michigan
Woodstock, Georgia
For leases that are scheduled to expire during the next 12 months, we may negotiate new lease agreements, renew existing lease
agreements, exercise any respective options to extend the existing lease agreements, or use alternate facilities. We believe our facilities are
adequate for our needs and believe that we should be able to renew any of the above leases or secure similar property without an adverse
impact on our operations.
Item 3. Legal Proceedings
The information required with respect to this item can be found in Note 14 to the accompanying audited consolidated financial statements
contained in this report and is incorporated by reference into this Part I, Item 3.
Item 4. Mine Safety Disclosures
Not applicable.
40
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
On June 21, 2018, our Class A common stock began trading on the Nasdaq Global Select Market under the symbol “IIIV.”
Stockholders
As of November 22, 2019, there were 105 stockholders of record of our Class A common stock. The number of record holders does not
include persons who held shares of our Class A common stock in nominee or “street name” accounts through brokers. As of November 22,
2019, there were 56 stockholders of record of our Class B common stock.
Performance Graph
The following graph shows a comparison of cumulative total shareholder return for (1) our Class A common stock, (2) the S&P 500 Index
and (3) the S&P Information technology Index. The graph begins on June 21, 2018 (the first day our common stock was traded in conjunction
with our IPO). The graph assumes the value of the investment in our common stock and each index was $100.00 on June 21, 2018 and that all
dividends, if any, were reinvested. The comparisons reflected in the graph and table are not intended to forecast the future performance of our
stock and may not be indicative of our future performance.
41
The following table presents the corresponding data for the periods shown in the graph:
June 21, 2018
June 29, 2018
September 30, 2018
December 31, 2018
March 29, 2019
June 28, 2019
September 30, 2019
$
$
$
$
$
$
$
Sales of Unregistered Securities
i3 Verticals, Inc.
S&P 500
S&P 500 Information Technology
100.00 $
117.08 $
176.77 $
185.38 $
184.77 $
226.54 $
154.77 $
100.00 $
98.86 $
105.97 $
91.17 $
103.08 $
106.98 $
108.25 $
100.00
97.44
105.71
87.02
103.87
109.74
113.00
All sales of unregistered securities during the year ended September 30, 2019, have been previously disclosed in either a Quarterly Report
on Form 10-Q or a Current Report on Form 8-K.
Issuer Purchases of Equity Securities
We did not repurchase any shares of our Class A or Class B common stock during the quarter ended September 30, 2019.
Item 6. Selected Financial Data
The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in Part II, Item 7 of this Annual Report on Form 10-K and our consolidated financial statements and related notes
included elsewhere in this report.
(in thousands)
Statement of Operations Data:
Revenue
Interchange and network fees
Other costs of services
Selling general and administrative
Depreciation and amortization
Change in fair value of contingent consideration
Total other expenses
(Benefit from) provision for income taxes
Net income (loss)
Net (loss) income per share of Class A common stock(1):
Basic(2)
Diluted(3)
____________________
1.
Year ended September 30,
2019
2018
2017
$
$
$
$
376,307 $
242,867
44,237
62,860
16,564
3,389
6,004
(177)
563 $
323,508 $
214,543
40,314
40,585
11,839
3,866
16,985
337
(4,961) $
(0.29) $
(0.29) $
0.08
0.08
262,571
189,112
28,798
27,194
10,085
(218)
6,521
177
902
2.
3.
Basic and diluted earnings per Class A common stock is presented only for the period after the Company’s Reorganization Transactions. As such, net income used in the
calculation for the year ended September 30, 2018, represents the net income attributable to Class A common stockholders for the period from June 25, the closing of our
IPO, through September 30, 2018.
Excludes 282,801 and 299,412 restricted Class A common stock units for the years ended September 30, 2019 and 2018, respectively.
For the year ended September 30, 2019, all potentially dilutive securities were anti-dilutive, so diluted net loss per share was equivalent to basic net loss per share. The
following securities were excluded from the weighted average effect of dilutive securities in the computation of diluted earnings per share of Class A common stock:
a.
15,856,855 shares of weighted average Class B common stock for the year ended September 30, 2019, along with the reallocation of net income assuming conversion
of these shares, were excluded because the effect would have been anti-dilutive,
42
b.
c.
626,500 stock options for the year ended September 30, 2019, were excluded because the exercise price of these stock options exceeded the average market price of
our Class A common stock during the period (“out-of-the-money”) and the effect of including them would have been anti-dilutive, and
1,009,858 shares for the year ended September 30, 2019, resulting from estimated stock option exercises as calculated by the treasury stock method, and 282,801
restricted Class A common units for the year ended September 30, 2019 were excluded because the effect of including them would have been anti-dilutive.
(in thousands)
Balance Sheet Data:
Cash and cash equivalents
Total assets
Long-term debt, including current portion
Total liabilities
Total equity
(in thousands)
Cash Flow Data:
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
2019
September 30,
2018
2017
$
1,119 $
572 $
349,302
139,298
206,861
142,441
175,142
36,776
62,944
112,198
955
139,991
110,836
129,122
3,146
Year ended September 30,
2019
2018
2017
26,597
(143,728)
119,094
18,080
(38,055)
19,244
8,330
(47,903)
37,352
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our audited financial
statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-
looking statements as a result of many factors, including but not limited to those under the heading “Risk Factors” in Part I, Item 1A of this
Annual Report on Form 10-K. Certain amounts in this section may not foot due to rounding.
Executive Overview
Recognizing the convergence of software and payments, i3 Verticals was founded in 2012 with the purpose of delivering seamlessly
integrated payment and software solutions to SMBs and organizations in strategic vertical markets. Since commencing operations, we have
built a broad suite of payment and software solutions that address the specific needs of SMBs and other organizations in our strategic vertical
markets, and we believe our suite of solutions differentiates us from our competition. Our primary strategic vertical markets include education,
non-profit, public sector, property management and healthcare.
Initial Public Offering
On June 25, 2018, we completed the IPO of 7,647,500 shares of our Class A common stock at a public offering price of $13.00 per share.
We received approximately $92.5 million of net proceeds, after deducting underwriting discounts and commissions, which we used to purchase
7,264,083 newly issued Common Units from i3 Verticals, LLC (the “Common Units”) for approximately $87.8 million, and 383,417 Common
Units from a selling common unit holder for approximately $4.6 million, in each case at a price per Common Unit equal to the price per share
paid by the underwriters for shares of our Class A common stock in the IPO.
Secondary Offering
On June 10, 2019, we completed a secondary public offering (the “June 2019 Secondary Public Offering”) of 5,165,527 shares of our Class
A common stock, at a public offering price of $22.75 per share, which included a full exercise of the underwriters' option to purchase 673,764
additional shares of Class A Common Stock from us.
43
We received approximately $111.6 million of net proceeds, after deducting underwriting discounts and commissions, but before offering
expenses. We used the net proceeds to purchase (1) 1,000,000 Common Units directly from i3 Verticals, LLC, and (2) 4,165,527 Common
Units (including 673,764 Common Units due to the exercise of the underwriters' option to purchase additional shares in full) and an equivalent
number of Class B common stock (which shares were then canceled) from certain Continuing Equity Owners, in each case at a price per
Common Unit equal to the price per share paid by the underwriters for shares of our Class A common stock in the offering. i3 Verticals, LLC
received $20.9 million in net proceeds from the sale of Common Units to the Company, which it used to repay outstanding indebtedness. In
connection with this offering, we recognized an additional deferred tax asset of $26.2 million related to the Tax Receivable Agreement and a
corresponding liability of $22.2 million.
Acquisitions
Acquisitions during the year ended September 30, 2019
On May 31, 2019, we acquired all the outstanding stock of Pace Payment Systems, Inc. (“Pace”). We acquired Pace to expand our
software offerings, primarily in the public sector and education verticals. The total net purchase consideration was $56.1 million, including $52.5
million in cash consideration, funded by proceeds from our revolving credit facility, $3.3 million of contingent consideration, $0.2 million of
restricted Class A common stock in i3 Verticals and potential additional consideration of up to $20.0 million to be paid based upon the
achievement of certain growth metrics related to the financial performance of Pace in the 24 months from January 1, 2020 through December
31, 2021.
During the year ended September 30, 2019, we also completed the acquisitions of additional unrelated businesses. These acquisitions
expanded our software offerings in the public sector vertical market, provided technology that enhances our Burton Platform and expanded our
merchant base. Total net purchase consideration for these businesses was $98.8 million, which included $89.1 million of cash consideration
funded with proceeds from our revolving credit facility and $9.7 million of contingent consideration.
Acquisitions during the year ended September 30, 2018
On October 31, 2017, we acquired all of the outstanding stock of San Diego Cash Register Company, Inc. (“SDCR, Inc.”). We acquired
SDCR, Inc. to expand our presence within the integrated POS market. The total net purchase consideration was $20.8 million, including $20.0
million in cash consideration, funded by proceeds from our revolving credit facility, $0.7 milling of contingent consideration and $0.1 million of
common units in i3 Verticals, LLC.
During the year ended September 30, 2018, we also completed the acquisitions of additional businesses. These acquisitions expanded the
Company's merchant base. Total net purchase consideration for these businesses was $15.6 million, which included $13.7 million of cash
consideration funded with proceeds from our revolving credit facility and $1.4 million of contingent cash consideration.
The results of operations of these acquired businesses have been included in our financial statements since the applicable acquisition
date. For additional information, see Note 4 to our consolidated financial statements.
Our Revenue and Expenses
Revenues
We generate revenue primarily from payment processing services provided to clients, which principally include but are not limited to
volume-based fees (“discount fees”), and to a lesser extent, software licensing subscriptions, ongoing support and other POS-related solutions
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.
44
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.
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.
How We Assess Our Business
Merchant Services
Our Merchant Services segment provides comprehensive payment solutions to businesses and organizations. Our Merchant Services
segment includes third-party integrated payment solutions as well as traditional payment services across our strategic vertical markets.
Proprietary Software and Payments
Our Proprietary Software and Payments segment delivers embedded payment solutions to our clients through company-owned software.
Payments are delivered through both the payment facilitator model and the traditional merchant processing model. Our Proprietary Software
and Payments clients are primarily in the education, public sector and property management markets.
Other
Our Other category includes corporate overhead expenses, when presenting reportable segment information.
For additional information on our segments, see Note 16 to our 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 years ended September 30, 2019 and 2018 was $13.1 billion and $11.6 billion, respectively, representing a
period-to-period growth rate of 14%. 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.
45
Integrated payments represents 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 50% of
our payment volume for the year ended September 30, 2019 from 43% for the year ended September 30, 2018.
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 year ended September 30, 2019, we experienced
approximately 1% net volume attrition per month.
Results of Operations
Year Ended September 30, 2019 Compared to Year Ended September 30, 2018
The following table presents our historical results of operations for the periods indicated:
(in thousands)
Revenue
Operating expenses
Interchange and network fees
Other costs of services
Selling general and administrative
Depreciation and amortization
Change in fair value of contingent consideration
Total operating expenses
Year ended September 30,
Change
2019
2018
Amount
%
$
376,307 $
323,508 $
52,799
16.3 %
242,867
44,237
62,860
16,564
3,389
369,917
214,543
40,314
40,585
11,839
3,866
311,147
28,324
3,923
22,275
4,725
(477)
58,770
13.2 %
9.7 %
54.9 %
39.9 %
(12.3) %
18.9 %
Income from operations
6,390
12,361
(5,971)
(48.3) %
Other expenses
Interest expense, net
Change in fair value of warrant liability
Total other expenses
6,004
—
6,004
8,498
8,487
16,985
(2,494)
(8,487)
(10,981)
(29.3) %
n/m
(64.7) %
Income (loss) before income taxes
386
(4,624)
5,010
(108.3) %
(Benefit from) provision for income taxes
(177)
337
(514)
(152.5) %
Net income (loss)
563
(4,961)
5,524
Net income attributable to non-controlling interest
3,608
1,937
Net (loss) income attributable to i3 Verticals, Inc.
$
(3,045) $
(6,898) $
1,671
3,853
n/m = not meaningful
n/m
n/m
n/m
46
Revenue
Revenue increased $52.8 million, or 16.3%, to $376.3 million for the year ended September 30, 2019 from $323.5 million for the year
ended September 30, 2018. This increase was principally driven by acquisitions completed during the 2019 and 2018 fiscal years. These
acquisitions contributed an incremental $41.2 million to our revenue for the year ended September 30, 2019. The remaining $11.6 million of
increased revenue was due primarily to an increase in payment volume.
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 $5.4 million, or 30.2%, to $12.4 million for the year
ended September 30, 2019 from $17.8 million for the year ended September 30, 2018. Excluding revenues from the Purchased Portfolios,
revenue grew $58.2 million, or 19.0%, to $363.9 million for the year ended September 30, 2019 from $305.7 million for the year ended
September 30, 2018.
Revenue within Merchant Services increased $33.9 million, or 11.2%, to $336.8 million for the year ended September 30, 2019 from $302.9
million for the year ended September 30, 2018. This increase was principally driven by acquisitions completed during the 2019 and 2018 fiscal
years. These acquisitions contributed an incremental $23.3 million of our revenue within Merchant Services for the year ended September 30,
2019. The remaining $10.6 million of increased revenue was due primarily to an increase in payment volume.
Revenue within Proprietary Software and Payments increased $18.9 million, or 91.9%, to $39.5 million for the year ended September 30,
2019 from $20.6 million for the year ended September 30, 2018. This increase was partially driven by acquisitions completed during the 2019
and 2018 fiscal years. These acquisitions contributed an incremental $17.9 million of our revenue within Proprietary Software and Payments for
the year ended September 30, 2019. The remaining $1.0 million of increased revenue was due primarily to an increase in payment volume.
Payment volume increased $1.6 billion, or 13.8%, to $13.1 billion for the year ended September 30, 2019 from $11.6 billion for the year
ended September 30, 2018.
Interchange and Network Fees
Interchange and network fees increased $28.3 million, or 13.2%, to $242.9 million for the year ended September 30, 2019 from $214.5
million for the year ended September 30, 2018. This increase was principally driven by acquisitions completed during the 2019 and 2018 fiscal
years. These acquisitions contributed an incremental $17.3 million to our interchange and network fees for the year ended September 30,
2019. The remaining $11.0 million of increased interchange and network fees was due primarily to an increase in payment volume.
Interchange and network fees related to the Purchased Portfolios decreased $2.6 million, or 29.3%, to $6.2 million for the year ended
September 30, 2019 from $8.8 million for the year ended September 30, 2018. Excluding interchange and network fees from these Purchased
Portfolios, interchange and network fees grew $30.9 million, or 15.0%, to $236.7 million for the year ended September 30, 2019 from $205.8
million for the year ended September 30, 2018.
Interchange and network fees within Merchant Services increased $26.5 million, or 12.6%, to $236.2 million for the year ended September
30, 2019 from $209.7 million for the year ended September 30, 2018. Interchange and network fees within Proprietary Software and Payments
increased $1.8 million or 38.1%, to $6.7 million for the year ended September 30, 2019 from $4.8 million for the year ended September 30,
2018.
Other Costs of Services
Other costs of services increased $3.9 million, or 9.7%, to $44.2 million for the year ended September 30, 2019 from $40.3 million for the
year ended September 30, 2018. This increase was principally driven by acquisitions completed during the 2019 and 2018 fiscal years. These
acquisitions contributed an incremental $4.1 million to our other costs of services for the year ended September 30, 2019.
47
Other costs of services within Merchant Services increased $2.9 million, or 7.6%, to $41.3 million for the year ended September 30, 2019
from $38.4 million for the year ended September 30, 2018.
Other costs of services within Proprietary Software and Payments increased $1.0 million, or 52.8%, to $2.9 million for the year ended
September 30, 2019 from $1.9 million for the year ended September 30, 2018.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $22.3 million, or 54.9%, to $62.9 million for the year ended September 30, 2019
from $40.6 million for the year ended September 30, 2018. This increase was primarily driven by an increase in employment costs of $16.7
million due to an increase in stock compensation and an increase in headcount resulting from acquisitions. Increases in professional services
and insurance, rent, advertising and marketing expenses, and travel expenses comprised the remainder of the increase.
Depreciation and Amortization
Depreciation and amortization increased $4.7 million, or 39.9%, to $16.6 million for the year ended September 30, 2019 from $11.8 million
for the year ended September 30, 2018. Amortization expense increased $4.3 million to $15.4 million for the year ended September 30, 2019
from $11.0 million for the year ended September 30, 2018 primarily due to greater amortization expense resulting from recent acquisitions,
which was partially offset by lower amortization expense for historical acquisitions due to our accelerated method of amortization. Depreciation
expense increased $0.4 million to $1.2 million for the year ended September 30, 2019 from $0.8 million for the year ended September 30,
2018.
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 $3.4 million for the year ended
September 30, 2019 primarily due to the performance of some of our acquisitions exceeding our expectations. The change in fair value of
contingent consideration for the year ended September 30, 2018 was a charge of $3.9 million.
Interest Expense, net
Interest expense, net, decreased $2.5 million, or 29.3%, to $6.0 million for the year ended September 30, 2019 from $8.5 million for the
year ended September 30, 2018. The decrease reflects a lower average amount of indebtedness outstanding and payment of all of the
outstanding aggregate principal balance and accrued interest on the notes payable to the lenders under our Mezzanine Notes and unsecured
notes payable to related and unrelated creditors in connection with the Reorganization Transactions in the second quarter of fiscal year 2018.
Change in Fair Value of Warrant Liability
The change in fair value of our warrant liabilities corresponds to the value of the warrants issued in connection with our Mezzanine Notes
(as defined below). The change in the fair value of the warrants corresponded with their exercise in June 2018 in conjunction with our IPO. The
change in fair value of the warrant liabilities was a benefit of $8.5 million for the year ended September 30, 2018.
Provision for Income Taxes
The provision for income taxes decreased to a benefit of $0.2 million for the year ended September 30, 2019 from a provision of $0.3
million for the year ended September 30, 2018. The provision for income taxes consists primarily of provisions for state income taxes and, for
certain subsidiaries of i3 Verticals, LLC which are corporations, provisions for federal income taxes. Our effective tax rate was (46)% for the
year ended September 30, 2019. Our effective tax rate differs from the federal statutory rate because significant pre-tax losses related to the
change in the fair value of contingent consideration. 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.
Year Ended September 30, 2018 Compared to Year Ended September 30, 2017
For discussion related to the results of operations for the years ended September 30, 2018 and 2017 refer to Part II, Item 7.
“Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal
year ended September 30, 2018, which was filed with the Securities and Exchange Commission on December 7, 2018.
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Seasonality
We have experienced in the past, and may continue to experience, seasonal fluctuations in our revenues as a result of consumer and
business spending patterns. Revenues during the first quarter of the calendar year, which is our second fiscal quarter, tend to decrease in
comparison to the remaining three quarters of the calendar year on a same store basis. This decrease is due to the relatively higher number
and amount of electronic payment transactions related to seasonal retail events, such as holiday and vacation spending in their second, third
and fourth quarters of the calendar year. The number of business days in a month or quarter also may affect seasonal fluctuations. Revenue in
our education vertical fluctuates with the school calendar. Revenue for our education customers is strongest in August, September, October,
January and February, at the start of each semester, and generally weakens throughout the semester, with little revenue in the summer months
of June and July. Operating expenses show less seasonal fluctuation, with the result that net income is subject to the same seasonal factors as
our revenues. The growth in our business may have partially overshadowed seasonal trends to date, and seasonal impacts on our business
may be more pronounced in the future.
Liquidity and Capital Resources
We have historically financed our operations and working capital through net cash from operating activities. As of September 30, 2019 we
had $1.1 million of cash and cash equivalents and available borrowing capacity of $158.9 million under our Senior Secured Credit Facility. We
usually minimize cash balances by making payments on our revolving credit facility to minimize borrowings and interest expense. As of
September 30, 2019, we had borrowings outstanding of $141.1 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. 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.
Cash Flows
The following table presents a summary of cash flows from operating, investing and financing activities for the following comparative
periods.
Year Ended September 30, 2019 Compared to Year Ended September 30, 2018
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
Year ended September 30,
2019
2018
(in thousands)
$
$
$
26,597 $
(143,728) $
119,094 $
18,080
(38,055)
19,244
Cash Flow from Operating Activities
Net cash provided by operating activities increased $8.5 million to $26.6 million for the year ended September 30, 2019 from $18.1 million
for the year ended September 30, 2018. The increase in net cash provided by operating activities included an increase in net income for the
year ended September 30, 2019, from a net loss for the year ended September 30, 2018, of $5.5 million offset by a $8.5 million increase in the
change in the fair value of warrant liabilities. Depreciation and amortization expense increased $4.7 million, equity-based compensation
increased $4.6 million, and we experienced a reduction of $0.1 million in benefit from income taxes from the revaluation of deferred taxes
related to the federal tax reform enacted on December 22, 2017. These increases were partially offset by a $0.5 million reduction in increases
in non-cash contingent consideration expense from original estimates. Operating assets and liabilities increased $2.8 million, primarily driven
by a $4.8 million decrease in accounts receivable, a $2.7 million increase in deferred revenue and a $0.5 million increase in
49
contingent consideration paid in excess of original estimates, partially offset by a $2.9 million decrease in accounts payable, a $1.8 million
increase in prepaid expenses, a $0.5 million decrease in accrued liabilities and a $0.4 million decrease in other long-term liabilities for the year
ended September 30, 2019 compared to the year ended September 30, 2018.
Cash Flow from Investing Activities
Net cash used in investing activities increased $105.7 million to $143.7 million for the year ended September 30, 2019 from $38.1 million
for the year ended September 30, 2018. The increase in net cash used in investing activities was primarily driven by an increase of $104.7
million in cash used in acquisitions, net of cash acquired, $2.4 million in purchases of merchant portfolios and residual buyouts and $1.1 million
in expenditures for capitalized software. These increases were partially offset by a decrease of $1.4 million in expenditures for property and
equipment and $1.1 million in acquisitions of other intangibles for the year ended September 30, 2019 compared to the year ended September
30, 2018.
Cash Flow from Financing Activities
Net cash provided by financing activities increased $99.9 million to $119.1 million for the year ended September 30, 2019 from $19.2
million for the year ended September 30, 2018. The increase in net cash provided by financing activities was primarily the result of an increase
in proceeds from the revolving credit facility of $161.2 million, a reduction in payments on the revolving credit facility of $43.7 million, proceeds
from the issuance of Class A common stock sold in the offering in June 2019 of $111.7 million, a reduction in payments of notes payable to
mezzanine lenders of $10.5 million and a decrease in payments of unsecured notes payable to related and unrelated creditors of $5.5 million,
The increase in cash provided by financing activities is partially offset by a decrease in proceeds from the issuance of Class A common stock
sold in the initial public offering in June 2018 of $89.5 million, an increase in payments for the purchase of Common Units in i3 Verticals, LLC
from certain Continuing Equity Owners in connection with our June 2019 Secondary Public Offering of $85.4 million, an increase in payments
of notes payable to banks of $30.0 million and a decrease in proceeds from notes payable to banks of $24.7 million for the year ended
September 30, 2019 compared to the year ended September 30, 2018.
Year Ended September 30, 2018 Compared to Year Ended September 30, 2017
For discussion related to the cash flows for the year ended September 30, 2018 compared to the year ended September 30, 2017, refer to
Part II, Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” in
our Annual Report on Form 10-K for the fiscal year ended September 30, 2018, which was filed with the Securities and Exchange Commission
on December 7, 2018.
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Senior Secured Credit Facility
On May 9, 2019, we replaced our then existing credit facility (the “2017 Senior Secured Credit Facility”) with a new Amended and Restated
Credit Agreement with the guarantors and lenders party thereto and Bank of America, N.A., as administrative agent (the “Senior Secured Credit
Facility”). For a discussion of our existing 2017 Senior Secured Credit Facility, which consisted of $40.0 million in term loans and a $110.0
million revolving line of credit, please refer to Note 9 to the accompanying consolidated financial statements in this Annual Report on Form 10-
K. The Senior Secured Credit Facility provides for aggregate commitments of $300.0 million in the form of a senior secured revolving credit
facility.
The Senior Secured Credit Facility provides that we have the right to seek additional commitments to provide additional term loan facilities
or additional revolving credit commitments in an aggregate principal amount up to $50.0 million so long as, among other things, after giving pro
forma effect to the incurrence of such additional borrowings and any related transactions, our consolidated interest coverage ratio would not be
less than 3.00 to 1.0 and our consolidated senior leverage ratio would not exceed the ratios reflected in the schedule below, based on the
applicable quarter and calendar year:
Calendar Year
2019
2020
2021
thereafter
March 31
N/A
3.75 to 1.0
3.75 to 1.0
3.50 to 1.0
June 30
3.75 to 1.0
3.75 to 1.0
3.75 to 1.0
3.50 to 1.0
September 30
3.75 to 1.0
3.75 to 1.0
3.50 to 1.0
3.50 to 1.0
December 31
3.75 to 1.0
3.75 to 1.0
3.50 to 1.0
3.50 to 1.0
The provision of any such additional amounts under the additional term loan facilities or additional revolving credit commitments are subject
to certain additional conditions and the receipt of certain additional commitments by existing or additional lenders. The lenders under the Senior
Secured Credit Facility are not under any obligation to provide any such additional term loan facilities or revolving credit commitments.
The proceeds of the Senior Secured Credit Facility, together with proceeds from any additional amounts under the additional term loan
facilities or additional revolving credit commitments, may only be used by us to (i) finance working capital, capital expenditures and other lawful
corporate purposes, (ii) finance permitted acquisitions and (iii) to refinance certain existing indebtedness.
Borrowings under the Senior Secured Credit Facility will be made, at our option, at the base rate or the Eurodollar rate, plus, in each
case, an applicable margin. The base rate is a fluctuating rate of interest per annum equal to the highest of (a) the federal funds rate plus ½ of
1%, (b) the interest announced from time to time by Bank of America as its prime rate and (c) the Eurodollar rate plus 1%. The Eurodollar rate
will be the rate of interest per annum equal to LIBOR (based upon an interest period of one, two, three or six months or, under some
circumstances, up to twelve months). The applicable margin is based upon our consolidated total leverage ratio, as reflected in the schedule
below:
Consolidated Total Leverage Ratio
> 3.00 to 1.0
> 2.50 to 1.0 but < 3.00 to 1.0
> 2.00 to 1.0 but < 2.50 to 1.0
< 2.00 to 1.0
Commitment Fee
0.30%
0.25%
0.20%
0.15%
Letter of Credit Fee
3.25%
2.75%
2.50%
2.25%
Eurodollar Rate Loans
3.25%
2.75%
2.50%
2.25%
Base Rate Loans
1.25%
0.75%
0.50%
0.25%
In addition to paying interest on outstanding principal under the Senior Secured Credit Facility, we will be required to pay a commitment fee
equal to the product of between 0.15% and 0.30% (the applicable percentage depending on our consolidated total leverage ratio as reflected in
the schedule above) times the actual daily amount by which $300.0 million exceeds the total amount outstanding under the Senior Secured
Credit Facility and available to be drawn under all outstanding letters of credit.
We will be permitted to voluntarily reduce the unutilized portion of the commitment amount and repay outstanding loans under the
Senior Secured Credit Facility, whether such amounts are issued under the Senior
51
Secured Credit Facility or under the additional term loan facilities or additional revolving credit facilities, at any time without premium or penalty.
In addition, if the total amount borrowed under the Senior Secured Credit Facility exceeds $300.0 million at any time, the Senior
Secured Credit Facility requires us to prepay such excess outstanding amounts.
All obligations under the Senior Secured Credit Facility are unconditionally guaranteed by i3 Verticals, Inc., a Delaware corporation,
and each of i3 Verticals, Inc.’s existing and future direct and indirect material, wholly owned domestic restricted subsidiaries, subject to certain
exceptions. The obligations are secured by first-priority security interests in substantially all of our tangible and intangible assets, i3 Verticals,
Inc. and each subsidiary guarantor, in each case whether owned on the date of the initial borrowings or thereafter acquired.
The Senior Secured Credit Facility places certain restrictions on the ability of us, i3 Verticals, Inc. and their restricted subsidiaries to,
among other things, incur debt and liens; merge, consolidate or liquidate; dispose of assets; enter into hedging arrangements; make certain
restricted payments; undertake transactions with affiliates; enter into sale-leaseback transactions; make certain investments; prepay or modify
the terms of certain indebtedness; and modify the terms of certain organizational agreements.
The Senior Secured Credit Facility contains customary events of default, including payment defaults, breaches of representations and
warranties, covenant defaults, cross-defaults to other material indebtedness, certain events of bankruptcy and insolvency, material judgments,
certain ERISA events, invalidity of loan documents and certain changes in control.
We were in compliance with such covenants as of September 30, 2019.
Mezzanine Notes
During 2013, we issued notes payable in the aggregate principal amount of $10.5 million (the “Mezzanine Notes”) to three related creditors
(the “Mezzanine Lenders”). The Mezzanine Notes accrued interest at a fixed annual rate of 12.0%, payable monthly, and were due to mature in
November 29, 2020. The Mezzanine Notes were secured by substantially all of our assets in accordance with the terms of a security
agreement and were subordinate to the Senior Secured Credit Facility.
In June 2018, all of the outstanding aggregate principal balance and accrued interest on the Mezzanine Notes was repaid with proceeds
from our IPO. As part of the extinguishment of the Mezzanine Notes, $0.1 million of unamortized debt issuance costs were written off.
Junior Subordinated Notes
During 2014, we issued notes payable (“Junior Subordinated Notes”) in the aggregate principal amount of $17.6 million to unrelated and
related creditors. The notes accrued interest, payable monthly, at a fixed rate of 10.0% and were due to mature on February 14, 2019. In June
2016, $1.0 million of the Junior Subordinated Notes held by Greg Daily, our CEO, were retired and exchanged for 309,598 Class A units in i3
Verticals, LLC. In July 2017, $0.5 million of the Junior Subordinated Notes held by our CEO were retired and exchanged for 147,929 Class A
units in i3 Verticals, LLC. At September 30, 2017, $16.1 million of the Junior Subordinated Notes remained outstanding. The Junior
Subordinated Notes were subordinate to the Mezzanine Notes and the Senior Secured Credit Facility.
In June 2018, in connection with our IPO and as part of the Reorganization Transactions, we issued 671,167 shares of our Class A
common stock pursuant to a voluntary private conversion of Junior Subordinated Notes by certain related and unrelated creditors of i3
Verticals, LLC. $8.1 million of the Junior Subordinated Notes were converted into newly issued shares of our Class A common stock. Also in
June 2018, the remaining $8.1 million of the Junior Subordinated Notes were repaid with proceeds from our IPO. As part of the extinguishment
of the Junior Subordinated Notes, a nominal amount of unamortized debt issuance costs were written off.
52
Class A Unit Offerings
During July 2017, we raised $12.5 million from the issuance of a total of 3,698,225 Class A units in i3 Verticals, LLC at a price of $3.38 per
unit in a private offering. As noted above, during July 2016, $0.5 million of the Junior Subordinated Notes held by our CEO were converted into
147,929 Class A units at a price of $3.38 per unit. The fair value of the Class A units we issued approximated the carrying amount of the Junior
Subordinated Notes, and we recognized no extinguishment gain or loss.
Contractual Obligations
The following table summarizes our contractual obligations and commitments as of September 30, 2019 related to leases and borrowings:
Contractual Obligations
(in thousands)
Processing minimums(1)
Facility leases
Senior Secured Credit Facility and related
interest(2)
Contingent consideration(3)
Total
Total
Less than 1
year
1 to 3 years
3 to 5 years
More than
5 years
Payments Due by Period
$
10,125 $
10,497
3,733 $
2,581
3,503 $
4,050
2,889 $
2,926
178,102
18,226
7,790
10,223
15,581
8,003
154,731
—
$
216,950 $
24,327 $
31,137 $
160,546 $
—
940
—
—
940
__________________________
1. We have non-exclusive agreements with several processors to provide us services related to transaction processing and transmittal, transaction authorization and data
capture, and access to various reporting tools. Certain of these agreements require us to submit a minimum monthly number of transactions for processing. If we submit a
number of transactions that is lower than the minimum, we are required to pay to the processor the fees it would have received if we had submitted the required minimum
number of transactions.
2. We estimated interest payments through the maturity of our Senior Secured Credit Facility by applying the interest rate of 5.29% in effect on our term loan as of September
3.
30, 2019, plus an unused fee rate of 0.15%.
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.
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 10 of
our consolidated financial statements. As a result of the Tax Receivable Agreement, we have been required to establish a liability in our
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 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.
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As of September 30, 2019, we recognized liabilities related to the Tax Receivable Agreement of $23.2 million.
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 accounting policies generally accepted in the United States of America (“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 accounting policies we believe to be most critical to understanding our financial condition and results of operations are discussed
below. For a list of all significant accounting policies refer to Note 2, “Summary of Significant Accounting Policies” in the notes to the
accompanying consolidated financial statements in this Annual Report.
Emerging Growth Company
Refer to Item 1A, “Risk Factors” for discussion of the reduced disclosure requirements and extended transition period to comply with new
or revised accounting standards applicable to public companies, afforded to us by our status as an “emerging growth company,” as defined in
Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the JOBS Act.
Acquisitions
Business acquisitions have been recorded using the acquisition method of accounting in accordance with Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”), and, accordingly, the purchase price has
been allocated to the assets acquired and liabilities assumed based on their estimated fair value as of the date of acquisition. Where relevant,
the fair value of material contingent consideration included in an acquisition is calculated using a Monte Carlo simulation. The fair value of
merchant relationships and non-compete assets acquired is identified using the Income Approach. The fair value of trade names acquired is
identified using the Relief from Royalty Method. For a discussion of the estimation methodology and the significance of various inputs, please
see the subheading below titled “Use of Estimates.” The fair value of deferred revenue is identified using the Adjusted Fulfillment Cost Method.
After the purchase price has been allocated, goodwill is recorded to the extent the total consideration paid for the acquisition, including the
acquisition date fair value of contingent consideration, if any, exceeds the sum of the fair values of the separately identifiable acquired assets
and assumed liabilities. Acquisition costs for business combinations are expensed when incurred and recorded in selling general and
administrative expenses in the accompanying consolidated statements of operations.
Acquisitions not meeting the accounting criteria to be accounted for as a business combination are accounted for as an asset acquisition.
An asset acquisition is recorded at its purchase price, inclusive of acquisition costs, which is allocated among the acquired assets and
assumed liabilities based upon their relative fair values at the date of acquisition.
The operating results of an acquisition are included in our consolidated statements of operations from the date of such acquisition.
Acquisitions completed during the year ended September 30, 2019 contributed $27.8 million and $2.2 million of revenue and net loss,
respectively, to the results in consolidated statements of operations for the year then ended.
Goodwill
In accordance with ASC 350, Intangibles—Goodwill and Other, we test goodwill for impairment for each reporting unit on an annual basis in
the fourth quarter, or when events or circumstances indicate the fair value of a reporting unit is below its carrying value.
Our goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in business
combinations. The goodwill generated from the business combinations is primarily related to
54
the value placed on the employee workforce and expected synergies. Judgment is involved in determining if an indicator or change in
circumstances relating to impairment has occurred. Such changes may include, among others, a significant decline in expected future cash
flows, a significant adverse change in the business climate, and unforeseen competition. No goodwill impairment charges were recognized
during the years ended September 30, 2019 and 2018.
We have the option of performing a qualitative assessment of impairment to determine whether any further quantitative testing for
impairment is necessary. The option of whether or not to perform a qualitative assessment is made annually and may vary by reporting unit. If
we determine not to perform the qualitative assessment or if we determine, on the basis of qualitative factors, that the fair value of the reporting
unit is more likely than not less than the carrying value, then we perform a quantitative test for that reporting unit. The fair value of each
reporting unit is compared to the reporting unit’s carrying value, including goodwill. Subsequent to the adoption on January 1, 2017 of
Accounting Standards Update (“ASU”) No. 2017-04, Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment, if the fair
value of a reporting unit is less than its carrying value, we recognize an impairment equal to the excess carrying value, not to exceed the total
amount of goodwill allocated to that reporting unit.
For a discussion of the estimation methodology, the qualitative factors considered when performing a qualitative assessment and the
significance of various inputs, please see the subheading below titled “Use of Estimates.”
As of our goodwill impairment test date for the year ended September 30, 2019, we have determined that we have nine reporting units. For
each of the years ended September 30, 2019 and 2018, we performed a quantitative assessment for each reporting unit. We determined that
none of the reporting units were impaired and fair values of all of our reporting units substantially exceeded their carrying values at the
assessment date.
Income Taxes
i3 Verticals, Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from i3 Verticals, LLC
based on i3 Verticals, Inc.'s economic interest in i3 Verticals, LLC. i3 Verticals, LLC's members, including i3 Verticals, Inc., are liable for federal,
state and local income taxes based on their share of i3 Verticals, LLC's pass-through taxable income. i3 Verticals, LLC is not a taxable entity for
federal income tax purposes, but is subject to and reports entity level tax in both Tennessee and Texas. In addition, certain subsidiaries of i3
Verticals, LLC are corporations that are subject to state and federal income taxes.
The amount provided for state income taxes is based upon the amounts of current and deferred taxes payable or refundable at the date of
the consolidated financial statements as a result of all events recognized in the financial statements as measured by the provisions of enacted
tax laws.
Under GAAP, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. We have
no uncertain tax positions that qualify for either recognition or disclosure in the consolidated financial statements.
Valuation of Contingent Consideration
On occasion, we may have acquisitions which include contingent consideration. Accounting for business combinations requires us to
estimate the fair value of any contingent purchase consideration at the acquisition date. For a discussion of the estimate methodology and the
significance of various inputs, please see the subheading below titled “Use of Estimates.” Changes in estimates regarding the fair value
contingent purchase consideration are reflected as adjustments to the related liability and recognized within operating expenses in the
consolidated statements of operations. Short and long-term contingent liabilities are presented within accrued expenses and other current
liabilities and other long-term liabilities on our consolidated balance sheets, respectively.
55
Revenue Recognition and Deferred Revenue
Revenue is recognized when it is realized or realizable and earned, in accordance with ASC 605, Revenue Recognition (“ASC 605”).
Recognition occurs when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or
services have been performed; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectability is reasonably assured. We
accrue for rights of refund, processing errors or penalties, or other related allowances based on historical experience.
The majority of our gross revenue for the years ended September 30, 2019 and 2018 is derived from volume-based payment processing
fees (“discount fees”) and other related fixed transaction or service fees. The remainder is comprised of sales of software licensing
subscriptions, ongoing support, and other POS-related solutions we provide to our clients directly and through its processing bank
relationships.
Discount fees represent a percentage of the dollar amount of each credit or debit transaction processed. Discount fees are recognized at
the time the merchants’ transactions are processed. We follow the requirements of ASC 605-45 Revenue Recognition—Principal Agent
Considerations, in determining our merchant processing services revenue reporting. Generally, where we have control over merchant pricing,
merchant portability, credit risk and ultimate responsibility for the merchant relationship, revenues are reported at the time of sale on a gross
basis equal to the full amount of the discount charged to the merchant. This amount includes interchange fees paid to card issuing banks and
assessments paid to payment card networks pursuant to which such parties receive payments based primarily on processing volume for
particular groups of merchants. Revenues generated from merchant portfolios where we do not have control over merchant pricing, liability for
merchant losses or credit risk or rights of portability are reported net of interchange and other fees.
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. Revenues derived from service fees are
recognized at the time the services are performed and there are no further performance obligations. Revenue from the sale of equipment is
recognized upon transfer of ownership and delivery to the customer, after which there are no further performance obligations.
Revenues from sales of our software licensing subscriptions are recognized when they are realized or realizable and earned. Contractual
arrangements are evaluated for indications that multiple element arrangements may exist, including instances where more-than-incidental
software deliverables are included. Arrangements may contain multiple elements, such as hardware, software products, maintenance, and
professional installation and training services. Revenues are allocated to each element based on the selling price hierarchy. The selling price
for a deliverable is based on vendor specific objective evidence of selling price, if available, third party evidence, or estimated selling price. We
establish estimated selling price, based on the judgment of our management, considering internal factors such as margin objectives, pricing
practices and controls, customer segment pricing strategies and the product life cycle. In arrangements with multiple elements, we determine
allocation of the transaction price at inception of the arrangement based on the relative selling price of each unit of accounting.
In multiple element arrangements where more-than-incidental software deliverables are included, we apply the residual method to
determine the amount of software license revenues to be recognized. Under the residual method, if fair value exists for undelivered elements in
a multiple-element arrangement, such fair value of the undelivered elements is deferred with the remaining portion of the arrangement
consideration recognized upon delivery of the software license or services arrangement. We allocate the fair value of each element of a
software-related multiple-element arrangement based upon its fair value as determined by vendor specific objective evidence of selling price,
with any remaining amount allocated to the software license. If evidence of the fair value cannot be established for the undelivered elements of
a software arrangement, then the entire amount of revenue under the arrangement is deferred until these elements have been delivered or
objective evidence can be established. These amounts, if any, are included in deferred revenue in the consolidated balance sheets. Revenues
related to software licensing subscriptions, maintenance or other support services with terms greater than one month are recognized ratably
over the term of the agreement.
Revenues from sales of our combined hardware and software element are recognized when they are realized or realizable and earned
which has been determined to be upon the delivery of the product. Revenues derived from service fees are recognized at the time the services
are performed and there are no further performance
56
obligations. Our training, installation, and repair services are recognized as revenue as these services are performed.
Deferred revenue represents amounts we have billed to customers for services contracts. The initial prepaid contract agreement balance is
deferred. The balance is then recognized as the services are provided over the contract term. Deferred revenue that is expected to be
recognized as revenue within one year is recorded as short-term deferred revenue and the remaining portion is recorded as other long-term
liabilities in the consolidated balance sheets.
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, with amendments
in 2015, 2016 and 2017, which creates new ASC Topic 606 (“ASU 2014-09”) that will replace most existing revenue recognition guidance in
GAAP when it becomes effective. ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the
transfer of promised goods or services to customers. The new standard will be adopted in our first quarter of fiscal year 2020 with the
cumulative effect recognized as of the date of initial application (modified retrospective transition method).
We currently expect the most significant ongoing impact of adopting the new revenue standard in fiscal year 2020 to be driven by changes
in principal versus agent considerations, with the majority of the change overall in total net revenue attributable to reflecting our interchange
and network fees on a net basis prospectively, as opposed to our gross presentation of $242.9 million in the year ended September 30, 2019.
We do not expect the adoption of the new revenue standard to have a material impact on net income. We will include additional disclosures of
the amount by which each consolidated financial statement line item is affected during fiscal year 2020, as compared to the guidance that was
in effect before the change, and an explanation of the reasons for any significant changes.
Refer to Note 2, “Summary of Significant Accounting Policies” in the notes to the accompanying consolidated financial statements for
additional information on our revenue recognition policy and ASU 2014-09.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include, but are not
limited to, the value of purchase consideration paid and identifiable assets acquired and assumed in acquisitions, goodwill and intangible asset
impairment review, warrant valuation, revenue recognition for multiple element arrangements, loss reserves, assumptions used in the
calculation of equity-based compensation and in the calculation of income taxes, and certain tax assets and liabilities as well as the related
valuation allowances. Actual results could differ from those estimates.
Below is a summary of our critical accounting estimates for which the nature of management’s assumptions are material due to the levels
of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and for which the
impact of the estimates and assumptions on financial condition or operating performance is material.
Contingent Consideration in Acquisitions
On occasion, we may have acquisitions that include contingent consideration. Accounting for business combinations requires us to
estimate the fair value of any contingent purchase consideration at the acquisition date. Where relevant, the fair value of material contingent
consideration included in an acquisition is calculated using a Monte Carlo simulation.
The contingent consideration is revalued each period until it is settled. Management reviews the historical and projected performance of
each acquisition with contingent consideration and uses an income probability method to revalue the contingent consideration. The revaluation
requires management to make certain assumptions and represent management's best estimate at the valuation date. The probabilities are
determined based on a management review of the expected likelihood of triggering events that would cause a change in the contingent
consideration paid. For example, if management’s forecasted performance for an acquisition increased, we would
57
have anticipated a higher probability of contingent consideration being paid on the acquisition and would have recorded additional losses from
the change in fair value of contingent consideration. Conversely, if management’s forecasted performance for an acquisition decreased, we
would have anticipated a higher probability of contingent consideration being paid on the acquisition and would have recorded a gain from
change in fair value of contingent consideration.
Goodwill
We test goodwill for impairment using a fair value approach at least annually, absent some triggering event that would require an interim
impairment assessment. Absent any impairment indicators, we perform our goodwill impairment testing as of July 1 each year.
In our goodwill impairment review, we use significant estimates and assumptions that include the identification of reporting units, assigning
assets and liabilities to reporting units, assigning goodwill to reporting units and determining the fair value of each reporting unit. Our
assessment of qualitative factors involves significant judgments about expected future business performance and general market conditions. In
a quantitative assessment, the fair value of each reporting unit is determined based on a combination of techniques, including the present value
of future cash flows, applicable multiples of competitors and multiples from sales of like businesses, and requires management to make
estimates and assumptions regarding discount rates, growth rates and our future long-term business plans. Changes in any of these estimates
or assumptions could materially affect the determination of fair value and the associated goodwill impairment charge for each reporting unit. For
example, if management’s forecasted earnings decreased for a reporting unit, we may have recorded an impairment loss for that reporting unit.
Warrant Valuation
As of September 30, 2017 there were in the aggregate $1.4 million of warrants (the “Mezzanine Warrants”) outstanding and exercisable to
purchase common units in i3 Verticals, LLC related to the issuance of the Mezzanine Notes. The Mezzanine Warrants were mandatorily
redeemable and embodied a conditional obligation to redeem the instrument by a transfer of assets. The Mezzanine Warrants were
remeasured at each reporting date through the settlement of the instrument and changes in value were reflected in earnings.
We used the Black-Scholes option pricing model to determine the fair market value of the Mezzanine Warrants at each reporting period.
The option pricing model required the input of highly subjective assumptions, including the estimated enterprise value of the Company,
expected term of the warrants, expected volatility, risk-free interest rates and discount for lack of marketability. To determine the fair value of the
Mezzanine Warrants, we engaged an outside consultant to prepare a valuation of the unit price at each reporting date, using information
provided by management and information obtained from private and public sources. The fair market value of the warrants was $0.8 million as
of September 30, 2017.
We used an expected volatility based on the historical volatilities of a group of guideline companies and estimated a liquidity event in June
2018 to determine the term of the warrants. The risk-free interest rates were obtained from publicly available U.S. Treasury yield curve rates.
The discount for lack of marketability was determined using the Finnerty Model.
Based on our analysis, the most highly sensitive input in our option pricing model related to management’s forecasted earnings. For
example, if management’s forecasted earnings increased, we would have recorded additional losses from the change in fair value of warrant
liability. Conversely, if management’s forecasted earnings decreased, we would have recorded a gain from change in fair value of warrant
liability. Other inputs, such as expected volatility and the risk free interest rate, had a less material impact of the valuation of the warrant liability.
The change in fair value of the warrant liabilities was an increase of $8.5 million and a reduction of $0.4 million for the years ended
September 30, 2018 and 2017, respectively.
The fair market value of the warrants was $0.8 million as of September 30, 2017. On June 25, 2018, in conjunction with the Reorganization
Transactions described in Note 1 to our consolidated financial statements, all
58
existing Mezzanine Warrants were exercised for common units in i3 Verticals, LLC. See Note 9 to our consolidated financial statements for
additional discussion of the Mezzanine Warrants.
Related Parties
Transactions involving related parties cannot be presumed to be carried out at an arm's length- basis, as the requisite conditions of
competitive, free-dealing markets may not exist. A description of related-party transactions is provided in Note 15 in our audited consolidated
financial statements.
Recently Issued Accounting Pronouncements
Refer to Note 2, “Summary of Significant Accounting Policies” in the notes to the accompanying consolidated financial statements for
further discussion.
Off-Balance Sheet Arrangements
As of September 30, 2019, we did not have any off-balance sheet financing arrangements.
Effects of Inflation
While inflation may impact our revenues and cost of services, we believe the effects of inflation, if any, on our results of operations and
financial condition have not been significant. However, there can be no assurance that our results of operations and financial condition will not
be materially impacted by inflation in the future.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Senior Secured Credit Facility consists of a $300.0 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 up to 3.25% (3.25% as of September 30, 2019), 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 up to 1.25% (1.25% as of September 30, 2019), 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 the Company to pay unused commitment fees of
up to 0.30% (0.30% as of September 30, 2019) 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. As of September 30, 2019, there was $158.9 million available for borrowing under the revolving credit
facility.
As of September 30, 2019, we had borrowings outstanding of $141.1 million under the Senior Secured Credit Facility. A 1.0% increase or
decrease in the interest rate applicable to such borrowing (which is the LIBOR rate) would have a $1.4 million impact on the results of the
business.
Foreign Currency Exchange Rate Risk
Invoices for our services are denominated in U.S. dollars. We do not expect our future operating results to be significantly affected by
foreign currency transaction risk.
59
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
i3 Verticals, Inc. and its Subsidiaries
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of September 30, 2019 and September 30, 2018
Consolidated Statements of Operations for the Years Ended September 30, 2019, 2018 and 2017
Consolidated Statements of Changes in Equity (Deficit) for the Years Ended September 30, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended September 30, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
Page
61
62
63
64
67
69
60
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
i3 Verticals, Inc.
Nashville, Tennessee
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of i3 Verticals, Inc. (the “Company”) and subsidiaries as of September 30,
2019 and 2018, the related consolidated statements of operations, changes in equity, and cash flows for each of the three years in the period
ended September 30, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at September
30, 2019 and 2018, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2019,
in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or
fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of
our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2016.
Nashville, Tennessee
November 22, 2019
61
i3 Verticals, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
Assets
Current assets
Cash and cash equivalents
Accounts receivable, net
Settlement assets
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Restricted cash
Capitalized software, net
Goodwill
Intangible assets, net
Deferred tax asset
Other assets
Total assets
Liabilities and equity
Liabilities
Current liabilities
Accounts payable
Current portion of long-term debt
Accrued expenses and other current liabilities
Settlement obligations
Deferred revenue
Total current liabilities
Long-term debt, less current portion and debt issuance costs, net
Long-term tax receivable agreement obligations
Other long-term liabilities
Total liabilities
Commitments and contingencies (see Note 14)
Stockholders' equity
Preferred stock, par value $0.0001 per share, 10,000,000 shares authorized; 0 shares issued and outstanding as of
September 30, 2019 and 2018
Class A common stock, par value $0.0001 per share, 150,000,000 shares authorized; 14,444,115 and 9,112,042 shares
issued and outstanding as of September 30, 2019 and 2018, respectively
Class B common stock, par value $0.0001 per share, 40,000,000 shares authorized; 12,921,637 and 17,213,806 shares
issued and outstanding as of September 30, 2019 and 2018, respectively
Additional paid-in-capital
Accumulated (deficit) earnings
Total stockholders' equity
Non-controlling interest
Total equity
Total liabilities and stockholders' equity
See Notes to the Consolidated Financial Statements
62
September 30,
2019
2018
$
1,119 $
15,335
—
4,117
20,571
5,026
2,081
15,454
168,284
107,419
28,138
2,329
572
12,500
863
2,630
16,565
2,958
665
3,372
83,954
66,023
1,152
453
$
$
$
349,302 $
175,142
3,438 $
—
21,560
—
10,237
35,235
139,298
23,204
9,124
206,861
—
1
1
82,380
(2,309)
80,073
62,368
142,441
349,302 $
4,114
5,000
11,538
863
4,927
26,442
31,776
791
3,935
62,944
—
1
2
38,562
736
39,301
72,897
112,198
175,142
i3 Verticals, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
Revenue
Operating expenses
Interchange and network fees
Other costs of services
Selling general and administrative
Depreciation and amortization
Change in fair value of contingent consideration
Total operating expenses
Income from operations
Other expenses
Interest expense, net
Change in fair value of warrant liability
Total other expenses
Year ended September 30,
2019
2018
2017
$
376,307 $
323,508 $
262,571
242,867
44,237
62,860
16,564
3,389
369,917
214,543
40,314
40,585
11,839
3,866
311,147
189,112
28,798
27,194
10,085
(218)
254,971
6,390
12,361
7,600
6,004
—
6,004
8,498
8,487
16,985
6,936
(415)
6,521
Income (loss) before income taxes
386
(4,624)
1,079
(Benefit from) provision for income taxes
(177)
337
Net income (loss)
Net income attributable to non-controlling interest
Net (loss) income attributable to i3 Verticals, Inc.
Net (loss) income per share attributable to Class A common stockholders(1):
Basic
Diluted
Weighted average shares of Class A common stock outstanding(1):
Basic
Diluted
$
$
$
563
(4,961)
3,608
(3,045) $
1,937
(6,898) $
(0.29) $
(0.29) $
0.08
0.08
10,490,981
10,490,981
8,812,630
26,873,878
177
902
—
902
__________________________
1.
Basic and diluted net income per Class A common stock are presented only for the period after the Company’s Reorganization Transactions. See Note 1 for a description of
the Reorganization Transactions. See Note 18 for the calculation of income per common share.
See Notes to the Consolidated Financial Statements
63
i3 Verticals, Inc.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(In thousands, except share amounts)
Class A Units Common Units Class P Units
Accumulated
Members'
Deficit
Total Equity
Balance at September 30, 2016
Preferred returns on Class A Units
Preferred returns on Redeemable Class A Units
Issuance of Class A Units
Issuance of Common Units
Distributions to members
Equity issuance costs
Net income
$
19,765 $
2,223
—
13,000
—
—
(64)
—
965 $
—
—
—
275
—
—
—
Balance at September 30, 2017
$
34,924 $
1,240 $
— $
—
—
—
—
—
—
—
— $
(30,240) $
(2,223)
(701)
—
—
(756)
—
902
(33,018) $
(9,510)
—
(701)
13,000
275
(756)
(64)
902
3,146
See Notes to the Consolidated Financial Statements
64
Balance at September 30,
2017
Preferred returns on Class A
Units
Preferred returns on
Redeemable Class A Units
Issuance of Common Units
Net loss prior to the
Reorganization Transactions
Exercise of Junior
Subordinated Notes
Warrants and Mezzanine
Warrants
Equity based compensation
recognized prior to the
Reorganization Transactions
Effect of the Reorganization
Transactions
Issuance of Class A
common stock in conversion
of Junior Subordinated
Notes
Sale of Class A common
stock in initial public offering,
net
Purchase of common units
in i3 Verticals, LLC from
selling shareholder
Capitalization of initial public
offering costs
Establishment of liabilities
under tax receivable
agreement and related
changes to deferred tax
assets associated with
increases in tax basis
Non-controlling interests
related to purchase of
Common Units in i3
Verticals, LLC
Issuance of Class A
common stock
Equity based compensation
recognized subsequent to
the Reorganization
Transactions
Forfeitures of restricted
Class A common stock
Net income subsequent to
the Reorganization
Transactions
Balance at September 30,
2018
i3 Verticals, Inc.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (CONTINUED)
(In thousands, except share amounts)
Class A
Units
Common
Units
Class P
Units
Class A Common Stock
Class B Common Stock
Shares
Amount
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Members'
Deficit
Retained
Earnings
Non-
Controlling
Interest
Total Equity
$ 34,924 $ 1,240 $ —
— $ —
— $ — $
— $ (33,018) $ — $
— $
3,146
2,522
—
—
—
—
—
—
—
(2,522)
—
—
104
—
—
—
—
—
—
—
—
—
—
—
—
(552)
—
—
—
—
—
—
—
(552)
104
—
—
—
—
—
—
—
(7,634)
—
—
(7,634)
—
—
—
—
12,218
—
—
—
—
—
(145)
—
—
—
12,073
—
—
—
—
—
—
—
38
—
—
—
38
(37,446)
(13,562)
—
824,861
— 17,597,223
2
804
43,726
—
15,493
9,017
—
—
—
619,542
—
—
—
8,054
—
—
—
8,054
—
—
— 7,647,500
1
—
—
92,446
—
—
—
92,447
—
—
—
—
—
—
(383,417)
—
—
—
—
(4,635)
(4,635)
—
—
—
—
—
—
(4,015)
—
—
—
(4,015)
—
—
—
—
—
—
—
144
—
—
—
144
—
—
—
—
—
—
—
—
—
—
(60,102)
—
—
60,102
—
—
—
27,840
—
—
—
550
—
—
—
550
—
—
—
—
—
—
788
—
—
—
—
(7,701)
—
—
—
—
—
—
—
—
788
—
—
—
—
—
—
—
—
—
—
736
1,937
2,673
$
— $ — $ — 9,112,042 $
1 17,213,806 $
2 $ 38,562 $
— $ 736 $ 72,897 $ 112,198
See Notes to the Consolidated Financial Statements
65
i3 Verticals, Inc.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (CONTINUED)
(In thousands, except share amounts)
Balance at September 30, 2018
9,112,042 $
1 17,213,806 $
2 $
38,562 $
— $
736 $
72,897 $ 112,198
Class A Common Stock
Class B Common Stock
Shares
Amount
Shares
Amount
Additional
Paid-In Capital
Accumulated
Members'
Deficit
Retained
Earnings
(Deficit)
Non-
Controlling
Interest
Total Equity
Equity-based compensation
Forfeitures of restricted Class A common
stock
Net (loss) income
Distributions to non-controlling interest
holders
Redemption of common units in i3
Verticals, LLC
Sale of Class A common stock in public
offering, net
Capitalization of public offering costs
Establishment of liabilities under a tax
receivable agreement and related changes
to deferred tax assets associated with
increases in tax basis
Issuance of restricted Class A common
stock under Equity Plan
Exercise of equity-based awards
Balance at September 30, 2019
—
(36,113)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
6,124
—
—
—
4,292,169
—
(4,292,169)
(1)
12,077
1,000,000
—
—
8,799
67,218
—
—
—
—
—
—
—
—
—
—
—
—
21,660
(899)
—
—
—
3,959
225
672
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(3,045)
3,608
6,124
—
563
—
(2,060)
(2,060)
—
(12,077)
(1)
—
—
—
—
—
—
—
21,660
(899)
—
—
—
3,959
225
672
14,444,115 $
1 12,921,637 $
1 $
82,380 $
— $
(2,309) $
62,368 $ 142,441
See Notes to the Consolidated Financial Statements
66
i3 Verticals, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
Equity-based compensation
Provision for doubtful accounts
Amortization of deferred financing costs
Debt extinguishment costs
Loss on disposal of assets
Provision for (benefit from) deferred income taxes
Non-cash change in fair value of warrant liability
Increase (decrease) in non-cash contingent consideration expense from original
estimate
Changes in operating assets:
Accounts receivable
Prepaid expenses and other current assets
Other assets
Changes in operating liabilities:
Accounts payable
Accrued expenses and other current liabilities
Deferred revenue
Other long-term liabilities
Contingent consideration paid in excess of original estimates
Net cash provided by operating activities
Cash flows from investing activities:
Expenditures for property and equipment
Expenditures for capitalized software
Purchases of merchant portfolios and residual buyouts
Acquisitions of businesses, net of cash acquired
Acquisition of other intangibles
Net cash used in investing activities
Year ended September 30,
2019
2018
2017
$
563 $
(4,961) $
902
16,564
6,124
30
721
152
8
(586)
—
3,389
2,430
(817)
(2,769)
(1,768)
1,572
2,588
(44)
(1,560)
26,597
(807)
(2,227)
(3,586)
(137,036)
(72)
(143,728)
11,839
1,567
14
1,072
—
5
(682)
8,487
3,866
(2,321)
1,017
(3,182)
1,172
2,040
(123)
362
(2,092)
18,080
(2,217)
(1,092)
(1,207)
(32,362)
(1,177)
(38,055)
10,085
—
216
453
—
44
56
(415)
(218)
(2,432)
305
9
(384)
1,515
388
40
(2,234)
8,330
(636)
(1,452)
(1,632)
(44,175)
(8)
(47,903)
See Notes to the Consolidated Financial Statements
67
i3 Verticals, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Cash flows from financing activities:
Proceeds from revolving credit facility
Payments of revolving credit facility
Proceeds from notes payable to banks
Payments of notes payable to banks
Payment of notes payable to Mezzanine Lenders
Payment of unsecured notes payable to related and unrelated creditors
Payment of debt issuance costs
Proceeds from the exercise of Mezzanine Warrants and Junior Subordinated Notes
Warrants
Proceeds from issuance of Class A common stock sold in public offering, net of
underwriting discounts and offering costs
Proceeds from issuance of Class A common stock sold in initial public offering, net of
underwriting discounts and offering costs
Payments for Common Units in i3 Verticals, LLC from selling shareholders
Proceeds from the issuance of Class A Units
Payment of equity issuance costs for Class A unit issuances
Cash paid for contingent consideration
Required distributions to members for tax obligations
Proceeds from stock option exercises
Net cash provided by financing activities
Net increase (decrease) in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash at beginning of period
Cash, cash equivalents, and restricted cash at end of period
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for income taxes
$
$
$
Year ended September 30,
2019
2018
2017
188,491
(51,867)
—
(35,000)
—
—
(168)
—
111,687
—
(90,027)
—
—
(2,634)
(2,060)
672
119,094
1,963
1,237
27,250
(95,600)
24,671
(5,000)
(10,486)
(5,489)
(266)
270
—
89,506
(4,635)
—
—
(977)
—
—
19,244
(731)
1,968
3,200 $
1,237 $
56,500
(23,900)
—
(5,000)
—
—
(254)
—
—
—
—
12,500
(64)
(966)
(1,464)
—
37,352
(2,221)
4,189
1,968
4,911 $
1,420 $
7,881 $
483 $
6,288
837
See Notes to the Consolidated Financial Statements
68
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
1. ORGANIZATION AND OPERATIONS
i3 Verticals, Inc. (the “Company”) was formed as a Delaware corporation on January 17, 2018. The Company was formed for the purpose
of completing an initial public offering (“IPO”) of its Class A common stock and other related transactions in order to carry on the business of i3
Verticals, LLC and its subsidiaries. i3 Verticals, LLC was founded in 2012 and delivers seamlessly integrated payment and software solutions to
small- and medium-sized businesses (“SMBs”) and organizations in strategic vertical markets. The Company’s headquarters are in Nashville,
Tennessee, with operations throughout the United States. Unless the context otherwise requires, references to “we,” “us,” “our,” “i3 Verticals”
and the “Company” refer to i3 Verticals, Inc. and its subsidiaries, including i3 Verticals, LLC.
Initial Public Offering
On June 25, 2018, the Company completed the IPO of 7,647,500 shares of its Class A common stock at a public offering price of $13.00
per share. The Company received approximately $92.5 million of net proceeds, after deducting underwriting discounts and commissions, which
the Company used to purchase newly issued common units from i3 Verticals, LLC (the “Common Units”), and Common Units from a selling
Common Unit holder, 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 IPO.
Reorganization Transactions
In connection with the IPO, the Company completed the following transactions (the “Reorganization Transactions”):
•
•
•
•
i3 Verticals, LLC amended and restated its existing limited liability company agreement to, among other things, (1) convert all existing
Class A units, common units (including common units issued upon the exercise of existing warrants) and Class P units of ownership
interest in i3 Verticals, LLC into either Class A voting common units of i3 Verticals, LLC (such holders of Class A voting common units
referred to herein as the “Continuing Equity Owners”) or Class B non-voting common units of i3 Verticals, LLC (such holders of Class B
non-voting common units referred to herein as the “Former Equity Owners”), and (2) appoint i3 Verticals, Inc. as the sole managing
member of i3 Verticals, LLC upon its acquisition of Common Units in connection with the IPO;
the Company amended and restated its certificate of incorporation to provide for, among other things, Class A common stock and
Class B common stock;
i3 Verticals, LLC and the Company consummated a merger among i3 Verticals, LLC, i3 Verticals, Inc. and a newly formed wholly-
owned subsidiary of i3 Verticals, Inc. (“MergerSub”) whereby: (1) MergerSub merged with and into i3 Verticals, LLC, with i3 Verticals,
LLC as the surviving entity; (2) Class A voting common units converted into newly issued Common Units in i3 Verticals, LLC together
with an equal number of shares of Class B common stock of i3 Verticals, Inc., and (3) Class B non-voting common units converted into
Class A common stock of i3 Verticals, Inc. based on a conversion ratio that provided an equitable adjustment to reflect the full value of
the Class B non-voting common units; and
the Company issued shares of its Class A common stock pursuant to a voluntary private conversion of certain subordinated notes (the
“Junior Subordinated Notes”) by certain related and unrelated creditors of i3 Verticals, LLC.
69
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Following the completion of the IPO and Reorganization Transactions, the Company became a holding company and its principal asset is
the Common Units in i3 Verticals, LLC that it owns. i3 Verticals, Inc. operates and controls all of i3 Verticals, LLC's operations and, through i3
Verticals, LLC and its subsidiaries, conducts i3 Verticals, LLC's business. i3 Verticals, Inc. has a minority economic interest in i3 Verticals, LLC.
Public Offering
On June 10, 2019, the Company completed a secondary public offering (the “June 2019 Secondary Public Offering”) of 5,165,527 shares
of its Class A common stock, at a public offering price of $22.75 per share, which included a full exercise of the underwriters' option to
purchase 673,764 additional shares of Class A Common Stock from the Company. The Company received approximately $111,640 of net
proceeds, after deducting underwriting discounts and commissions, but before offering expenses. The Company used the net proceeds to
purchase (1) 1,000,000 Common Units directly from i3 Verticals, LLC, and (2) 4,165,527 Common Units (including 673,764 Common Units due
to the exercise of the underwriters' option to purchase additional shares in full) and an equivalent number of Class B common stock (which
shares were then canceled) from certain Continuing Equity Owners, in each case at a price per Common Unit equal to the price per share paid
by the underwriters for shares of our Class A common stock in the offering. i3 Verticals, LLC received $20,870 in net proceeds from the sale of
Common Units to the Company, which it used to repay outstanding indebtedness.
•
•
•
As of September 30, 2019, i3 Verticals, Inc. owned 52.8% of the economic interest in i3 Verticals, LLC.
As of September 30, 2019, the Continuing Equity Owners owned Common Units in i3 Verticals, LLC representing approximately 47.2%
of the economic interest in i3 Verticals, LLC, shares of Class A common stock in the Company representing approximately 1.0% of the
economic interest and voting power in the Company, and shares of Class B common stock in i3 Verticals, Inc., representing
approximately 47.2% of the voting power in the Company.
The Continuing Equity Owners who own Common Units in i3 Verticals, LLC may redeem at each of their options (subject in certain
circumstances to time-based vesting requirements) their Common Units for, at the election of i3 Verticals, LLC, cash or newly-issued
shares of the Company's Class A common stock.
• Combining the Class A common stock and Class B common stock, the Continuing Equity Holders hold approximately 48.2% of the
economic interest and voting power in i3 Verticals, Inc.
i3 Verticals, Inc. is the sole managing member of i3 Verticals, LLC and as a result, consolidates the financial results of i3 Verticals, LLC and
reports a non-controlling interest representing the Common Units of i3 Verticals, LLC held by the Continuing Equity Owners.
As the Reorganization Transactions are considered transactions between entities under common control, the financial statements
retroactively reflect the accounts of i3 Verticals, LLC for periods prior to the IPO and Reorganization Transactions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in
the United States of America (“GAAP”) and pursuant to the reporting and disclosure rules and regulations of the Securities and Exchange
Commission (“SEC”).
Principles of Consolidation
These consolidated financial statements include the accounts of the Company and its subsidiary companies. All significant intercompany
accounts and transactions have been eliminated in consolidation.
70
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers cash on hand, checking accounts, and savings accounts to be cash and
cash equivalents. At times, the balance in these accounts may exceed federal insured limits. Cash equivalents are defined as financial
instruments readily transferrable into cash with an original maturity less than 90 days.
Restricted Cash
Restricted cash represents funds held-on-deposit with processing banks pursuant to agreements to cover potential merchant losses. It is
presented as long-term assets on the accompanying consolidated balance sheets since the related agreements extend beyond the next twelve
months. Following the adoption of Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows: Restricted Cash (Topic 230), the
Company includes restricted cash along with the cash and cash equivalents balance for presentation in the consolidated statements of cash
flows. The reconciliation between the consolidated balance sheet and the consolidated statement of cash flows is as follows:
Cash and cash equivalents on consolidated balance sheet
Restricted cash
Total cash, cash equivalents and restricted cash on consolidated statement of cash flows $
$
1,119 $
2,081
3,200 $
572
665
1,237
September 30, 2019
September 30, 2018
Accounts Receivable and Credit Policies
Accounts receivable consist primarily of uncollateralized credit card processing residual payments due from processing banks requiring
payment within thirty days following the end of each month. Accounts receivable also include amounts due from the sales of the Company’s
technology solutions to its customers. The carrying amount of accounts receivable is reduced by an allowance for doubtful accounts, if
necessary, which reflects management’s best estimate of the amounts that will not be collected. The allowance is estimated based on
management’s knowledge of its customers, historical loss experience and existing economic conditions. Accounts receivable and the
allowance are written-off when, in management’s opinion, all collection efforts have been exhausted. The Company’s allowance for doubtful
accounts was $232 and $205 as of September 30, 2019 and 2018, respectively; however, actual write-offs may exceed estimated amounts.
Settlement Assets and Obligations
Settlement assets and obligations result when funds are temporarily held or owed by the Company on behalf of merchants, consumers,
schools, and other institutions. Timing differences, interchange expense, merchant reserves and exceptional items cause differences between
the amount received from the card networks and the amount funded to counterparties. These balances arising in the settlement process are
reflected as settlement assets and obligations on the accompanying consolidated balance sheets. With the exception of merchant reserves,
settlement assets or settlement obligations are generally collected and paid within one to four days. As of September 30, 2019, the Company
had no remaining settlement assets or settlement obligations. As of September 30, 2018, settlement assets and settlement obligations were
both $863.
Inventories
Inventories consist of point-of-sale equipment to be sold to customers and are stated at the lower of cost, determined on a weighted
average basis, or net realizable value. Inventories were $1,294 and $930 at September 30, 2019 and 2018, respectively, and are included
within prepaid expenses and other current assets on the accompanying consolidated balance sheets.
71
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Property and Equipment
Property and equipment are stated at cost or, if acquired through a business combination or an asset acquisition, fair value at the date of
acquisition. Depreciation and amortization are provided over the assets’ estimated useful lives (or, if obtained in connection with a business
acquisition, over their estimated remaining useful lives) using the straight-line method, except for leasehold improvements, which are
depreciated over the shorter of the estimated useful lives of the assets or the lease term.
Expenditures for maintenance and repairs are expensed when incurred. Expenditures for renewals or betterments are capitalized.
Management reviews long-lived assets for impairment when events or changes in circumstances indicate the carrying amount of an asset may
not be recoverable. The Company recognizes impairment when the sum of undiscounted estimated future cash flows expected to result from
the use of the asset is less than the carrying value of the asset. There were no impairment charges during the years ended September 30,
2019, 2018 and 2017.
Capitalized Software
Development costs for software to be sold or leased to customers are capitalized once technological feasibility of the software product has
been established. Costs incurred prior to establishing technological feasibility are expensed as incurred. Technological feasibility is established
when the Company has completed a detailed program design and has determined that a product can be produced to meet its design
specifications, including functions, features and technical performance requirements. Capitalization of costs ceases when the product is
generally available to clients. Software development costs are amortized using the greater of the straight-line method or the usage method over
its estimated useful life, which is generally estimated to be three years.
Software development costs may become impaired in situations where development efforts are abandoned due to the viability of a planned
project becoming doubtful or due to technological obsolescence of a planned software product. Management evaluates the remaining useful
lives and carrying values of capitalized software at least annually or when events and circumstances warrant such a review, to determine
whether significant events or changes in circumstances indicate that impairment in value may have occurred. To the extent estimated net
realizable values, which are estimated to equal future undiscounted cash flows, exceed the carrying value, no impairment is necessary. If
estimated net realizable values are less than the carrying values, an impairment charge is recorded. Impairment charges during the years
ended September 30, 2019, 2018 and 2017 were nominal.
Identifiable software technology intangible assets resulting from acquisitions are amortized using the straight-line method over periods not
exceeding their remaining estimated useful lives. GAAP requires that intangible assets with estimated useful lives be amortized over their
respective estimated useful lives to their residual values, and reviewed for impairment. Acquisition technology intangibles’ net book values are
included in capitalized software, net in the accompanying consolidated balance sheets.
Acquisitions
Business acquisitions have been recorded using the acquisition method of accounting in accordance with Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”), and, accordingly, the purchase price has
been allocated to the assets acquired and liabilities assumed based on their estimated fair value as of the date of acquisition. Where relevant,
the fair value of material contingent consideration included in an acquisition is calculated using a Monte Carlo simulation. The fair value of
merchant relationships and non-compete assets acquired is identified using the Income Approach. The fair value of trade names acquired is
identified using the Relief from Royalty Method. The fair value of deferred revenue is identified using the Adjusted Fulfillment Cost Method.
After the purchase price has been allocated, goodwill is recorded to the extent the total consideration paid for the acquisition, including the
acquisition date fair value of contingent consideration, if any, exceeds the sum of the fair values of the separately identifiable acquired assets
and assumed liabilities. Acquisition costs for business combinations are expensed
72
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
when incurred and recorded in selling general and administrative expenses in the accompanying consolidated statements of operations.
Acquisitions not meeting the accounting criteria to be accounted for as a business combination are accounted for as an asset acquisition.
An asset acquisition is recorded at its purchase price, inclusive of acquisition costs, which is allocated among the acquired assets and
assumed liabilities based upon their relative fair values at the date of acquisition.
The operating results of an acquisition are included in the consolidated statements of operations from the date of such acquisition.
Acquisitions completed during the year ended September 30, 2019 contributed $27,820 and $2,229 of revenue and net loss, respectively, to
the results in the Company's consolidated statements of operations for the year then ended.
Goodwill
In accordance with ASC 350, Intangibles—Goodwill and Other, the Company tests goodwill for impairment for each reporting unit on an
annual basis in the fourth quarter, or when events or circumstances indicate the fair value of a reporting unit is below its carrying value.
The Company’s goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in business
combinations. The goodwill generated from the business combinations is primarily related to the value placed on the employee workforce and
expected synergies. Judgment is involved in determining if an indicator or change in circumstances relating to impairment has occurred. Such
changes may include, among others, a significant decline in expected future cash flows, a significant adverse change in the business climate,
and unforeseen competition. No goodwill impairment charges were recognized during the years ended September 30, 2019, 2018 and 2017.
The Company has the option of performing a qualitative assessment of impairment to determine whether any further quantitative testing for
impairment is necessary. The option of whether or not to perform a qualitative assessment is made annually and may vary by reporting unit.
Factors the Company considers in the qualitative assessment include general macroeconomic conditions, industry and market conditions, cost
factors, overall financial performance of the Company’s reporting units, events or changes affecting the composition or carrying amount of the
net assets of its reporting units, sustained decrease in its share price, and other relevant entity specific events. If the Company determines not
to perform the qualitative assessment or if it determines, on the basis of qualitative factors, that the fair value of the reporting unit is more likely
than not less than the carrying value, then the Company performs a quantitative test for that reporting unit. The fair value of each reporting unit
is compared to the reporting unit’s carrying value, including goodwill. Subsequent to the adoption on January 1, 2017 of Accounting Standards
Update (“ASU”) No. 2017-04, Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment, if the fair value of a reporting unit
is less than its carrying value, the Company recognizes an impairment equal to the excess carrying value, not to exceed the total amount of
goodwill allocated to that reporting unit.
For a discussion of the estimation methodology, the qualitative factors considered when performing a qualitative assessment and the
significance of various inputs, please see the subheading below titled “Use of Estimates.”
The Company has determined that it has nine reporting units. For each of the years ended September 30, 2019, 2018 and 2017 the
Company performed a quantitative assessment for each of its reporting units. The Company determined that none of the reporting units were
impaired and fair values of all of its reporting units substantially exceeded their carrying values at the assessment date.
73
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Intangible Assets
Intangible assets include acquired merchant relationships, residual buyouts, referral agreements, trademarks, tradenames, website
development costs and non-compete agreements. Merchant relationships represent the fair value of customer relationships purchased by the
Company. Residual buyouts represent the right to not have to pay a residual to an independent sales agent related to certain future
transactions with the agent’s referred merchants. Referral agreements represent the right to exclusively obtain referrals from a partner for their
customers' credit card processing services.
The Company amortizes definite lived identifiable intangible assets using a method that reflects the pattern in which the economic benefits
of the intangible asset are expected to be consumed or otherwise utilized. The estimated useful lives of the Company’s customer-related
intangible assets approximate the expected distribution of cash flows, whether straight-line or accelerated, generated from each asset. The
useful lives of contract-based intangible assets are equal to the terms of the agreement.
During the first quarter of fiscal year 2019, management determined it was appropriate to change the amortization rate of our merchant
contract intangible assets to reflect the expected distribution of future cash flows. This change was applied prospectively beginning on October
1, 2018 and resulted in $1,290 in additional amortization expense recorded in the year ended September 30, 2019.
Management evaluates the remaining useful lives and carrying values of long-lived assets, including definite lived intangible assets, at least
annually, or when events and circumstances warrant such a review, to determine whether significant events or changes in circumstances
indicate that a change in the useful life or impairment in value may have occurred. There were no impairment charges during the years ended
September 30, 2019, 2018 and 2017.
Income Taxes
i3 Verticals, Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from i3 Verticals, LLC
based on i3 Verticals, Inc.'s economic interest in i3 Verticals, LLC. i3 Verticals, LLC's members, including the Company, are liable for federal,
state and local income taxes based on their share of i3 Verticals, LLC's pass-through taxable income. i3 Verticals, LLC is not a taxable entity for
federal income tax purposes, but is subject to and reports entity level tax in both Tennessee and Texas. In addition, certain subsidiaries of i3
Verticals, LLC are corporations that are subject to state and federal income taxes.
The amount provided for state income taxes is based upon the amounts of current and deferred taxes payable or refundable at the date of
the consolidated financial statements as a result of all events recognized in the financial statements as measured by the provisions of enacted
tax laws.
Under GAAP, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The
Company has no uncertain tax positions that qualify for either recognition or disclosure in the consolidated financial statements.
Valuation of Contingent Consideration
On occasion, the Company may have acquisitions which include contingent consideration. Accounting for business combinations requires
the Company to estimate the fair value of any contingent purchase consideration at the acquisition date. For a discussion of the estimate
methodology and the significance of various inputs, please see the subheading below titled “Use of Estimates.” Changes in estimates regarding
the fair value contingent purchase consideration are reflected as adjustments to the related liability and recognized within operating expenses
in the consolidated statements of operations. Short and long-term contingent liabilities are presented within accrued expenses and other
current liabilities and other long-term liabilities on the Company's consolidated balance sheets, respectively.
74
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Classification of Financial Instruments
The Company classifies certain financial instruments issued as either equity or as liabilities. Determination of classification is based upon
the underlying properties of the instrument. See specific discussion regarding the nature of instruments issued, the presentation on the
consolidated financial statements and the related valuation method applied in Notes 9, 11, 12, and 13.
Revenue Recognition and Deferred Revenue
Revenue is recognized when it is realized or realizable and earned, in accordance with ASC 605, Revenue Recognition (“ASC 605”).
Recognition occurs when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or
services have been performed; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectability is reasonably assured. The
Company accrues for rights of refund, processing errors or penalties, or other related allowances based on historical experience.
The majority of the Company's gross revenue for the years ended September 30, 2019, 2018 and 2017 is derived from volume-based
payment processing fees (“discount fees”) and other related fixed transaction or service fees. The remainder is comprised of sales of software
licensing subscriptions, ongoing support, and other POS-related solutions the Company provides to its clients directly and through its
processing bank relationships.
Discount fees represent a percentage of the dollar amount of each credit or debit transaction processed. Discount fees are recognized at
the time the merchants’ transactions are processed. The Company follows the requirements of ASC 605-45 Revenue Recognition—Principal
Agent Considerations, in determining its merchant processing services revenue reporting. Generally, where the Company has control over
merchant pricing, merchant portability, credit risk and ultimate responsibility for the merchant relationship, revenues are reported at the time of
sale on a gross basis equal to the full amount of the discount charged to the merchant. This amount includes interchange fees paid to card
issuing banks and assessments paid to payment card networks pursuant to which such parties receive payments based primarily on
processing volume for particular groups of merchants. Revenues generated from merchant portfolios where the Company does not have
control over merchant pricing, liability for merchant losses or credit risk or rights of portability are reported net of interchange and other fees.
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. Revenues derived from service fees are
recognized at the time the services are performed and there are no further performance obligations. Revenue from the sale of equipment is
recognized upon transfer of ownership and delivery to the customer, after which there are no further performance obligations.
Revenues from sales of the Company’s software licensing subscriptions are recognized when they are realized or realizable and earned.
Contractual arrangements are evaluated for indications that multiple element arrangements may exist, including instances where more-than-
incidental software deliverables are included. Arrangements may contain multiple elements, such as hardware, software products,
maintenance, and professional installation and training services. Revenues are allocated to each element based on the selling price hierarchy.
The selling price for a deliverable is based on vendor specific objective evidence of selling price, if available, third party evidence, or estimated
selling price. The Company establishes estimated selling price, based on the judgment of the Company's management, considering internal
factors such as margin objectives, pricing practices and controls, customer segment pricing strategies and the product life cycle. In
arrangements with multiple elements, the Company determines allocation of the transaction price at inception of the arrangement based on the
relative selling price of each unit of accounting.
In multiple element arrangements where more-than-incidental software deliverables are included, the Company applies the residual
method to determine the amount of software license revenues to be recognized. Under the residual method, if fair value exists for undelivered
elements in a multiple-element arrangement, such fair value of the undelivered elements is deferred with the remaining portion of the
arrangement consideration recognized upon delivery of the software license or services arrangement. The Company allocates the fair value
75
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
of each element of a software-related multiple-element arrangement based upon its fair value as determined by vendor specific objective
evidence of selling price, with any remaining amount allocated to the software license. If evidence of the fair value cannot be established for the
undelivered elements of a software arrangement, then the entire amount of revenue under the arrangement is deferred until these elements
have been delivered or objective evidence can be established. These amounts, if any, are included in deferred revenue in the consolidated
balance sheets. Revenues related to software licensing subscriptions, maintenance or other support services with terms greater than one
month are recognized ratably over the term of the agreement.
Revenues from sales of the Company’s combined hardware and software element are recognized when they are realized or realizable and
earned which has been determined to be upon the delivery of the product. Revenues derived from service fees are recognized at the time the
services are performed and there are no further performance obligations. The Company’s training, installation, and repair services are
recognized as revenue as these services are performed.
Deferred revenue represents amounts billed to customers by the Company for services contracts. The initial prepaid contract agreement
balance is deferred. The balance is then recognized as the services are provided over the contract term. Deferred revenue that is expected to
be recognized as revenue within one year is recorded as short-term deferred revenue and the remaining portion is recorded as other long-term
liabilities in the consolidated balance sheets.
Interchange and Network Fees and Other Cost of Services
Interchange and network fees consist primarily of fees that are directly related to discount fee revenue. These include interchange fees
paid to issuers and assessment fees payable to card associations, which are a percentage of the processing volume the Company generates
from Visa and Mastercard, as well as fees charged by card-issuing banks. Other costs of services include costs directly attributable to
processing and bank sponsorship costs, which may not be based on a percentage of volume. These costs also include related costs such as
residual payments to sales groups, which are based on a percentage of the net revenues generated from merchant referrals. In certain
merchant processing bank relationships the Company is liable for chargebacks against a merchant equal to the volume of the transaction.
Losses resulting from chargebacks against a merchant are included in other cost of services on the accompanying consolidated statement of
operations. The Company evaluates its risk for such transactions and estimates its potential loss from chargebacks based primarily on
historical experience and other relevant factors. The reserve for merchant losses is included within accrued expenses and other current
liabilities on the accompanying consolidated balance sheets. The cost of equipment sold is also included in other cost of services. Interchange
and other costs of services are recognized at the time the merchant's transactions are processed.
The Company accounts for all governmental taxes associated with revenue transactions on a net basis.
Advertising and Promotion Costs
Advertising and promotion costs are expensed as incurred. Advertising expense was $1,443, $765 and $654 for the years ended
September 30, 2019, 2018 and 2017, respectively, and is included in selling, general and administrative expenses in the Consolidated
Statements of Operations.
Equity-based Compensation
The Company accounts for grants of equity awards to employees in accordance with ASC 718, Compensation—Stock Compensation. This
standard requires compensation expense to be measured based on the estimated fair value of the share-based awards on the date of grant
and recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period.
Equity-based compensation was $6,124 and $1,567 for the years ended September 30, 2019 and 2018, respectively. There was no equity-
based compensation for the year ended September 30, 2017.
76
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include, but are not
limited to, the value of purchase consideration paid and identifiable assets acquired and assumed in acquisitions, goodwill and intangible asset
impairment review, warrant valuation, revenue recognition for multiple element arrangements, loss reserves, assumptions used in the
calculation of equity-based compensation and in the calculation of income taxes, and certain tax assets and liabilities as well as the related
valuation allowances. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software: Customer's Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (Subtopic 350-40). The amendments in ASU No.
2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the
requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments in this ASU No. 2018-
15 are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years,
with early adoption permitted. As a public business entity, the Company is an emerging growth company and smaller reporting company and
has elected to use the extended transition period provided for such companies. As a result, the Company is not required to adopt this ASU No.
2018-15 until October 1, 2021. Early adoption is permitted, including adoption in an interim period. The Company elected to early adopt this
standard using the prospective method as of October 1, 2018. There was no impact on the Company’s consolidated financial statements for
the adoption of ASU No. 2018-15.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement: Disclosure Framework—Changes to the Disclosure
Requirements for Fair Value Measurement (Topic 820). The amendments in ASU No. 2018-13 provide clarification and modify the disclosure
requirements on fair value measurement in Topic 820, Fair Value Measurement. The amendments in this ASU No. 2018-13 are effective for
public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption
permitted. As a public business entity, the Company is an emerging growth company and smaller reporting company and has elected to use
the extended transition period provided for such companies. As a result, the Company will not be required to adopt this ASU No. 2018-13 until
October 1, 2021. The Company is currently evaluating the impact of the adoption of this principle on the Company’s consolidated financial
statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation: Improvements to Nonemployee Share-Based
Payment Accounting (Topic 718). The amendments in ASU No. 2018-07 expand the scope of Topic 718, Compensation—Stock Compensation
to include share-based payments issued to nonemployees for goods or services. The amendments in this ASU No. 2018-07 are effective for
public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. As a public business
entity, the Company is an emerging growth company and smaller reporting company and has elected to use the extended transition period
provided for such companies. As a result, the Company is not required to adopt this ASU No. 2018-07 until October 1, 2020. Early adoption is
permitted, but no earlier than a company’s adoption date of ASU No. 2014-09 (defined below). The Company is electing to early adopt this
standard as of October 1, 2019. There will be no impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326). The amendments in ASU No. 2016-
13 require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current
conditions, and reasonable and supportable forecasts. The amendments in this ASU No. 2016-13 are effective for public business entities for
fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for fiscal years
beginning after December 15, 2019, including interim periods within those fiscal years. As a public
77
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
business entity, the Company is an emerging growth company and a smaller reporting company and has elected to use the extended transition
period provided for such companies. As a result, the Company will not be required to adopt this ASU No. 2016-13 until October 1, 2023. The
Company is currently evaluating the impact of the adoption of this principle on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). This ASU No. 2016-02 amends the existing
guidance by recognizing all leases, including operating leases, with a term longer than twelve months on the balance sheet and disclosing key
information about the lease arrangements. The effective date of this update is for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2018, with early adoption permitted. As a public business entity, the Company is an emerging growth company
and smaller reporting company and has elected to use the extended transition period provided for such companies. As a result, the Company
will not be required to adopt this ASU No. 2016-02 until October 1, 2021. The update requires modified retrospective transition, with the option
to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment and elect various practical expedients. In
July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, which narrows aspects of the guidance issued in
the amendments in ASU 2016-02, and ASU 2018-11, Leases—Targeted Improvements (Topic 842), by allowing lessees and lessors to
recognize and measure existing leases at the beginning of the period of adoption without modifying the comparative period financial statements
(which therefore will remain under prior GAAP, Topic 840, Leases). In December 2018, the FASB issued ASU 2018-20, Narrow-Scope
Improvements for Lessors, which clarifies or simplifies certain narrows aspects of the guidance issued in the amendments in ASU 2016-02 for
lessors. Since the Company has not yet adopted ASU 2016-02, the effective date and transition requirements will be the same as the effective
date and transition requirements in ASU 2016-02. In March 2019, the FASB issued ASU 2019-01, Codification Improvements, which clarifies
certain aspects of the guidance issued in the amendments in ASU 2016-02. The amendments in this ASU No. 2016-02 are effective for public
business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption
permitted. The Company is currently evaluating the impact of the adoption of these principles on the Company’s consolidated financial
statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). The FASB issued
updates and clarifications to ASU 2014-09, including ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus
Agent Considerations (Reporting Gross versus Net) issued in March 2016, ASU 2016-10, Revenue from Contracts with Customers (Topic 606):
Identifying Performance Obligations and Licensing issued in April 2016 and ASU 2016-12, Revenue from Contracts with Customers (Topic
606): Narrow-Scope Improvements and Practical Expedients issued in May 2016. ASU 2014-09 supersedes the revenue recognition
requirements in ASC 605. The new standard provides a five-step analysis of transactions to determine when and how revenue is recognized,
based upon the core principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also requires additional
disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new
standard, as amended, is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early
adoption permitted. As an emerging growth company and smaller reporting company, the Company will not be required to adopt this ASU No.
2014-09 until October 1, 2019. The amendment allows companies to use either a full retrospective or a modified retrospective approach,
through a cumulative adjustment, to adopt this ASU No. 2014-09.
The Company has performed a review of the requirements of the new revenue standard and has monitored the activity of the FASB and
the transition resource group as it relates to specific interpretive guidance. The Company has assessed the effects of the new revenue
standard in a multi-phase approach. In the first phase, the team reviewed revenue sources and evaluated revenue populations by type to
determine the appropriate portfolios that will result in materially consistent conclusions as if each revenue type was evaluated on a contract-by-
contract basis under the new standard, applying the five-step model of the new standard to each contract category and comparing the results
to current accounting practices. In the second phase, the Company quantified the potential effects, assessed additional contract categories and
principal agent considerations, revised
78
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
accounting policies and considered the effects on related disclosures and/or internal control over financial reporting. The third phase, which will
complete the adoption and implementation of the new revenue standard, includes quantifying the cumulative-effect adjustment (including tax
effects).
The new standard will change the timing of certain revenue and expenses to be recognized under various arrangement types. In addition, it
could increase the administrative burden on the Company’s operations to properly account for customer contracts and provide the more
expansive required disclosures. More judgment and estimates will be required when applying the requirements of the new standard than are
required under existing GAAP, such as estimating the amount of variable consideration to include in transaction price and estimating expected
periods of benefit for certain costs. Through management's review of individual contracts and historical revenue recognition patters in
comparison to the provisions under ASU 2014-09, the Company expects the timing of revenue to be recognized under ASU 2014-09 for each
of the Company’s revenue categories, including discount fees, software licensing subscriptions, ongoing support, and other POS-related
solutions, will be similar to the timing of revenue recognized under current accounting practices. The Company will evaluate, on an ongoing
basis, costs to obtain contracts with customers, as well as certain implementation and set-up costs, and, in some cases, may be required to
amortize these costs over longer periods than they were historically amortized. Finally, the new standard requires additional disclosures
regarding revenues and related capitalized contract costs, if any.
The Company is adopting the new revenue standard using a modified retrospective basis on October 1, 2019. The Company has
calculated that the adoption will result in a $1,821 cumulative increase to retained earnings, due to capitalized costs to obtain contracts with
customers being amortized over the expected life of the customer rather than the life of the specific contract.
The Company currently expects the most significant ongoing impact of adopting the new revenue standard in fiscal year 2020 to be driven
by changes in principal versus agent considerations, with the majority of the change overall in total net revenue attributable to reflecting the
Company's interchange and network fees on a net basis prospectively, as opposed to its gross presentation of $242,867 in the year ended
September 30, 2019. The Company does not expect the adoption of the new revenue standard to have a material impact on net income. The
Company will include additional disclosures of the amount by which each consolidated financial statement line item is affected during fiscal
year 2020, as compared to the guidance that was in effect before the change, and an explanation of the reasons for any significant changes.
3. CREDIT RISK AND OTHER CONCENTRATIONS
The Company places its cash with high credit quality financial institutions which provide Federal Deposit Insurance Corporation insurance.
The Company performs periodic evaluations of the relative credit standing of these institutions and does not expect any losses related to such
concentrations.
The Company’s revenues are earned by processing transactions for merchant businesses and other institutions under contract with the
Company. The Company utilizes the funds settlement services of primarily six processing banks, from which most accounts receivable are
remitted monthly.
No single merchant accounted for more than 1.0% of the Company's revenue during the years ended September 30, 2019, 2018 and 2017.
The Company believes that the loss of any single merchant would not have a material adverse effect on the Company's financial condition or
results of operations.
The Company uses third party payment processors, three of which facilitate more than 10% of our processing revenues for the years
ended September 30, 2019, 2018, and 2017.
79
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
4. ACQUISITIONS
During the years ended September 30, 2019, 2018 and 2017 the Company acquired the following intangible assets and businesses:
Residual Buyouts
From time to time, the Company acquires future commission streams from sales agents in exchange for an upfront cash payment. This
results in an increase in overall gross processing volume to the Company. The residual buyouts are treated as asset acquisitions, resulting in
recording a residual buyout intangible asset at cost on the date of acquisition. These assets are amortized using a method of amortization that
reflects the pattern in which the economic benefits of the intangible asset are expected to be utilized over their estimated useful lives.
During the years ended September 30, 2019, 2018 and 2017, the Company purchased $3,585, $1,567 and $476, respectively, in residual
buyouts using a combination of cash on hand and borrowings on the Company's revolving credit facility. The acquired residual buyout
intangible assets have weighted average estimated amortization periods of seven and two years, respectively.
Merchant Relationships Portfolio Purchase
Effective March 31, 2017, the Company acquired a payment portfolio in an asset acquisition. The acquisition was completed to expand the
Company’s merchant base. Total purchase consideration was $1,156, including $56 in acquisition-related costs, which was funded using a
combination of cash on hand and long-term debt. The purchase consideration of the acquired assets was allocated based on the relative fair
values to the merchant relationships intangible asset. The acquired merchant relationships intangible asset has an estimated amortization
period of fifteen years.
Referral Agreements
From time to time, the Company enters into referral agreements with agent banks or other organizations (“referral partner”). Under these
agreements, the referral partner exclusively refers its customers to the Company for credit card processing services. Total consideration paid
for these agreements in the years ended September 30, 2019 and 2018 was $0 and $815, respectively, all of which was settled with cash on
hand. Because the Company pays an up-front fee to compensate the referral partner, the amount is treated as an asset acquisition in which the
Company has acquired an intangible stream of referrals. This asset is amortized over a straight-line period. The weighted-average amortization
period for all intangibles acquired is five years.
2017 Business Combinations
During the year ended September 30, 2017, the Company completed the acquisitions of three businesses, including Fairway Payments,
LLC, and two additional unrelated businesses which were considered individually immaterial but collectively material.
Fairway Payments, LLC
Effective August 1, 2017, the Company acquired certain assets and assumed certain liabilities of Fairway Payments, LLC (“Fairway”), a
privately-held company engaged in business similar to the Company. The acquisition was completed to add independent software vendor
distribution partners, to increase the Company's presence in the healthcare and non-profit verticals and to provide another vendor for the
Company's payment processing services. Net purchase consideration was $39,275, which includes $275 of common units issued to the seller
and cash payment which was funded using proceeds from the issuance of long-term debt and from proceeds from the issuance of Class A
units in i3 Verticals, LLC.
The goodwill associated with the acquisition is not deductible for tax purposes. The acquired relationships contracts intangible asset has an
estimated amortization period of fifteen years. The non-compete agreement and trade name have an amortization period of three years. The
weighted-average amortization period for all intangibles acquired is fifteen years.
80
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Acquisition-related costs for Fairway were $284 and were expensed as incurred.
Fairway had a defined benefit pension plan (“Fairway Defined Benefit Plan”). The Fairway Defined Benefit Plan was frozen as of the date of
acquisition and, per the terms of the agreement, the funding obligation of the plan is the sole responsibility of the selling party. Accordingly, the
Company has not recorded a liability for the Fairway Defined Benefit Plan.
Other 2017 Business Combinations
The Company completed the acquisitions of other businesses to expand the Company’s merchant base and to provide additional service to
the Company’s customers. Total purchase consideration for the other acquisitions was $6,396, including $5,175 in cash and revolving credit
facility proceeds and $1,221 of contingent cash consideration.
The goodwill associated with the acquisitions of the other businesses is tax-deductible. The weighted-average amortization period for all
intangibles acquired is fifteen years. Acquisition-related costs for the other businesses amounted to approximately $184 and were expensed as
incurred.
Certain provisions in the purchase agreement for one of the two other businesses provided for additional consideration of up to $4,700, in
the aggregate, to be paid based upon the achievement of specified financial performance targets, as defined in the purchase agreement,
through December 2019. The Company determined the acquisition date fair value of the liability for the contingent consideration based on a
discounted cash flow analysis. In each subsequent reporting period, the Company reassesses its current estimates of performance relative to
the targets and adjusts the contingent liability to its fair value through earnings. See additional disclosures in Note 11.
Summary of 2017 Business Combinations
The fair values assigned to certain assets and liabilities assumed, as of the acquisition dates, during the year ended September 30, 2017
were as follows:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Property and equipment
Acquired merchant relationships
Non-compete agreements
Trade name
Goodwill
Total assets acquired
Deferred rent
Deferred revenue, current
Net assets acquired
2018 Business Combinations
Fairway
Other
Total
$
— $
—
226
5
19,200
40
500
19,309
39,280
5
—
30 $
15
—
57
2,160
40
—
4,152
6,454
—
58
30
15
226
62
21,360
80
500
23,461
45,734
5
58
$
39,275 $
6,396 $
45,671
During the year ended September 30, 2018, the Company completed the acquisitions of businesses, including San Diego Cash Register
Company, Inc., and additional unrelated businesses which were considered individually immaterial but collectively material.
81
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Purchase of San Diego Cash Register Company, Inc.
On October 31, 2017, the Company closed an agreement to purchase all of the outstanding stock of San Diego Cash Register Company,
Inc. (“SDCR, Inc.”). The acquisition was completed to expand the Company's revenue within the integrated POS market. Total purchase
consideration was $20,834, which includes $104 of common units in i3 Verticals, LLC issued to the seller. The acquisition was funded using
$20,000 in proceeds from the issuance of long-term debt from the 2017 Senior Secured Credit Facility (as defined in Note 9) and $730 of
contingent cash consideration.
The goodwill associated with the acquisition is not deductible for tax purposes. The acquired merchant relationships intangible asset has an
estimated amortization period of twelve years. The non-compete agreement and trade name have amortization periods of two and five years,
respectively. The weighted-average amortization period for all intangibles acquired is eleven years.
Acquisition-related costs for SDCR, Inc. were $293 and were expensed as incurred.
Certain provisions in the purchase agreement provide for additional consideration of up to $2,400, in the aggregate, to be paid based upon
the achievement of specified financial performance targets, as defined in the purchase agreement, through October 2019. The Company
determined the acquisition date fair value of the liability for the contingent consideration based on a discounted cash flow analysis. In each
subsequent reporting period the Company reassesses its current estimates of performance relative to the targets and adjusts the contingent
liability to its fair value through earnings. See additional disclosures in Note 11.
Other 2018 Business Combinations
The Company completed the acquisitions of the other businesses to expand the Company's merchant base. Total purchase consideration
for the other acquisitions was $15,604, including $13,700 in cash and revolving credit facility proceeds, $550 of restricted Class A common
stock and $1,354 of contingent cash consideration.
The goodwill associated with the acquisitions of the other businesses is deductible for tax purposes. The acquired merchant relationships
intangible assets have estimated amortization periods of between twelve and 15 years. The exclusivity agreement acquired has an estimated
amortization period of ten years. The non-compete agreements and trade name have weighted-average amortization periods of five years. The
weighted-average amortization period for all intangibles acquired is twelve years.
Acquisition-related costs for the other businesses amounted to approximately $233 and were expensed as incurred.
Certain provisions in the purchase agreements for the other businesses provide for additional consideration of up to $11,800, in the
aggregate, to be paid based upon the achievement of specified financial performance targets, as defined in the purchase agreements, through
no later than January 2020. The Company determined the acquisition date fair values of the liabilities for the contingent consideration based on
discounted cash flow analyses. In each subsequent reporting period, the Company will reassess its current estimates of performance relative to
the targets and adjust the contingent liabilities to their fair values through earnings. See additional disclosures in Note 11.
82
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Summary of 2018 Business Combinations
The fair values assigned to certain assets and liabilities assumed, as of the acquisition dates, during the year ended September 30, 2018
were as follows:
Cash and cash equivalents
Accounts receivable
Settlement assets
Related party receivable
Inventories
Prepaid expenses and other current assets
Property and equipment
Capitalized software
Acquired merchant relationships
Exclusivity Agreements
Non-compete agreements
Trade name
Goodwill
Other assets
Total assets acquired
Accounts payable
Accrued expenses and other current liabilities
Settlement obligations
Deferred revenue, current
Other long-term liabilities
Net assets acquired
2019 Business Combinations
$
SDCR, Inc.
Other
Total
1,338 $
1,008
—
773
1,318
1,176
69
—
5,500
—
40
1,340
16,523
—
29,085
1,342
3,123
—
2,029
1,757
— $
—
350
—
—
8
58
200
5,100
100
1,440
200
8,914
4
16,374
—
431
350
190
—
1,338
1,008
350
773
1,318
1,184
127
200
10,600
100
1,480
1,540
25,437
4
45,459
1,342
3,554
350
2,219
1,757
$
20,834 $
15,403 $
36,237
During the year ended September 30, 2019, the Company completed the acquisitions of unrelated businesses, including Pace Payment
Systems, Inc.
Purchase of Pace Payment Systems, Inc.
On May 31, 2019, i3-Holdings Sub, Inc. acquired all of the stock of Pace Payment Systems, Inc. (“Pace”) via a reverse triangular merger
involving Pace and a special acquisition subsidiary of i3-Holdings Sub, Inc. The Company acquired Pace to expand its software offerings,
primarily in the public sector and education verticals. The total purchase consideration was $56,053, including $52,492 in cash consideration,
funded by proceeds from the Company's revolving credit facility, $3,336 of contingent consideration and $225 of restricted shares of Class A
common stock in i3 Verticals. Certain of the purchase price allocations assigned for this acquisition are preliminary.
The goodwill associated with the acquisition is not deductible for tax purposes. The acquired merchant relationships intangible asset has an
estimated amortization period of fifteen years. The non-compete agreement and trade name have estimated amortization periods of three and
five years, respectively. The weighted-average estimated amortization period of all intangibles acquired is fifteen years. The acquired
capitalized software has an estimated amortization period of seven years. The acquisition also included deferred tax assets related to net
83
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
operating losses and Section 163(j) carryforwards and deferred tax liabilities related to intangibles, which are presented as a total net deferred
tax asset as of September 30, 2019.
Acquisition-related costs for Pace amounted to approximately $444 and were expensed as incurred.
Certain provisions in the merger agreement provide for additional consideration of up to $20,000 in the aggregate, to be paid based upon
achievement of specified financial performance targets, as defined in the purchase agreement, in the 24 months from January 1, 2020 through
December 31, 2021. The Company determined the acquisition date fair value of the liability for the contingent consideration based on a
discounted cash flow analysis. In each subsequent reporting period, the Company will reassess the current estimates of performance relative
to the targets and adjust the contingent liability to its fair value through earnings. See additional disclosures in Note 11.
Other 2019 Business Combinations
The Company completed the acquisitions of other businesses to expand the Company’s software offerings in the public sector vertical
market, provide technology that enhances the Company’s Burton Platform and expand the Company's merchant base. Total purchase
consideration was $98,770, including $89,074 in revolving credit facility proceeds and $9,696 of contingent consideration. Certain of the
purchase price allocations assigned for these acquisitions are preliminary.
For some of these business acquired, the goodwill associated with the acquisitions is deductible for tax purposes, and goodwill associated
with the acquisitions of others of the businesses is not deductible for tax purposes. The acquired merchant relationships intangible assets have
estimated amortization periods of between thirteen and twenty years. The non-compete agreement and trade names have weighted-average
amortization periods of three and five years, respectively. The weighted-average amortization period for all intangibles acquired is sixteen
years. The acquired capitalized software has an estimated amortization period of six years.
Acquisition-related costs for these businesses amounted to approximately $1,179 and were expensed as incurred.
Certain provisions in the purchase agreements provide for additional consideration of up to $34,900, in the aggregate, to be paid based
upon the achievement of specified financial performance targets, as defined in the purchase agreements, through no later than September
2021. The Company determined the acquisition date fair values of the liabilities for the contingent consideration based on probability forecasts
and discounted cash flow analyses. In each subsequent reporting period, the Company will reassess its current estimates of performance
relative to the targets and adjust the contingent liabilities to their fair values through earnings. See additional disclosures in Note 11.
84
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Summary of 2019 Business Combinations
The fair values assigned to certain assets and liabilities assumed, as of the acquisition dates, during the year ended September 30, 2019
were as follows:
Cash and cash equivalents
Accounts receivable
Settlement assets
Related party receivable
Inventories
Prepaid expenses and other current assets
Property and equipment
Capitalized software
Acquired merchant relationships
Exclusivity Agreements
Non-compete agreements
Trade name
Goodwill
Other assets
Total assets acquired
Accounts payable
Accrued expenses and other current liabilities
Settlement obligations
Deferred revenue, current
Other long-term liabilities
Net assets acquired
$
Pace
Other
Total
108 $
545
—
—
45
59
527
3,400
13,400
—
60
500
36,522
1,689
56,855
722
56
—
24
—
4,453 $
4,732
18
—
61
505
1,929
9,440
34,480
—
150
1,540
47,777
2
4,561
5,277
18
—
106
564
2,456
12,840
47,880
—
210
2,040
84,299
1,691
105,087
161,942
369
2,108
18
2,698
1,124
1,091
2,164
18
2,722
1,124
$
56,053 $
98,770 $
154,823
Pro Forma Results of Operations for 2019 Business Combinations
The following unaudited supplemental pro forma results of operations have been prepared as though each of the acquired businesses in
the year ended September 30, 2019 had occurred on October 1, 2017. Pro forma adjustments were made to reflect the impact of depreciation
and amortization, changes to executive compensation and the revised debt load, all in accordance with ASC 805. This supplemental pro forma
information does not purport to be indicative of the results of operations that would have been attained had the acquisitions been made on
these dates, or of results of operations that may occur in the future.
Revenue
Net income (loss)
Year ended September 30,
2019
2018
$
$
418,815 $
(4,483) $
394,373
(16,166)
85
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
5. PROPERTY AND EQUIPMENT, NET
A summary of the Company's property and equipment as of September 30, 2019 and 2018 is as follows:
Computer equipment and software
Furniture and fixtures
Terminals
Office equipment
Automobiles
Leasehold improvements
Accumulated depreciation
Property and equipment, net
Estimated Useful Life
2 to 7 years
2 to 7 years
2 to 3 years
2 to 5 years
3 years
2 to 7 years
2019
2018
$
$
1,990 $
1,639
429
940
307
1,665
(1,944)
5,026 $
636
1,299
588
107
114
1,506
(1,292)
2,958
Depreciation expense for the years ended September 30, 2019, 2018 and 2017 amounted to $1,195, $802 and $875, respectively.
6. CAPITALIZED SOFTWARE, NET
A summary of the Company's capitalized software as of September 30, 2019 and 2018 is as follows:
Software development costs
Development in progress
Accumulated amortization
Capitalized software, net
Estimated Useful Life
1 to 7 years
2019
2018
$
$
20,347 $
833
(5,726)
15,454 $
6,021
389
(3,038)
3,372
The Company capitalized software development costs (including acquisitions) totaling $15,067 and $1,292 during the years ended
September 30, 2019 and 2018, respectively. Amortization expense for capitalized software development costs amounted to $2,977, $1,696 and
$1,541 during the years ended September 30, 2019, 2018 and 2017, respectively.
7. GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill are as follows:
Merchant
Services
Proprietary
Software and
Payments
Other
Total
Balance at September 30, 2017 (net of accumulated impairment losses of
$11,458, $0 and $0, respectively)
Goodwill attributable to acquisition activity during the year ended September
30, 2018
Balance at September 30, 2018
Goodwill attributable to acquisition activity during the year ended September
30, 2019
Balance at September 30, 2019
$
49,173 $
9,344 $
— $
58,517
20,493
69,666
4,944
14,288
38,806
45,524
—
—
—
25,437
83,954
84,330
$
108,472 $
59,812 $
— $
168,284
86
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Intangible assets consisted of the following as of September 30, 2019:
Finite-lived intangible assets:
Merchant relationships
Non-compete agreements
Website development costs
Trade names
Residual buyouts
Referral and exclusivity agreements
Total finite-lived intangible assets
Indefinite-lived intangible assets:
Trademarks
Total identifiable intangible assets
Cost
Accumulated
Amortization
Carrying
Value
Amortization Life and Method
$
142,671 $
1,770
77
4,292
5,346
900
155,056
(43,579) $
(619)
(22)
(1,307)
(1,882)
(264)
99,092
1,151
55
2,985
3,464
636
12 to 20 years – accelerated or
straight-line
2 to 5 years – straight-line
3 years – straight-line
3 to 7 years – straight-line
2 to 8 years – straight-line
5 to 10 years – straight-line
(47,673)
107,383
36
$
155,092 $
—
(47,673) $
36
107,419
Intangible assets consisted of the following as of September 30, 2018:
Finite-lived intangible assets:
Merchant relationships
Non-compete agreements
Website development costs
Trade names
Residual buyouts
Referral and exclusivity agreements
Total finite-lived intangible assets
Indefinite-lived intangible assets:
Trademarks
Total identifiable intangible assets
Cost
Accumulated
Amortization
Carrying Value
Amortization Life and Method
$
94,791 $
1,890
18
3,717
2,043
915
103,374
(34,086) $
(561)
(14)
(1,850)
(773)
(99)
(37,383)
60,705
1,329
4
1,867
1,270
816
65,991
15 years – accelerated or straight-
line
2 to 5 years – straight-line
3 years – straight-line
2 to 5 years – straight-line
2 years – straight-line
1 to 10 years – straight-line
32
—
103,406
(37,383)
32
66,023
Amortization expense for intangible assets amounted to $12,394, $9,341 and $7,669 during the years ended September 30, 2019, 2018
and 2017, respectively.
87
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Based on gross carrying amounts at September 30, 2019, the Company's estimate of future amortization expense for intangible assets are
presented in this table as follows for each fiscal year ending September 30:
2020
2021
2022
2023
2024
Thereafter
$
12,098
10,546
9,401
8,355
7,766
59,217
$
107,383
8. ACCRUED EXPENSES AND OTHER LIABILITIES
A summary of the Company's accrued expenses and other current liabilities as of September 30, 2019 and 2018 is as follows:
Accrued wages, bonuses, commissions and vacation
Accrued interest
Accrued contingent consideration --- current portion
Tax receivable agreement liability --- current portion
Accrued tax liabilities
Customer deposits
Other current liabilities
Accrued expenses and other current liabilities
2019
2018
$
$
4,256 $
254
10,223
24
50
1,968
4,785
21,560 $
1,975
75
3,813
25
836
1,333
3,481
11,538
A summary of the Company's long-term liabilities as of September 30, 2019 and 2018 is as follows:
Accrued contingent consideration --- long-term portion
Deferred tax liability --- long-term
Other long-term liabilities
Total other long-term liabilities
2019
2018
8,003 $
516
605
9,124 $
2,186
1,100
649
3,935
$
$
88
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
9. LONG-TERM DEBT, NET
A summary of long-term debt, net as of September 30, 2019 and September 30, 2018 is as follows:
Term loans to bank under the 2017 Senior Secured Credit Facility
Revolving lines of credit to banks under the 2017 Senior Secured Credit
Facility
Revolving lines of credit to banks under the Senior Secured Credit Facility
Debt issuance costs, net
Maturity
October 30, 2022
October 30, 2022
May 9, 2024
Total long-term debt, net of issuance costs
Less current portion of long-term debt
Long-term debt, less current portion
Senior Secured Credit Facility
2019
2018
$
— $
35,000
—
141,144
(1,846)
139,298
—
$
139,298 $
3,250
—
(1,474)
36,776
(5,000)
31,776
On May 9, 2019, the Company replaced its existing 2017 Senior Secured Credit Facility (defined below) with a new credit agreement (the
“Senior Secured Credit Facility”). The Company concluded that the replacement of the 2017 Senior Secured Credit Facility should be
accounted for as a debt modification based on the guidance in ASC 470-50. In connection with the replacement of the 2017 Senior Secured
Credit Facility, the Company recorded a debt extinguishment charge of $152 for the write-off of deferred financing costs, which was recorded in
interest expense in the consolidated statements of operations. The Senior Secured Credit Facility consists of a $300,000 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 $50,000 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% (3.25% as of September 30, 2019), 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 September 30, 2019), 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
the Company to pay unused commitment fees of 0.15% to 0.30% (0.30% as of September 30, 2019) 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. As of September 30, 2019, there was $158,856
available for borrowing under the revolving credit facility.
The Senior Secured Credit Facility is secured by substantially all assets of the Company. 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 the Company. 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 the activities of the Company during the period covered. The Company was in compliance with
such covenants as of September 30, 2019. In addition, the Senior Secured Credit Facility restricts the Company's ability to make dividends or
other distributions to the holders of the Company's equity. The Company is permitted to (i) make cash distributions to the holders of the
Company's equity in order to pay taxes incurred by owners of equity in i3 Verticals, LLC, by reason of such ownership, (ii) move intercompany
cash between subsidiaries that are joined to the Senior Secured Credit Facility, (iii) repurchase equity from employees, directors, officers or
consultants in an aggregate amount not to exceed $3,000 per year, (iv) make certain payments in connection with the Tax Receivable
Agreement, and (v) make other dividends or distributions in an aggregate amount not to exceed 5% of
89
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
the net cash proceeds received from any additional common equity issuance. The Company is also permitted to make non-cash dividends in
the form of additional equity issuances. Each subsidiary may make ratable distributions to persons that own equity interests in such subsidiary.
All other forms of dividends or distributions are prohibited under the Senior Secured Credit Facility.
2017 Senior Secured Credit Facility
On October 30, 2017, the Company replaced its then-existing credit facility with the 2017 Senior Secured Credit Facility (the “2017 Senior
Secured Credit Facility”). The 2017 Senior Secured Credit Facility consisted of term loans in the original principal amount of $40,000 and a
$110,000 revolving line of credit. The 2017 Senior Secured Credit Facility accrued interest, payable monthly, at the prime rate plus a margin of
0.50% to 2.00% or at the 30-day LIBOR rate plus a margin of 2.75% to 4.00%, in each case depending on the ratio of consolidated debt-to-
EBITDA, as defined in the agreement. Additionally, the 2017 Senior Secured Credit Facility required the Company to pay unused commitment
fees of up to 0.15% to 0.30% on any undrawn amounts under the revolving line of credit. The maturity date of the 2017 Senior Secured Credit
Facility is October 30, 2022. Principal payments of $1,250 were due on the last day of each calendar quarter until the maturity date, when all
outstanding principal and accrued and unpaid interest were due.
The 2017 Senior Secured Credit Facility was secured by substantially all assets of the Company. The lenders under the 2017 Senior
Secured Credit Facility held senior rights to collateral and principal repayment over all other creditors.
As previously mentioned, on May 9, 2019, the Company replaced its existing 2017 Senior Secured Credit Facility with the Senior Secured
Credit Facility.
Notes to Mezzanine Lenders
During 2013, the Company issued notes payable in the aggregate principal amount of $10,500 (the “Mezzanine Notes”) to three creditors.
The Mezzanine Notes accrued interest at a fixed rate of 12.0%, payable monthly, and initially were due to mature in February 2018. In April
2016, the Mezzanine Notes were amended and restated and the maturity dates were extended to November 29, 2020, when all outstanding
principal and accrued and unpaid interest was due. The amendment was accounted for as a modification under the guidance at ASC 470-50.
The Mezzanine Notes were secured by substantially all assets of the Company in accordance with the terms of a security agreement and were
subordinate to the Senior Secured Credit Facility.
The provisions of the Mezzanine Notes placed certain restrictions and limitations upon the Company. These included restrictions on
additional borrowings, capital expenditures, maintenance of certain financial ratios, and certain non-financial covenants pertaining to the
activities of the Company during the period covered. The Company was in compliance with such covenants as of September 30, 2017. The
Mezzanine Lenders participated in the July 2017 Class A unit offerings (see Note 13).
In June 2018, all of the outstanding aggregate principal balance and accrued interest on the Mezzanine Notes was repaid with proceeds
from the Company’s IPO. As part of the extinguishment of the Mezzanine Notes, $78 of unamortized debt issuance costs were written off.
Mezzanine Warrants
During 2013, the Company issued notes payable in the aggregate principal amount of $10,500 (the “Mezzanine Notes”) to three creditors.
In June 2018, all of the outstanding aggregate principal balance and accrued interest on the Mezzanine Notes was repaid with proceeds from
the Company’s IPO.
In connection with the issuance of the Mezzanine Notes, the Company granted the Mezzanine Warrants to purchase 1,423,688 common
units in i3 Verticals, LLC. The Mezzanine Warrants were determined to have no material value as of the grant date. The intrinsic value of the
Mezzanine Warrants was $767 as of September 30, 2017, and they had an exercise price of $0.01. On June 25, 2018, in conjunction with the
Reorganization
90
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Transactions described in Note 1, all existing Mezzanine Warrants were exercised for common units in i3 Verticals, LLC. The intrinsic value of
the Mezzanine Warrants at that date was $9,241. The change in the fair market value of the warrants for the year ended September 30, 2018 is
reflected within the consolidated statement of operations.
Unsecured notes payable to related and unrelated creditors
During 2014, the Company issued the Junior Subordinated Notes in the aggregate principal amount of $17,608 to unrelated and related
creditors. The Junior Subordinated Notes accrued interest, payable monthly, at a fixed rate of 10.0% and were due to mature on February 14,
2019, when all outstanding principal and accrued and unpaid interest was due. However, the unsecured notes were subordinate to the
Mezzanine Notes and the Senior Secured Credit Facility, which both had maturities beyond the Junior Subordinated Notes, and the provisions
of the Mezzanine Notes and Senior Secured Credit Facility did not permit the payment of any subordinated debt prior to its maturity. Should the
Junior Subordinated Notes have reached maturity and the terms of the Mezzanine Notes and Senior Secured Credit Facility remained in place,
the term of the Junior Subordinated Notes would have been extended until after the maturity of the Mezzanine Notes and Senior Secured
Credit Facility, in accordance with the terms of the Junior Subordinated Notes.
In connection with the issuance of the Junior Subordinated Notes, the Company granted detachable warrants (“Junior Subordinated Notes
Warrants”) to purchase 1,433,920 common units in i3 Verticals, LLC. Management determined that the warrants had no material value as of the
grant date, and none of the proceeds from the notes was attributed to the warrants. The warrants were accounted for as equity. See additional
disclosures in Note 13.
In July 2017, $500 of the Junior Subordinated Notes were retired and exchanged for 148 Class A units of the Company. The fair value of
the Class A units issued approximated the carrying amount of the Junior Subordinated Notes, so no extinguishment gain or loss was
recognized. See additional disclosures in Note 13 and Note 15.
In June 2018, in connection with the Company's IPO and as part of the Reorganization Transactions, $8,054 of the Junior Subordinated
Notes were converted to newly issued shares of the Company's Class A common stock, as described in Note 1, and the remaining $8,054 of
the Junior Subordinated Notes was repaid with proceeds from the Company's IPO. As part of the extinguishment of the Junior Subordinated
Notes, $43 of unamortized debt issuance costs were written off.
Debt issuance costs
During the years ended September 30, 2019 and 2018, the Company incurred debt issuance costs totaling $1,245 and $1,170,
respectively, in connection with the issuance of long-term debt. The debt issuance costs are being amortized over the related term of the debt
using the straight-line method, which is not materially different than the effective interest rate method, and are presented net against long-term
debt in the consolidated balance sheets. The amortization of deferred debt issuance costs is included in interest expense and amounted to
approximately $721, $1,072 and $453 during the years ended September 30, 2019, 2018 and 2017, respectively.
10. INCOME TAXES
i3 Verticals, Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from i3 Verticals, LLC
based on i3 Verticals, Inc.'s economic interest in i3 Verticals, LLC. i3 Verticals, LLC's members, including the Company, are liable for federal,
state and local income taxes based on their share of i3 Verticals, LLC's pass-through taxable income. i3 Verticals, LLC is not a taxable entity for
federal income tax purposes, but is subject to and reports entity level tax in both Tennessee and Texas. In addition, certain subsidiaries of i3
Verticals, LLC are corporations that are subject to state and federal income taxes.
91
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
As of September 30, 2019 and 2018, the Company had accrued no interest and no penalties related to uncertain tax positions. It is the
Company’s policy to recognize interest and/or penalties related to income tax matters in income tax expense.
Current:
Federal tax expense
State tax expense
Deferred
Federal tax (benefit)
State tax expense (benefit)
Income tax expense
Year ended September 30,
2019
2018
2017
$
$
220 $
189
(487)
(99)
(177) $
668 $
351
(685)
3
337 $
—
121
—
56
177
92
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
A reconciliation of income tax expense from operations computed at the U.S. federal statutory income tax rate to the Company’s effective
income tax rate is as follows:
2019
2018
2017
Year ended September 30,
Expected U.S. federal income taxes at statutory
rate
Partnership income not taxed at federal level
Valuation allowance
State and local income taxes, net of federal
benefit
Nondeductible expenses
Federal tax rate change
Other
Income tax (benefit) expense
$
81
(1,007)
251
21.0 % $
(260.9) %
65.0 %
(1,139)
294
965
24.6 % $
(6.4) %
(20.9) %
370
(1,352)
914
34.3 %
(125.3) %
84.7 %
104
393
—
1
$
(177)
26.9 %
101.8 %
— %
0.3 %
(45.9) % $
295
398
(471)
(5)
337
(6.4) %
(8.6) %
10.2 %
0.1 %
(7.3) % $
177
67
—
1
177
16.4 %
6.2 %
— %
0.1 %
16.4 %
Deferred income taxes are provided for the temporary differences between the financial reporting basis and tax basis of the Company’s
assets and liabilities. Net deferred taxes spanning multiple jurisdictions as of September 30, 2019 and 2018 were as follows:
Deferred tax assets:
Investment in partnership(1)
Stock-based compensation
Tax Receivable Agreement
Deferred revenue
Accrued expenses
Net operating loss carryforwards(1)
Section 163j carryforward
Other
Gross deferred tax assets
Valuation allowance(1)
Deferred tax liabilities:
Intangible assets
Other
Net deferred tax asset
September 30,
2019
2018 (revised)
40,880 $
811
—
564
110
6,360
2,006
42
50,773
(16,609)
(6,257) $
(285)
27,622 $
14,443
186
193
571
29
1,775
—
33
17,230
(15,517)
(1,656)
(5)
52
$
$
$
_________________
1. During the preparation of the Company’s 2019 financial statements, management determined that immaterial adjustments were necessary to correct certain 2018 amounts in
the table above as follows. The deferred tax asset related to the Company’s investment in partnership was decreased by $7,515 with an equal decrease in the valuation
allowance. Additionally, the amount associated with net operating loss carryforwards was increased by $1,672 with a corresponding increase in the valuation allowance.
These adjustments had no effect on the Company’s consolidated financial position, results of operations or cash flows for any period presented herein.
93
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Federal and state net operating loss carryforwards for the Company were $70,970 as of September 30, 2019 and will begin to expire in
2024. The net operating loss carryforwards are included in Other assets within the Consolidated Balance Sheets. The use of these federal and
state net operating losses is limited to the future taxable income of separate legal entities. Based on expectations of future taxable income,
management believes that it is more likely than not that the results of operations for certain separate legal entities will not generate sufficient
taxable income to realize portions of these net operating loss benefits. As a result, a valuation allowance has been provided for the loss
carryforwards for these specific legal entities.
On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law. The legislation contains several key tax provisions, including the
reduction of the federal corporate income tax rate to 21% effective January 1, 2018, as well as a variety of other changes, including limitation of
the tax deductibility of interest expense, acceleration of expensing of certain business assets and reductions in the amount of executive pay
that could qualify as a tax deduction. The SEC staff issued Staff Accounting Bulletin No. 118, which allowed the Company to record provisional
amounts during a measurement period not to extend beyond one year after the enactment date. As of December 22, 2018, the Company
completed its accounting for all of the enactment-date income tax effects of the Tax Cuts and Jobs Act. The Company made no material
adjustments to the provisional amounts recorded.
Tax Receivable Agreement
On June 25, 2018, the Company entered into a Tax Receivable Agreement with i3 Verticals, LLC and each of the Continuing Equity
Owners (the “Tax Receivable Agreement”) that provides for the payment by the Company to the Continuing Equity Owners of 85% of the
amount of certain tax benefits, if any, that it actually realizes, or in some circumstances, is deemed to realize in its tax reporting, as a result of (i)
future redemptions funded by the Company or exchanges, or deemed exchanges in certain circumstances, of Common Units of i3 Verticals,
LLC for Class A common stock of i3 Verticals, Inc. or cash, and (ii) certain additional tax benefits attributable to payments made under the Tax
Receivable Agreement. These tax benefit payments are not conditioned upon one or more of the Continuing Equity Owners maintaining a
continued ownership interest in i3 Verticals, LLC. If a Continuing Equity Owner transfers Common Units but does not assign to the transferee of
such units its rights under the Tax Receivable Agreement, such Continuing Equity Owner generally will continue to be entitled to receive
payments under the Tax Receivable Agreement arising in respect of a subsequent exchange of such Common Units. In general, the Continuing
Equity Owners’ rights under the Tax Receivable Agreement may not be assigned, sold, pledged or otherwise alienated to any person, other
than certain permitted transferees, without (a) the Company's prior written consent, which should not be unreasonably withheld, conditioned or
delayed, and (b) such persons becoming a party to the Tax Receivable Agreement and agreeing to succeed to the applicable Continuing Equity
Owner’s interest therein. The Company expects to benefit from the remaining 15% of the tax benefits, if any, that the Company may realize.
During the year ended September 30, 2018, in conjunction with the Company's IPO, i3 Verticals, Inc. purchased Class B common stock
from a Continuing Equity Owner for $4,635. This transaction triggered an increase in the tax basis of the Company's Common Units in i3
Verticals, LLC subject to the provisions of the Tax Receivable Agreement. The Company recognized a deferred tax asset in the amount of $960
and a corresponding liability of $816, representing 85% of the tax benefits due to the Continuing Equity Owners related to exchanges in the
year ended September 30, 2018.
During the year ended September 30, 2019, the Company acquired an aggregate of 4,292,169 common units of i3 Verticals, LLC in
connection with the redemption of common units, which resulted in an increase in the tax basis of our investment in i3 Verticals, LLC subject to
the provisions of the Tax Receivable Agreement. Primarily as a result of these exchanges, during the year ended September 30, 2019, the
Company recognized an increase to its net deferred tax assets in the amount of $25,776, and corresponding Tax Receivable Agreement
liabilities of $22,413, representing 85% of the tax benefits due to the Continuing Equity Owners. The results of these transactions brought the
deferred tax asset and corresponding Tax Receivable Agreement liability balances to $26,736 and $23,229, respectively, as of September 30,
2019.
94
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Payments to the Continuing Equity Owners related to exchanges through September 30, 2019 will range from $0 to $2,103 per year and
are expected to be paid over the next 24 years. The amounts recorded as of September 30, 2019, 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.
11. FAIR VALUE MEASUREMENTS
The Company applies the provisions of ASC 820, Fair Value Measurement, which defines fair value, establishes a framework for its
measurement and expands disclosures about fair value measurements. Fair value is the price that would be received to sell an asset or the
price paid to transfer a liability as of the measurement date. A three-tier, fair-value reporting hierarchy exists for disclosure of fair value
measurements based on the observability of the inputs to the valuation of financial assets and liabilities. The three levels are:
Level 1 — Quoted prices for identical instruments in active markets.
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not
active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are
unobservable in active exchange markets.
The carrying value of the Company’s financial instruments, including cash and cash equivalents, restricted cash, settlement assets and
obligations, accounts receivable, other assets, accounts payable, and accrued expenses, approximated their fair values as of September 30,
2019 and 2018, because of the relatively short maturity dates on these instruments. The carrying amount of debt approximates fair value as of
September 30, 2019 and 2018, because interest rates on these instruments approximate market interest rates.
95
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
The Company has no Level 1 or Level 2 financial instruments. The following tables present the changes in the Company's Level 3 financial
instruments that are measured at fair value on a recurring basis.
Balance at September 30, 2017
Exercise of warrant liabilities into Common Units
Change in the fair value of warrant liabilities, included in Other expenses
Contingent consideration accrued at time of business combination
Change in fair value of contingent consideration included in Operating expenses
Contingent consideration paid
Balance at September 30, 2018
Contingent consideration accrued at time of business combination
Change in fair value of contingent consideration included in Operating expenses
Contingent consideration paid
Balance at September 30, 2019
Accrued Contingent
Consideration
Mezzanine Warrants
$
767 $
8,487
(9,254)
—
—
—
— $
—
—
—
— $
$
$
3,340
—
—
1,877
3,851
(3,069)
5,999
13,032
3,389
(4,194)
18,226
Approximately $10,223 and $3,813 of contingent consideration was recorded in accrued expenses and other current liabilities as of
September 30, 2019 and 2018, respectively. Approximately $8,003 and $2,186 of contingent consideration was recorded in other long-term
liabilities as of September 30, 2019 and 2018, respectively.
12. EQUITY-BASED COMPENSATION
A summary of equity-based compensation expense recognized during the years ended September 30, 2019, 2018 and 2017 is as follows:
TRA non-participation compensatory shares
Stock options
Equity-based compensation expense
Year ended September 30,
2019
2018
2017
$
$
— $
6,124
6,124 $
741 $
826
1,567 $
—
—
—
Amounts are included in general and administrative expense on the consolidated statements of operations. Income tax benefits of 160
were recognized related to equity-based compensation during the year ended September 30, 2019. No income tax benefits were recognized
related to equity-based compensation during the years ended September 30, 2018, and 2017.
TRA Non-Participation Compensatory Shares
On June 25, 2018, the Company entered into the Tax Receivable Agreement as described in Note 10. The Former Equity Owners did not
participate in the Tax Receivable Agreement. Therefore, as part of the Reorganization Transactions, the Class B common units held by the
Former Equity Owners were converted into shares of Class A common stock based on a conversion ratio that provided an equitable adjustment
to reflect the full value of the Class B common units. For employees who are Former Equity Owners, this arrangement was a modification
under ASC 718. The Company recognized stock-based compensation expense of $741 as part of the Reorganization Transactions as a result
of this conversion.
96
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Stock Options
In May 2018, the Company adopted the 2018 Equity Incentive Plan (the “2018 Plan”) under which the Company may grant up to 3,500,000
stock options and other equity-based awards to employees, directors and officers. The number of shares of Class A common stock available
for issuance under the 2018 Plan includes an annual increase on the first day of each year, beginning with the 2019 calendar year, equal to
4.0% of the outstanding shares of all classes of the Company's common stock as of the last day of the immediately preceding calendar year,
unless the Company’s board of directors determines prior to the last trading day of December of the immediately preceding calendar year that
the increase shall be less than 4%. As of September 30, 2019, there were 4,552,873 options available to grant under the 2018 Plan.
In connection with the IPO, the Company granted 2,045,000 stock options to its directors and certain employees. The stock options were
granted with an exercise price of $13.00 per share and vest ratably over a three-year period.
The fair value of stock option awards during the year ended September 30, 2019 and from June 20, 2018 through September 30, 2018 was
determined on the grant date using the Black-Scholes valuation model based on the following weighted-average assumptions:
Expected volatility(1)
Expected dividend yield(2)
Expected term(3)
Risk-free interest rate(4)
September 30, 2019
September 30, 2018
26.7 %
— %
6 years
2.5 %
26.2 %
— %
6 years
2.8 %
_________________
1.
2.
3.
4.
Expected volatility is based on the historical volatility of a selected peer group over a period equivalent to the expected term.
The Company has assumed a dividend yield of zero as management has no plans to declare dividends in the foreseeable future.
Expected term represents the estimated period of time until an award is exercised and was determined using the simplified method.
The risk-free rate is an interpolation of yields on U.S. Treasury securities with maturities equivalent to the expected term.
A summary of stock option activity for the year ended September 30, 2019 is as follows:
Outstanding at beginning of period
Granted
Exercised
Forfeited
Outstanding at end of period
Stock Options
Weighted Average
Exercise Price
2,138,500 $
2,432,916
(89,974)
(240,747)
4,240,695 $
13.13
22.50
13.06
16.20
18.33
The weighted-average grant date fair value of stock options granted during the year ended September 30, 2019 was $7.06. As of
September 30, 2019, there were 4,240,695 stock options outstanding, of which 611,592 were exercisable. As of September 30, 2019, total
unrecognized compensation expense related to unvested stock options, including an estimate for pre-vesting forfeitures, was $17,770, which is
expected to be recognized over a weighted-average period of 2.3 years. The Company's policy is to account for forfeitures of stock-based
compensation awards as the occur. The total fair value of stock options that vested during the year ended September 30, 2019 was $2,925.
97
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
13. STOCKHOLDERS' / MEMBERS' EQUITY AND REDEEMABLE CLASS A UNITS
In connection with the Company’s IPO, the Company’s board of directors approved an amended and restated certificate of incorporation
(the “Amended and Restated Certificate of Incorporation”), which became effective on June 25, 2018. The Amended and Restated Certificate
of Incorporation authorizes the issuance of up to 150,000,000 shares of Class A common stock, up to 40,000,000 shares of Class B common
stock and 10,000,000 shares of preferred stock, each having a par value of $0.0001 per share. Shares of Class A common stock have both
economic and voting rights. Shares of Class B common stock have no economic rights, but do have voting rights. Holders of shares of Class A
common stock and Class B common stock are entitled to one vote per share on all matters presented to stockholders generally. The
Company’s board of directors has the discretion to determine the rights, preferences, privileges, and restrictions of any series of preferred
stock.
On June 25, 2018, the Company completed the IPO of 7,647,500 shares of its Class A common stock. In connection with the IPO, the
Company and i3 Verticals, LLC completed the Reorganization Transactions, pursuant to which all outstanding vested and non-vested Class A
units, Class P units and common units were converted into new Common Units. Former Equity Owners' Common Units were converted into
newly issued shares of Class A common stock. Continuing Equity Owners received newly issued shares of Class B common stock. For further
descriptions of the IPO and Reorganization Transactions, see Note 1.
i3 Verticals, LLC Recapitalization
As noted above, the i3 Verticals, LLC Limited Liability Company Agreement, among other things, appointed the Company as i3 Verticals,
LLC’s sole managing member and reclassified all outstanding membership interests in i3 Verticals, LLC as non-voting common units. As the
sole managing member of i3 Verticals, LLC, the Company controls the management of i3 Verticals, LLC. As a result, the Company consolidates
i3 Verticals, LLC’s financial results and reports a non-controlling interest related to the economic interest of i3 Verticals, LLC held by the
Continuing Equity Owners.
The Amended and Restated Certificate of Incorporation and the i3 Verticals, LLC Limited Liability Company Agreement discussed above
require i3 Verticals, LLC and the Company, at all times, to maintain (i) a one-to-one ratio between the number of shares of Class A common
stock issued by the Company and the number of Common Units owned by the Company and (ii) a one-to-one ratio between the number of
shares of Class B common stock owned by the Continuing Equity Owners and the number of Common Units owned by the Continuing Equity
Owners (other than shares of the Company's Class A common stock under unvested options the Company issues, treasury stock and preferred
stock (the “Excluded Common Units”)). The Company may issue shares of Class B common stock only to the extent necessary to maintain the
one-to-one ratio between the number of Common Units of i3 Verticals, LLC held by the Continuing Equity Owners (other than the Excluded
Common Units) and the number of shares of Class B common stock issued to the Continuing Equity Owners. Shares of Class B common stock
are transferable only together with an equal number of Common Units of i3 Verticals, LLC. Only permitted transferees of Common Units held by
the Continuing Equity Owners will be permitted transferees of Class B common stock.
The Continuing Equity Owners may from time to time at each of their options (subject, in certain circumstances, to time-based vesting
requirements) require i3 Verticals, LLC to redeem all or a portion of their Common Units in exchange for, at i3 Verticals, LLC’s election, newly-
issued shares of our Class A common stock on a one-for-one basis or a cash payment equal to a volume weighted average market price of one
share of Class A common stock for each Common Unit redeemed, in each case in accordance with the terms of the i3 Verticals, LLC Limited
Liability Company Agreement; provided that, at the Company’s election, the Company may effect a direct exchange of such Class A common
stock or such cash, as applicable, for such Common Units. The Continuing Equity Owners may exercise such redemption right for as long as
their Common Units remain outstanding. Simultaneously with the payment of cash or shares of Class A common stock, as applicable, in
connection with a redemption or exchange of Common Units pursuant to the terms of the i3 Verticals, LLC Limited Liability Company
Agreement, a number of shares of the Company's Class B common stock registered in the
98
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
name of the redeeming or exchanging Continuing Equity Owner will be canceled for no consideration on a one-for-one basis with the number of
Common Units so redeemed or exchanged.
Redeemable Class A Units
Prior to the Company's recapitalization, as of September 30, 2017, there were 4,900,000 redeemable Class A units issued and
outstanding. Upon receipt of a redemption request following the termination of employment of the current Chief Executive Officer of the
Company (the redemption event), the Company was required to redeem all of the outstanding redeemable Class A units held by certain
members. The redemption price of the redeemable Class A units was equal to the greater of (i) the fair value of the redeemable Class A unit or
(ii) original issue price per redeemable Class A unit plus any preferred returns through the date of the redemption request.
Holders of redeemable Class A units had preferred return rights in preference to any declaration or distribution to holders of Class P units
or common units, and equal to other Class A units. Preferred returns on the redeemable Class A units accrued at an amount equal to 10.0%
per unit per annum of the original issue price, compounded annually, whether or not declared by the board of directors, and were cumulative.
After preferential payment to the holder of redeemable Class A units and other Class A units, any additional distributions declared were
distributed pro-rata to the holders of Class A units, common units and Class P units, in proportion to their respective units. Total cumulative
preferred returns included within the carrying amount of the redeemable Class A units amounted to $3,376 and $2,823 as of June 25, 2018, the
date of the Reorganization Transactions, and September 30, 2017, respectively.
During 2017, as obligated under the provisions of its member agreements, the Company declared distributions of approximately $131 to its
redeemable Class A unit holders in connection with the members’ estimated tax liabilities.
As described in Note 1, the redeemable Class A units were converted into Common Units in i3 Verticals, LLC in connection with the
Reorganization Transactions.
Class A Units, Class P Units and Common Units
Prior to the Company's recapitalization, as of September 30, 2017, the Company had authorized the issuance of Class A units, Class P
units and common units. As described in Note 1, the Class A units, Class P units and Common Units were converted to Common Units in i3
Verticals, LLC in connection with the Reorganization Transactions.
Class A Units
As of September 30, 2017, there were 13,892,129 Class A units issued and outstanding.
Holders of Class A units had preferred return rights in preference to any declaration or distribution to holders of Class P units or common
units. Preferred returns on the Class A units accrued at an amount equal to 10.0% per unit per annum of the original issue price, compounded
annually, whether or not declared by the board of directors, and were cumulative. After preferential payment to the holder of Class A units, any
additional distributions declared were distributed pro-rata to the holders of Class A units, common units and Class P units, in proportion to their
respective units. Total cumulative preferred returns included within the carrying amount of the
99
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Class A units amounted to $7,627 and $5,105 as of June 25, 2018, the date of the Reorganization Transactions, and September 30, 2017,
respectively.
During 2017, as obligated under the provisions of its member agreements, the Company declared distributions of approximately $625 to its
Class A unit holders in connection with the members’ estimated tax liabilities.
Common Units
As of September 30, 2017, there were 1,548,722 common units issued and outstanding. Common units were generally issued in
association with acquisitions.
Junior Subordinated Notes Warrants
As of September 30, 2017, there were in the aggregate 1,433,920 warrants outstanding and exercisable to purchase common units which
are classified as equity instruments. The warrants were issued in connection with the issuance of the Junior Subordinated Notes (Note 9). As of
September 30, 2017, the intrinsic value of the junior subordinated warrants was $0.
Junior Subordinated Notes Warrants
Warrants
Expiration
Exercise Price
1,433,920
February 14, 2024 $
2.095
The Junior Subordinated Notes Warrants were issued at zero value and were reflected within members’ equity within the accompanying
Consolidated Balance Sheets. On June 25, 2018, in conjunction with the Reorganization Transactions described in Note 1, all existing Junior
Subordinated Notes Warrants were exercised for common units in i3 Verticals, LLC.
Mezzanine Warrants
As of September 30, 2017, there were in the aggregate 1,423,688 warrants outstanding and exercisable to purchase Common Units which
are classified as long-term liabilities. The warrants were issued in connection with the issuance of the Mezzanine Notes. See additional
disclosures in Note 9.
Restricted Class P Units
As of September 30, 2017, there were 7,647,350 restricted Class P units issued and outstanding to certain members of the Company's
Board of Directors and employees.
All Class P units were issued at a participation threshold above the valuation of the Company at the grant date. As a result, they had a
nominal value, individually and in the aggregate, at the grant date. Using an option-pricing model and considering liquidation preferences of the
Class P units, as well as the lack of marketability, management determined that any compensation expense related to the restricted units was
immaterial to the consolidated financial statements.
100
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
14. COMMITMENTS AND CONTINGENCIES
Leases
The Company utilizes office space and equipment under operating leases. Rent expense under these leases amounted to $2,302, $1,555
and $997 during the years ended September 30, 2019, 2018 and 2017, respectively.
A summary of approximate future minimum payments under these leases as of September 30, 2019 is as follows:
Years ending September 30:
2020
2021
2022
2023
2024
Thereafter
Total
Minimum Processing Commitments
$
2,581
2,150
1,900
1,721
1,205
940
$
10,497
The Company has non-exclusive agreements with several processors to provide it services related to transaction processing and
transmittal, transaction authorization and data capture, and access to various reporting tools. Certain of these agreements require the
Company to submit a minimum monthly number of transactions for processing. If the Company submits a number of transactions that is lower
than the minimum, it is required to pay to the processor the fees it would have received if it had submitted the required minimum number of
transactions. As of September 30, 2019, such minimum fee commitments were as follows:
Years ending September 30:
2020
2021
2022
2023
2024
Thereafter
Total
Litigation
$
3,733
1,457
2,046
2,646
243
—
$
10,125
With respect to all legal, regulatory and governmental proceedings, and in accordance with ASC 450-20, Contingencies—Loss
Contingencies, the Company considers the likelihood of a negative outcome. If the Company determines the likelihood of a negative outcome
with respect to any such matter is probable and the amount of the loss can be reasonably estimated, the Company records an accrual for the
estimated amount of loss for the expected outcome of the matter. If the likelihood of a negative outcome with respect to material matters is
reasonably possible and the Company is able to determine an estimate of the amount of possible loss or a range of loss, whether in excess of
a related accrued liability or where there is no accrued liability, the Company discloses the estimate of the amount of possible loss or range of
loss. However, the Company in some instances may be unable to estimate an amount of possible loss or range of loss based on the significant
uncertainties involved in, or the preliminary nature of, the matter, and in these instances the Company will disclose the nature of the
contingency and describe why the Company is unable to determine an estimate of possible loss or range of loss.
101
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
In addition, the Company is involved in ordinary course legal proceedings, which include all claims, lawsuits, investigations and
proceedings, including unasserted claims, which are probable of being asserted, arising in the ordinary course of business and otherwise not
described below. The Company has considered all such ordinary course legal proceedings in formulating its disclosures and assessments.
After taking into consideration the evaluation of such legal matters by the Company's legal counsel, the Company's management believes at
this time such matters will not have a material impact on the Company's consolidated balance sheet, results of operations or cash flows.
Other
The Company's subsidiary CP-PS, LLC has certain indemnification obligations in favor of FDS Holdings, Inc. related to the acquisition of
certain assets of Merchant Processing Solutions, LLC in February 2014. The Company has incurred expenses related to these indemnification
obligations in prior periods and may have additional expenses in the future. However, after taking into consideration the evaluation of such
matters by the Company’s legal counsel, the Company’s management believes at this time that the anticipated outcome of any existing or
potential indemnification liabilities related to this matter will not have a material impact on the Company’s consolidated financial position, results
of operations or cash flows.
15. RELATED PARTY TRANSACTIONS
Related parties held $6,158 of the Company’s Junior Subordinated Notes as of September 30, 2017. As described Note 9, in connection
with the Company's IPO and as part of the Reorganization Transactions, $924 of the Junior Subordinated Notes held by related parties was
converted to newly issued shares of the Company's Class A common stock. Also in June 2018, the remaining $5,234 of the Junior
Subordinated Notes held by related parties were repaid with proceeds from the Company's IPO. Interest expense to related parties for the
Company’s Junior Subordinated Notes amounted to $457 and $632 during the years ended September 30, 2018 and 2017, respectively.
All lenders party to the Company’s Mezzanine Notes are considered related parties, through their ownership interest in the Company and
affiliated director relationships. Outstanding Mezzanine Notes payable to related parties amounted to $10,500 as of September 30, 2017. In
June 2018, the Mezzanine Notes were repaid in full with proceeds from the Company's IPO. Interest expense to related parties for the
Company’s Mezzanine Notes amounted to $952 and $1,282 during the years ended September 30, 2018 and 2017, respectively.
In April, 2016, the Company entered into a purchase agreement to purchase certain assets of Axia, LLC. On April 29, 2016, the Company
entered into a Processing Services Agreement (the “Axia Tech Agreement”) with Axia Technologies, LLC (“Axia Tech”), an entity controlled by
the previous owner of Axia, LLC. Under the Axia Tech Agreement, the Company agreed to provide processing services for certain merchants
as designated by Axia Tech from time to time. In accordance with ASC 605-45, revenue from the processing services is recognized net of
interchange, residual expense and other fees. The Company earned net revenues related to the Axia Tech Agreement of $81, $53 and $27
during the years ended September 30, 2019, 2018 and 2017 respectively. i3 Verticals, LLC, the Company's CEO and Clay Whitson, the
Company's CFO, own 2.0%, 10.6% and 0.4%, respectively, of the outstanding equity of Axia Tech.
In connection with our IPO, we entered into a Tax Receivable Agreement with certain non-controlling interest holders that provides for the
payment by the Company to the Continuing Equity Owners of 85% of the amount of certain tax benefits, if any, that it actually realizes, or in
some circumstances, is deemed to realize in its tax reporting, as a result of (i) future redemptions funded by the Company or exchanges, or
deemed exchanges in certain circumstances, of Common Units of i3 Verticals, LLC for Class A common stock of i3 Verticals, Inc. or cash, and
(ii) certain additional tax benefits attributable to payments made under the Tax Receivable Agreement. See Note 10 for further information. As
of September 30, 2019, the total amount due under the Tax Receivable Agreement was $23,229.
102
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
16. SEGMENTS
The Company determines its operating segments based on ASC 280, Segment Reporting, how the chief operating decision making group
monitors and manages the performance of the business and the level at which financial information is reviewed. The Company’s operating
segments are strategic business units that offer different products and services.
The Company's core business is delivering seamless integrated payment and software solutions to SMBs and organizations in strategic
vertical markets. This is accomplished through the Merchant Services and Proprietary Software and Payments segments.
The Merchant Services segment provides comprehensive payment solutions to businesses and organizations. The Merchant Services
segment includes third-party integrated payment solutions as well as traditional payment services across the Company's strategic vertical
markets.
The Proprietary Software and Payments segment delivers embedded payment solutions to the Company's clients through company-owned
software. Payments are delivered through both the payment facilitator model and the traditional merchant processing model. The Company's
Proprietary Software and Payments clients are primarily in the education, property management and public sector markets.
The Other category includes corporate overhead expenses, when presenting reportable segment information.
The Company primarily uses processing margin to measure operating performance. The following is a summary of reportable segment
operating performance for the years ended September 30, 2019, 2018 and 2017.
Revenue
$
336,800 $
39,507 $
— $
376,307
As of and for the Year ended September 30, 2019
Merchant Services
Proprietary Software
and Payments
Other
Total
Operating expenses
Interchange and network fees
Other costs of services
Selling general and administrative
Depreciation and amortization
Change in fair value of contingent consideration
Income (loss) from operations
Processing margin(1)
Total assets
Goodwill
236,170
41,309
25,150
11,788
51
6,697
2,928
19,184
4,223
3,338
—
—
18,526
553
—
22,332 $
3,137 $
(19,079) $
76,343 $
203,326 $
108,472 $
30,523 $
112,514 $
59,812 $
— $
33,462 $
— $
242,867
44,237
62,860
16,564
3,389
6,390
106,866
349,302
168,284
$
$
$
$
__________________________
1.
Processing margin is equal to revenue less interchange and network fees, less other costs of services, $17,022, $641 and $0 of residual expense, a component of other costs
of services, are added back to the Merchant Services segment, Proprietary Software and Payments segment, and Other category, respectively.
103
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Revenue
$
302,929 $
20,582 $
(3) $
323,508
As of and for the Year ended September 30, 2018
Merchant Services
Proprietary Software
and Payments
Other
Total
Operating expenses
Interchange and network fees
Other costs of services
Selling general and administrative
Depreciation and amortization
Change in fair value of contingent consideration
Income (loss) from operations
Processing margin(1)
Total assets
Goodwill
209,695
38,399
23,291
9,535
1,772
4,848
1,916
7,602
2,097
2,094
—
(1)
9,692
207
—
20,237 $
2,025 $
(9,901) $
68,811 $
141,977 $
69,666 $
14,371 $
28,339 $
14,288 $
(2) $
4,826 $
— $
214,543
40,314
40,585
11,839
3,866
12,361
83,180
175,142
83,954
$
$
$
$
__________________________
1.
Processing margin is equal to revenue less interchange and network fees, less other costs of services. $13,976, $553 and $0 of residual expense, a component of other costs
of services, are added back to the Merchant Services segment, Proprietary Software and Payments segment, and Other category, respectively.
Revenue
$
248,005 $
14,582 $
(16) $
262,571
As of and for the Year ended September 30, 2017
Merchant Services
Proprietary Software
and Payments
Other
Total
Operating expenses
Interchange and network fees
Other costs of services
Selling general and administrative
Depreciation and amortization
Change in fair value of contingent consideration
Income (loss) from operations
Processing margin(1)
Total assets
Goodwill
__________________________
1.
185,141
27,350
13,858
8,029
192
3,971
1,559
7,194
1,938
(410)
—
(111)
6,142
118
—
13,435 $
330 $
(6,165) $
47,389 $
113,568 $
49,173 $
9,423 $
8,901 $
9,344 $
(53) $
17,522 $
— $
189,112
28,798
27,194
10,085
(218)
7,600
56,759
139,991
58,517
$
$
$
$
Processing margin is equal to revenue less interchange and network fees, less other costs of services. $11,875, $371 and $(148) of residual expense, a component of other
costs of services, are added back to the Merchant Services segment, Proprietary Software and Payments segment, and Other category, respectively.
104
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
17. NON-CONTROLLING INTEREST
i3 Verticals, Inc. is the sole managing member of i3 Verticals, LLC and as a result, consolidates the financial results of i3 Verticals, LLC and
reports a non-controlling interest representing the Common Units of i3 Verticals, LLC held by the Continuing Equity Owners. Changes in i3
Verticals, Inc.’s ownership interest in i3 Verticals, LLC while i3 Verticals, Inc. retains its controlling interest in i3 Verticals, LLC will be accounted
for as equity transactions. As such, future redemptions or direct exchanges of Common Units of i3 Verticals, LLC by the Continuing Equity
Owners will result in a change in ownership and reduce or increase the amount recorded as non-controlling interest and increase or decrease
additional paid-in capital when i3 Verticals, LLC has positive or negative net assets, respectively.
As of September 30, 2019, and 2018, respectively, i3 Verticals, Inc. owned 14,444,115 and 9,112,042 of i3 Verticals, LLC's Common Units,
representing a 52.8% and 34.6% economic ownership interest in i3 Verticals, LLC.
18. EARNINGS PER SHARE
Basic earnings per share of Class A common stock is computed by dividing net income available to i3 Verticals, Inc. by the weighted-
average number of shares of Class A common stock outstanding during the period. Diluted earnings per share of Class A common stock is
computed by dividing net income available to i3 Verticals, Inc. by the weighted-average number of shares of Class A common stock
outstanding adjusted to give effect to potentially dilutive securities.
Prior to the IPO, the i3 Verticals, LLC membership structure included Class A units, common units and Class P units. The Company
analyzed the calculation of earnings per unit for periods prior to the IPO using the two-class method and determined that it resulted in values
that would not be meaningful to the users of these consolidated financial statements. Therefore, earnings per share information for the year
ended September 30, 2018 represents only the period from June 25, 2018 through September 30, 2018.
105
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per share of
Class A common stock:
Basic net (loss) income per share:
Numerator
Net income(1)
Less: Net income attributable to non-controlling interests
Net (loss) income attributable to Class A common stockholders
Denominator
Weighted average shares of Class A common stock outstanding(2)
Basic net (loss) income per share(3)
Dilutive net (loss) income per share(3):
Numerator
Net (loss) income attributable to Class A common stockholders
Reallocation of net income assuming conversion of common units(4)
Net income attributable to Class A common stockholders - diluted
Denominator
Weighted average shares of Class A common stock outstanding(2)
Weighted average effect of dilutive securities
Weighted average shares of Class A common stock outstanding - diluted
Diluted net income per share
Year ended September 30,
2019
2018
$
$
$
563 $
3,608
(3,045) $
2,673
1,937
736
10,490,981
8,812,630
(0.29) $
0.08
$
$
$
736
1,464
2,200
8,812,630
18,061,248
26,873,878
0.08
____________________
1.
2.
3.
4.
Basic and diluted earnings per Class A common stock is presented only for the period after the Company’s Reorganization Transactions. As such, net income used in the
calculation for the year ended September 30, 2018 represents the net income attributable to Class A common stockholders for the period from June 25, 2018 through
September 30, 2018.
Excludes 282,801 and 299,412 restricted Class A common stock units for the years ended September 30, 2019 and 2018, respectively.
For the year ended September 30, 2019, all potentially dilutive securities were anti-dilutive, so diluted net loss per share was equivalent to basic net loss per share. The
following securities were excluded from the weighted average effect of dilutive securities in the computation of diluted earnings per share of Class A common stock:
a.
15,856,855 shares of weighted average Class B common stock for the year ended September 30, 2019, along with the reallocation of net income assuming conversion
of these shares, were excluded because the effect would have been anti-dilutive,
626,500 stock options for the year ended September 30, 2019, were excluded because the exercise price of these stock options exceeded the average market price of
our Class A common stock during the period (“out-of-the-money”) and the effect of including them would have been anti-dilutive, and
1,009,858 shares for the year ended September 30, 2019, resulting from estimated stock option exercises as calculated by the treasury stock method, and 282,801
restricted Class A common units for the year ended September 30, 2019 were excluded because the effect of including them would have been anti-dilutive.
b.
c.
The reallocation of net income assuming conversion of common units represents the tax effected net income attributable to non-controlling interest using the effective income
tax rates described in Note 10 above and assuming all common units of i3 Verticals, LLC were exchanged for Class A common stock at the beginning of the year. The
common units of i3 Verticals, LLC held by the Continuing Equity Owners are potentially dilutive securities, and the computations of pro forma diluted net income per share
assume that all common units of i3 Verticals, LLC were exchanged for shares of Class A common stock at the beginning of the year.
Shares of the Company's Class B common stock do not participate in the earnings or losses of the Company and are therefore not
participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class
method has not been presented.
106
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
19. SIGNIFICANT NON-CASH TRANSACTIONS
The Company engaged in the following significant non-cash investing and financing activities during the years ended September 30, 2019,
2018, and 2017:
Exchange of Junior Subordinated Notes for Class A Units
Common Units issued as part of acquisitions' purchase consideration (Note 4)
Restricted Class A common stock issued as part of acquisitions' purchase
consideration (Note 4)
Acquisition date fair value of contingent consideration in connection with
business combinations
Replacement of the 2016 Senior Secured Credit Facility with the 2017 Senior
Secured Credit Facility
Replacement of the 2017 Senior Secured Credit Facility with the Senior Secured
Credit Facility
Mezzanine Notes net settled with Mezzanine Warrant exercises
Unsecured notes payable to related and unrelated creditors net settled with
Junior Subordinated Notes Warrants
Settlement of warrant liability with equity as a result of Mezzanine Warrant
exercise
Preferred return on Redeemable Class A Units
Preferred return on Class A Units
Debt issuance costs financed with proceeds from the 2017 Senior Secured
Credit Facility
Debt issuance costs and accrued interest financed with proceeds from the 2019
Senior Secured Credit Facility
Conversion of notes payable to related and unrelated creditors to Class A
common stock
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Year ended September 30,
2019
2018
2017
— $
— $
— $
104 $
225 $
550 $
500
275
—
13,032 $
2,084 $
1,221
— $
87,525 $
100,229 $
— $
— $
14 $
— $
2,565 $
— $
— $
— $
— $
9,253 $
552 $
2,522 $
904 $
1,271 $
— $
— $
8,054 $
—
—
—
—
—
701
2,223
—
—
—
107
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
20. QUARTERLY INFORMATION (UNAUDITED)
The tables below present summarized unaudited quarterly results of operations for the years ended September 30, 2019 and 2018.
Management believes that all necessary adjustments have been included in the amounts stated below for a fair presentation of the results of
operations for the periods presented when read in conjunction with the consolidated financial statements for the years ended September 30,
2019 and 2018. Results of operations for a particular quarter are not necessarily indicative of results of operations for an annual period and are
not predictive of future periods.
December 31,
March 31,
June 30,
September 30,
Quarter ended
$
$
$
$
77,221 $
3,347 $
(721) $
(332) $
Fiscal Year 2018:
Revenue
Income from operations
(Loss) income before income taxes
Net (loss) income attributable to i3 Verticals, Inc.(1)
Basic (loss) earnings per share attributable to i3 Verticals, Inc.(2)
(3)
Diluted (loss) earnings per share attributable to i3 Verticals, Inc.
(2)(4)
Fiscal Year 2019:
$
Revenue
$
Income (loss) from operations
$
Income (loss) before income taxes
Net income (loss) attributable to i3 Verticals, Inc.
$
Basic earnings (loss) per share attributable to i3 Verticals, Inc.(3) $
Diluted earnings (loss) per share attributable to i3 Verticals, Inc.
(5)
____________________
1. Represents net loss of i3 Verticals, LLC for the periods prior to the Company's Reorganization Transactions.
2.
84,868 $
3,530 $
2,616 $
178 $
0.02 $
0.02 $
$
77,698 $
2,596 $
(6,586) $
(6,836) $
$
$
85,394 $
(203) $
(1,358) $
(1,102) $
(0.12) $
84,536 $
2,923 $
37 $
(564) $
(0.01) $
(0.01) $
97,483 $
1,194 $
(724) $
(1,191) $
(0.12) $
84,053
3,495
2,646
834
0.09
0.09
108,562
1,869
(148)
(930)
(0.07)
(0.12) $
(0.12) $
(0.07)
Basic and diluted (loss) earnings per Class A common stock is presented only for the period after the Company’s Reorganization Transactions. As such, net loss used in the
calculation for the quarter ended June 30, 2018 represents the loss for the period from June 25 through June 30, 2018.
Basic (loss) earnings per share excludes 279,273 and 299,412 restricted Class A common units from the calculation for the quarters ended June 30, 2018, and September
20, 2018, respectively, and 295,405, 277,758, 285,433 and 271,881 restricted Class A common stock units from the calculation for the quarters ended December 31, 2018,
March 31, 2019, June 30, 2019, and September 30, 2019, respectively.
For the quarters ended June 30, 2018, and September 30, 2018, the following securities were excluded from the weighted average effect of dilutive securities in the
computation of diluted earnings per share of Class A common stock:
3.
4.
a.
b.
17,213,806 shares of weighted average Class B common stock for the quarters ended June 30, 2018 and September 30, 2018, along with the reallocation of net
income assuming conversion of these shares, were excluded from the calculation of diluted earnings per share of Class A common stock because the effect would
have been anti-dilutive, and
377,537 and 565,840 shares for the quarters ended June 30, 2018, and September 30, 2018, respectively, resulting from estimated stock option exercises as
calculated by the treasury stock method, and 279,273 and 299,412 restricted Class A common units for the quarters ended June 30, 2018, and September 30,
2018, respectively, were excluded because the effect of including them would have been anti-dilutive.
5.
For the quarters ended December 31, 2018, and March 31, June 30, and September 30, 2019, the following securities were excluded from the weighted average effect of
dilutive securities in the computation of diluted earnings per share of Class A common stock:
a.
17,213,806, 17,112,164, 16,184,026 and 12,921,637 shares of weighted average Class B common stock for the quarters ended December 31, 2018, and March 31,
June 30, and September 30, 2019, respectively, along with the reallocation of net income assuming conversion of these shares, were excluded from the calculation
of diluted earnings per share of Class A common stock because the effect would have been anti-dilutive,
108
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
b.
c.
754,750, 30,500, 443,000 and 446,000 stock options for the quarters ended December 31, 2018, and March 31, June 30, and September 30, 2019, respectively,
were excluded because the exercise price of these stock options exceeded the average market price of our Class A common stock during the period (“out-of-the-
money”) and the effect of including them would have been anti-dilutive, and
1,012,916, 1,188,987 and 1,131,760 shares for the quarters ended March 31, June 30, and September 30, 2019, respectively, resulting from estimated stock option
exercises as calculated by the treasury stock method, and 277,758, 285,433 and 271,881 restricted Class A common units for the quarters ended March 31, June
30, and September 30, 2019, respectively, were excluded because the effect of including them would have been anti-dilutive.
109
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer, with the participation of other members of management, have evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act, as of the end
of the period covered by this report. Based on such evaluations, our Chief Executive Officer and Chief Financial Officer concluded that, as of
such date, our disclosure controls and procedures were effective (at the reasonable assurance level) to ensure that the information required to
be included in this report has been recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and
forms and to ensure that the information required to be included in this report was accumulated and communicated to management, including
our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-
15(f) under the Exchange Act. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of
our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. Because of its
inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Our management, including the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over
financial reporting as of September 30, 2019. In making this assessment, we used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013). Based on such assessment our
management has concluded that, as of September 30, 2019, our internal control over financial reporting is effective based on those criteria.
This annual report does not include an attestation report from our registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit
emerging growth companies, which we are, to provide only management's report in this annual report.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the fiscal year ended September 30, 2019 that materially
affected, or which are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
110
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this item is incorporated herein by reference to the Proxy Statement for the 2019 annual meeting of the
stockholders, which will be filed with the SEC within 120 days after the end of the fiscal year ended September 30, 2019.
We have adopted a Corporate Code of Conduct that applies to all of our directors, officers and employees. Our Board of Directors expects
its members, as well as our officers and employees, to act in accordance with the highest standards of ethical business conduct. The Corporate
Code of Conduct, as well as the charters of the, Audit Committee and the Compensation Committee, are available on the Investor Relations
section of our website at www.i3Verticals.com under the captions “Investors” and “Corporate Governance.” Upon the written request of any
person, we will furnish, without charge, a copy of any of these documents. Requests should be directed to i3 Verticals, Inc., 40 Burton Hills
Blvd., Suite 415, Nashville, Tennessee 37215, Attention: Paul Maple, General Counsel. We intend to disclose any amendments to our
Corporate Code of Conduct and any waiver from a provision of our code, as required by the SEC, on our website.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to the Proxy Statement for the 2019 annual meeting of the
stockholders, which will be filed with the SEC within 120 days after the end of the fiscal year ended September 30, 2019.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to the Proxy Statement for the 2019 annual meeting of the
stockholders, which will be filed with the SEC within 120 days after the end of the fiscal year ended September 30, 2019.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to the Proxy Statement for the 2019 annual meeting of the
stockholders, which will be filed with the SEC within 120 days after the end of the fiscal year ended September 30, 2019.
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated herein by reference to the Proxy Statement for the 2019 annual meeting of the
stockholders, which will be filed with the SEC within 120 days after the end of the fiscal year ended September 30, 2019.
111
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Consolidated Financial Statements
See Index to Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the information is not required under the related instructions or is not applicable or
because the information required is already included in the financial statements or the notes to those financial statements.
(a)(3) Exhibits
The documents set forth below are filed herewith or incorporated herein by reference to the location indicated.
Exhibit Number
Exhibit Description
Incorporated by Reference
Form
File No.
Exhibit
Filing Date
2.1#
2.2#
3.1
3.2
4.1
4.2*
10.1
10.2
10.3
10.4
10.5#
10.6#
Membership Interest Purchase Agreement, dated April 3,
2019, by and among, i3 Verticals, LLC, i3-Bearcat, LLC,
NTD Holdings, Inc., GH Holdco, Inc. and David Graves
and Tory Humphries.
Agreement and Plan of Merger, dated May 31, 2019, by
and among i3-SDCR, Inc., as buyer, i3 Merger Sub, Inc.,
i3 Verticals, LLC, as guarantor, Pace Payment Systems,
Inc. and 3S Advisors, LLC, as representative.
Amended and Restated Certificate of Incorporation of i3
Verticals, Inc.
Amended and Restated Bylaws of i3 Verticals, Inc.
Specimen Stock Certificate evidencing the shares of
Class A common stock
Description of Securities
Form of Tax Receivable Agreement
Form of Registration Rights Agreement
8-K
8-K
8-K
S-1
S-1
S-1
Limited Liability Company Agreement of i3 Verticals, LLC 8-K
Plan Administration Agreement, dated June 25, 2018, by
and between i3 Verticals, Inc. and i3 Verticals, LLC
8-K
8-K
001-38532
2.1
4/8/19
001-38532
001-38532
001-38532
333-225214
333-225214
333-225214
001-38532
001-38532
2.1
3.1
3.2
4.1
10.2
10.3
10.3
10.4
6/3/19
6/25/18
6/25/18
5/25/18
5/25/18
5/25/18
6/25/18
6/25/18
Amended and Restated Credit Agreement, dated as of
May 9, 2019, among i3 Verticals, LLC, the guarantor and
lender parties thereto and Bank of America, N.A., as
administrative agent.
Security and Pledge Agreement, dated as of May 9, 2019,
among i3 Verticals, LLC, as borrower, the Obligors
thereto, and Bank of America, N.A., as administrative
agent.
8-K
001-38532
10.1
5/13/19
8-K
001-38532
10.2
5/13/19
112
10.7
10.8+
10.9+
10.10+
10.11+
10.12+
10.13+
10.14+
10.15+
10.16+
21.1*
23.1*
31.1*
31.2*
32.1**
32.2**
101.INS*
101.SCH*
101.CAL*
First Amendment to the Amended and Restated Credit
Agreement, dated as of June 26, 2019, among i3
Verticals, LLC, the guarantor and lender parties thereto
and Bank of America, N.A., as administrative agent.
i3 Verticals, LLC Amended & Restated Equity Incentive
Plan, dated November 29, 2016
First Amendment to i3 Verticals, LLC Amended &
Restated Equity Incentive Plan, dated October 31, 2017
Second Amendment to i3 Verticals, LLC Amended &
Restated Equity Incentive Plan, dated May 7, 2018
2018 Equity Incentive Plan
Form of Restricted Stock Award Agreement under 2018
Equity Incentive Plan
Form of Stock Option Award Agreement under 2018
Equity Incentive Plan
10-Q
001-38532
10.3
8/13/19
S-1
S-1
S-1
S-1
S-1
S-1
333-225214
10.21
5/25/18
333-225214
10.22
5/25/18
333-225214
333-225214
10.23
10.24
5/25/18
5/25/18
333-225214
10.25
5/25/18
333-225214
10.26
5/25/18
Employment Agreement, effective as of May 5, 2014, by
and between Charge Payment, LLC and Clay M. Whitson S-1
333-225214
10.27
5/25/18
S-1
S-1
333-225214
333-225214
10.28
10.29
5/25/18
5/25/18
Change in Control Agreement, dated as of May 10, 2017,
by and between i3 Verticals, LLC and Paul Maple
Form of Indemnification Agreement
List of subsidiaries of i3 Verticals, Inc.
Consent of Independent Registered Accounting Firm
Certification of Chief Executive Officer pursuant to Rules
13a-14(a)/15d-14(a) under the Securities Exchange Act of
1934, as amended.
Certification of Chief Financial Officer pursuant to Rules
13a-14(a)/15d-14(a) under the Securities Exchange Act of
1934, as amended.
Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
XBRL Instance Document (the instance document does
not appear in the Interactive Data File because its XBRL
tags are embedded within the Inline XBRL document).
Inline XBRL Taxonomy Extension Schema Document.
Inline XBRL Taxonomy Extension Calculation Linkbase
Document.
113
101.DEF*
101.LAB*
101.PRE*
104
Inline XBRL Taxonomy Definition Linkbase Document.
Inline XBRL Taxonomy Label Linkbase Document.
Inline XBRL Taxonomy Extension Presentation Linkbase
Document.
Cover Page Interactive Data File (formatted as Inline
XBRL and contained in Exhibit 101).
____________________
# Schedules and exhibits have been omitted pursuant to Item 601 of Regulation S-K. i3 Verticals, Inc. hereby undertakes to furnish supplementally copies of any of the omitted
schedules and exhibits upon request by the Securities and Exchange Commission.
+ Denotes a management contract or compensatory plan or arrangement.
* Filed herewith.
** Furnished herewith.
Item 16. Form 10-K Summary
None.
114
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
i3 Verticals, Inc.
By:
/s/ Gregory S. Daily
Gregory S. Daily
Chief Executive Officer
Date:
November 22, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on its
behalf of the registrant and in the capacities and on the dates indicated:
Signature
/s/ Gregory S. Daily
Gregory S. Daily
/s/ Clay Whitson
Clay Whitson
/s/ Scott Meriwether
Scott Meriwether
/s/ Elizabeth Seigenthaler Courtney
Elizabeth Seigenthaler Courtney
/s/ John Harrison
John Harrison
/s/ Burton Harvey
Burton Harvey
/s/ Timothy McKenna
Timothy McKenna
/s/ David Morgan
David Morgan
/s/ David Wilds
David Wilds
Title
Date
November 22, 2019
November 22, 2019
November 22, 2019
November 22, 2019
November 22, 2019
November 22, 2019
November 22, 2019
November 22, 2019
November 22, 2019
Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer and Director
(Principal Financial Officer)
Senior Vice President of Finance (Principal
Accounting Officer)
Director
Director
Director
Director
Director
Director
115
EXHIBIT 4.2
DESCRIPTION OF SECURITIES
The following description of the capital stock of i3 Verticals, Inc. (“i3 Verticals,” “us,” “our,” “we,” or the “Company”) is a summary of the
rights of our capital stock and certain provisions of (i) our amended and restated certificate of incorporation and amended and restated bylaws,
both as currently in effect, and (ii) certain applicable provisions of Delaware law. Reference is made to the more detailed provisions of, and the
descriptions are qualified in their entirety by reference to, the amended and restated certificate of incorporation and amended and restated
bylaws, copies of which are filed as exhibits to this Annual Report on Form 10-K and incorporated by reference herein.
General
Our authorized capital stock consists of 150,000,000 shares of Class A common stock, par value $0.0001 per share, 40,000,000 shares of
Class B common stock, par value $0.0001 per share; and 10,000,000 shares of preferred stock, par value $0.0001 per share.
Class A Common Stock
Voting rights. The holders of Class A common stock are entitled to one vote per share on all matters to be voted upon by the stockholders.
The holders of our Class A common stock do not have cumulative voting rights in the election of directors. Generally, all matters to be voted on
by stockholders must be approved by a majority (or, in the case of election of directors, by a plurality) of the votes entitled to be cast by all
stockholders present in person or represented by proxy, voting together as a single class.
Dividend rights. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of shares of Class A
common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by our Board of Directors (the
“Board”) out of funds legally available therefor. However, we do not intend to pay dividends for the foreseeable future. Holders of shares of
Class B common stock are not entitled to receive dividends in respect of such shares.
Rights upon liquidation. In the event of any voluntary or involuntary liquidation, dissolution or winding up of our affairs, the holders of
Class A common stock are entitled to share ratably in all assets remaining after payment of our debts and other liabilities, subject to prior
distribution rights of preferred stock, then outstanding, if any.
Other rights. The holders of our Class A common stock have no preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the Class A common stock. The rights, preferences and privileges of holders of our Class A
common stock are subject to those of the holders of any shares of our preferred stock we may issue in the future.
Fully Paid. The issued and outstanding shares of Class A common stock are fully paid and non-assessable.
Class B Common Stock
Shares of Class B common stock will be issued in the future only to the extent necessary to maintain a one-to-one ratio between the
number of common units of i3 Verticals, LLC (the “Common Units”) held by the holders, other than i3 Verticals, Inc., of Common Units (the
“Continuing Equity Owners”) and the number of shares of Class B common stock issued to the Continuing Equity Owners. Shares of Class B
common stock are transferable only together with an equal number of Common Units of i3 Verticals, LLC. Only permitted transferees of
Common Units held by the Continuing Equity Owners are permitted transferees of Class B common stock.
Voting rights. The holders of our Class B common stock are entitled to one vote for each share held of record on all matters presented to
our stockholders generally. The holders of shares of our Class B common stock do not
1
have cumulative voting rights in the election of directors. Holders of shares of our Class B common stock vote together with holders of our
Class A common stock as a single class on all matters presented to our stockholders for their vote or approval, except for certain amendments
to our amended and restated certificate of incorporation described below or as otherwise required by applicable law or the amended and
restated certificate of incorporation. Generally, all matters to be voted on by stockholders must be approved by a majority (or, in the case of
election of directors, by a plurality) of the votes entitled to be cast by all stockholders present in person or represented by proxy, voting together
as a single class.
Dividend rights. The holders of our Class B common stock will not participate in any dividends declared by our Board of Directors.
Other rights. The holders of shares of our Class B common stock do not have preemptive, subscription, redemption or conversion rights.
There are no redemption or sinking fund provisions applicable to the Class B common stock. Any amendment of our amended and restated
certificate of incorporation that gives holders of our Class B common stock (1) any rights to receive dividends or any other kind of distribution,
(2) any right to convert into or be exchanged for Class A common stock or (3) any other economic rights must be approved by the majority of
the voting power of all of our outstanding voting stock.
Preferred Stock
Our Board of Directors has the authority to direct us to issue shares of preferred stock in one or more series without stockholder approval.
Our Board of Directors has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock.
The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of i3 Verticals, Inc. without
further action by the stockholders. Additionally, the issuance of preferred stock may adversely affect the holders of our Class A common stock
by restricting dividends on the Class A common stock, diluting the voting power of the Class A common stock or subordinating the liquidation
rights of the Class A common stock. As a result of these or other factors, the issuance of preferred stock could have an adverse impact on the
market price of our Class A common stock. At present, we have no shares of preferred stock issued and outstanding and we have no plans to
issue any preferred stock.
Anti-Takeover Effects of Our Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws and Certain
Provisions of Delaware Law
Our amended and restated certificate of incorporation, amended and restated bylaws and the Delaware General Corporation Law (the
“DGCL”) contain provisions, which are summarized in the following paragraphs, that are intended to enhance the likelihood of continuity and
stability in the composition of our Board of Directors and to discourage certain types of transactions that may involve an actual or threatened
acquisition of our company. These provisions are intended to avoid costly takeover battles, reduce our vulnerability to a hostile change of
control or other unsolicited acquisition proposal, and enhance the ability of our Board of Directors to maximize stockholder value in connection
with any unsolicited offer to acquire us. However, these provisions may have the effect of delaying, deterring or preventing a merger or
acquisition of our company by means of a tender offer, a proxy contest or other takeover attempt that a stockholder might consider in its best
interest, including attempts that might result in a premium over the prevailing market price for the shares of Class A common stock held by
stockholders. Our amended and restated certificate of incorporation provides that any action required or permitted to be taken by our
stockholders must be effected at a duly called annual or special meeting of such stockholders and may not be effected by any consent in
writing by such stockholders.
Authorized but Unissued Capital Stock
2
Delaware law does not require stockholder approval for any issuance of authorized shares. However, the listing requirements of The
Nasdaq Stock Market, LLC (“Nasdaq”), which would apply if and so long as our Class A common stock remains listed on Nasdaq, require
stockholder approval of certain issuances equal to or exceeding 20% of the then outstanding voting power or then outstanding number of
shares of Class A common stock. Additional shares that may be used in the future may be used for a variety of corporate purposes, including
future public offerings, to raise additional capital, to facilitate acquisitions or to repay indebtedness.
One of the effects of the existence of unissued and unreserved common stock may be to enable our Board of Directors to issue shares to
persons friendly to current management, which issuance could render more difficult or discourage an attempt to obtain control of our company
by means of a merger, tender offer, proxy contest or otherwise and thereby protect the continuity of our management and possibly deprive our
stockholders of opportunities to sell their shares of Class A common stock at prices higher than prevailing market prices.
Election of Directors and Vacancies
Our amended and restated certificate of incorporation provides that our Board of Directors must consist of between three and 15 directors.
The exact number of directors is fixed from time to time by our Board of Directors. Each director is elected for a one-year term. There is no limit
on the number of terms a director may serve on our Board of Directors.
In addition, our amended and restated certificate of incorporation provides that any vacancy on the Board of Directors, including a vacancy
that results from an increase in the number of directors or a vacancy that results from the removal of a director with cause, may be filled only by
a majority of the directors then in office.
Business Combinations
We have opted out of Section 203 of the DGCL; however, our amended and restated certificate of incorporation contains similar provisions
providing that we may not engage in certain “business combinations” with any “interested stockholder” for a three-year period following the time
that the stockholder became an interested stockholder, unless:
1. prior to such time, our Board of Directors approved either the business combination or the transaction that resulted in the stockholder
becoming an interested stockholder;
2. upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the votes of our voting stock outstanding at the time the transaction commenced, excluding certain shares; or
3. at or subsequent to that time, the business combination is approved by our Board of Directors and by the affirmative vote of holders of
at least 66 2/3% of the votes of our outstanding voting stock that is not owned by the interested stockholder.
Generally, a “business combination” includes a merger, asset or stock sale or other transaction resulting in a financial benefit to the
interested stockholder. Subject to certain exceptions, an “interested stockholder” is a person who, together with that person’s affiliates and
associates, owns, or within the previous three years owned, 15% or more of the votes of our outstanding voting stock. For purposes of this
provision, “voting stock” means any class or series of stock entitled to vote generally in the election of directors.
Under certain circumstances, this provision makes it more difficult for a person who would be an “interested stockholder” to effect various
business combinations with our company for a three-year period. This provision may encourage companies interested in acquiring our
company to negotiate in advance with our Board of Directors because the stockholder approval requirement would be avoided if our Board of
Directors approves either the business combination or the transaction that results in the stockholder becoming an interested stockholder. These
3
provisions also may have the effect of preventing changes in our Board of Directors and may make it more difficult to accomplish transactions
that stockholders may otherwise deem to be in their best interests.
Quorum
Our amended and restated certificate of incorporation provides that at any meeting of the Board of Directors, a majority of the total number
of directors then in office constitutes a quorum for all purposes.
No Cumulative Voting
Under Delaware law, the right to vote cumulatively does not exist unless the amended and restated certificate of incorporation specifically
authorizes cumulative voting. Our amended and restated certificate of incorporation does not authorize cumulative voting.
Special Stockholder Meetings
Our amended and restated certificate of incorporation provides that special meetings of our stockholders may be called at any time only by
or at the direction of the chairman of our Board of Directors, our chief executive officer, or by our Board of Directors, and not by our
stockholders. Our amended and restated bylaws prohibit the conduct of any business at a special meeting other than as specified in the notice
for such meeting.
Requirements for Advance Notification of Director Nominations and Stockholder Proposals
Our amended and restated bylaws establish an advance notice procedure for stockholder proposals to be brought before an annual
meeting of our stockholders, including proposed nominations of persons for election to our Board of Directors. Stockholders at an annual
meeting are only able to consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the
direction of our Board of Directors or by a stockholder who is a stockholder of record who is entitled to vote at the meeting, or who is a
stockholder that holds such stock through a nominee or “street name” holder of record and can demonstrate to us that such indirect ownership
of such stock and such stockholder’s entitlement to vote such stock on such business, and who has given our secretary timely written notice, in
proper form, of the stockholder’s intention to bring that business before the meeting. To be timely, such notice must be delivered to our
secretary:
4.
5.
in the case of an annual meeting of stockholders, not earlier than the close of business on the 120th day and not later than the close of
business on the 90th day prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event the
date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder to
be timely must be so delivered not earlier than the close of business on the 120th day prior to the date of such annual meeting and not
later than the close of business on the later of the 90th day prior to the date of such annual meeting or, if the first public announcement
of the date of such annual meeting is less than 100 days prior to the date of such annual meeting, the 10th day following the day on
which we first make a public announcement of the date of such meeting; and
in the case of a special meeting of stockholders called for the purpose of electing directors, not earlier than the close of business on the
120th day prior to such special meeting and not later than the close of business on the later of the 90th day prior to such special
meeting or the 10th day following the date on which notice of the date of the special meeting was mailed or public disclosure of the
date of the special meeting was made, whichever first occurs.
Amendment of Certificate of Incorporation and Bylaws
The DGCL provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a
corporation’s certificate of incorporation or bylaws, unless a corporation’s certificate of incorporation or bylaws, as the case may be, requires a
greater percentage. Our amended and restated bylaws
4
may be amended or repealed by a majority vote of our board of directors or by the affirmative vote of a majority of the votes which all our
stockholders would be eligible to cast in an election of directors.
Conflicts of Interest
Delaware law permits corporations to adopt provisions renouncing any interest or expectancy in certain opportunities that are presented to
the corporation or its officers, directors or stockholders. Our amended and restated certificate of incorporation, to the maximum extent permitted
from time to time by Delaware law, renounces any interest, expectancy that we have in, or right to be offered an opportunity to participate in,
specified business opportunities that are from time to time presented to certain of our officers, directors or stockholders or their respective
affiliates, other than those officers, directors, stockholders or affiliates who are our or our subsidiaries’ employees. Our amended and restated
certificate of incorporation provides that, to the fullest extent permitted by law, any director or stockholder who is not employed by us (including
any non-employee director who serves as one of our officers in both his director and officer capacities) or his or her affiliates do not have any
duty to refrain from (1) engaging in a corporate opportunity in the same or similar lines of business in which we or our affiliates now engage or
propose to engage or (2) otherwise competing with us or our affiliates. In addition, to the fullest extent permitted by law, if any director or
stockholder, other than a director or stockholder who is not employed by us or our affiliates acquires knowledge of a potential transaction or
other business opportunity which may be a corporate opportunity for itself or himself or its or his affiliates or for us or our affiliates, such person
has no duty to communicate or offer such transaction or business opportunity to us or any of our affiliates and they may take any such
opportunity for themselves or offer it to another person or entity, unless such opportunity was expressly offered to them solely in their capacity
as a director, executive officer or employee of us or our affiliates. To the fullest extent permitted by Delaware law, no potential transaction or
business opportunity may be deemed to be a corporate opportunity of the corporation or its subsidiaries unless (1) we or our subsidiaries would
be permitted to undertake such transaction or opportunity in accordance with the amended and restated certificate of incorporation, (2) we or
our subsidiaries at such time have sufficient financial resources to undertake such transaction or opportunity, (3) we have an interest or
expectancy in such transaction or opportunity and (4) such transaction or opportunity would be in the same or similar line of our or our
subsidiaries’ business in which we or our subsidiaries are engaged or a line of business that is reasonably related to, or a reasonable extension
of, such line of business. Our amended and restated certificate of incorporation does not renounce our interest in any business opportunity that
is expressly offered to an employee director or employee in his or her capacity as a director or employee of i3 Verticals, Inc. To the fullest extent
permitted by law, no business opportunity will be deemed to be a potential corporate opportunity for us unless we would be permitted to
undertake the opportunity under our amended and restated certificate, we have sufficient financial resources to undertake the opportunity and
the opportunity would be in line with our business.
Limitation of Liability and Indemnification of Directors and Officers
The DGCL authorizes corporations to limit or eliminate the personal liability of directors to corporations and their stockholders for monetary
damages for breaches of directors’ fiduciary duties, subject to certain exceptions. Our amended and restated certificate of incorporation
includes a provision that eliminates the personal liability of directors for monetary damages for any breach of fiduciary duty as a director, except
to the extent such exemption from liability or limitation thereof is not permitted under the DGCL. The effect of these provisions is to eliminate
the rights of us and our stockholders, through stockholders’ derivative suits on our behalf, to recover monetary damages from a director for
breach of fiduciary duty as a director, including breaches resulting from grossly negligent behavior. However, exculpation does not apply to any
director if the director has acted in bad faith, knowingly or intentionally violated the law, authorized illegal dividends or redemptions or derived
an improper benefit from his or her actions as a director.
Our amended and restated bylaws provide that we must indemnify and advance expenses to our directors and officers to the fullest extent
authorized by the DGCL. We carry directors’ and officers’ liability insurance
5
providing indemnification for our directors, officers and certain employees for some liabilities. We believe that these indemnification and
advancement provisions and insurance are useful to attract and retain qualified directors and officers.
The limitation of liability, indemnification and advancement provisions included in our amended and restated certificate of incorporation and
amended and restated bylaws may discourage stockholders from bringing a lawsuit against directors for breaches of their fiduciary duty. These
provisions also may have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action,
if successful, might otherwise benefit us and our stockholders. In addition, your investment may be adversely affected to the extent we pay the
costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions.
We have entered into indemnification agreements with each of our directors and executive officers. These agreements require us to
indemnify these individuals to the fullest extent permitted under the DGCL against expenses, losses and liabilities that may arise in connection
with actual or threatened proceedings in which they are involved by reason of their service to us and to advance expenses incurred as a result
of any proceeding against them as to which they could be indemnified.
Dissenters’ Rights of Appraisal and Payment
Under the DGCL, with certain exceptions, our stockholders have appraisal rights in connection with a merger or consolidation of us.
Pursuant to the DGCL, stockholders who properly request and perfect appraisal rights in connection with such merger or consolidation have
the right to receive payment of the fair value of their shares as determined by the Delaware Court of Chancery.
Stockholders’ Derivative Actions
Under the DGCL, any of our stockholders may bring an action in our name to procure a judgment in our favor, also known as a derivative
action, provided that the stockholder bringing the action is a holder of our shares at the time of the transaction to which the action relates or
such stockholder’s stock thereafter devolved by operation of law.
Stockholder Registration Rights
We entered into a Registration Rights Agreement with the Continuing Equity Owners in connection with our initial public offering pursuant
to which such parties have specified rights to require us to register all or a portion of their shares under the Securities Act of 1933, as amended.
The Registration Rights Agreement contains customary terms and conditions.
Listing on the Nasdaq Global Select Market
Our Class A common stock is listed on the Nasdaq Global Select Market under the symbol “IIIV.”
Transfer Agent and Registrar
The transfer agent and registrar for the Class A common stock is ComputerShare Trust Company, N.A. Its address is 250 Royall Street,
Canton, Massachusetts 02021, and its telephone number is (781) 575-3951.
6
Name of Subsidiary
(Including d/b/a name, if applicable)
Ad Valorem Records, Inc.
CP-DBS, LLC
CP-PS, LLC
Fairway Payments, LLC
i3-Aero, LLC
i3-Axia, LLC
i3-BP, LLC
i3-CS, LLC
i3-CSC, LLC
i3-EMS, LLC
i3-EZCP, LLC
i3-EZPay, LLC
i3-Holdings Sub, Inc.
i3-Infin, LLC
i3-MPN, LLC
i3-LL, LLC
Monetra Technologies, LLC
i3-PBS, LLC
i3-Randall, LLC
i3-RS, LLC
i3-Sequel, LLC
i3-Software & Services, LLC
i3-Splash, LLC
i3-TS, LLC
i3 Verticals, LLC
i3 Verticals Management Services, Inc.
i3-Bearcat, LLC
Pace Payment Systems, Inc.
Pace Payments, Inc.
San Diego Cash Register Company, Inc.
i3 Verticals, Inc.
LIST OF SUBSIDIARIES
Jurisdiction of Incorporation
Doing Business As Name
Exhibit 21.1
Texas
Delaware
Delaware
Virginia
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
California
AVR, Inc.
PaySchools
Fairway Payments
Axia Payments
Bill & Pay
Court Solutions
EMS
EZCourtPay
EZPay
Infintech
SchoolPay
Local Level
Monetra
Practical Business Solutions; RU Practical
Randall Data Systems
PlacePay
CJT
Software & Services
iGov Solutions
NETData; GHS
Pace
Pace
SDCR
Pursuant to Item 601(b)(21)(ii) of Regulation S-K, certain subsidiaries have been omitted because, when considered in the
aggregate, they do not constitute a significant subsidiary.
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
i3 Verticals, Inc.
Nashville, Tennessee
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-225812 and No. 333-229678) and
Form S-3 (No. 333-233126) of i3 Verticals, Inc. of our report dated November 22, 2019, relating to the consolidated financial statements, which
appears in this Form 10-K.
/s/ BDO USA, LLP
Nashville, Tennessee
November 22, 2019
Certification Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
Exhibit 31.1
I, Gregory S. Daily, certify that:
1. I have reviewed this Annual Report on Form 10-K of i3 Verticals, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: November 22, 2019
By:
/s/ Gregory S. Daily
Gregory S. Daily
Chief Executive Officer (Principal Executive Officer)
Certification Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
Exhibit 31.2
I, Clay Whitson, certify that:
1. I have reviewed this Annual Report on Form 10-K of i3 Verticals, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: November 22, 2019
By:
/s/ Clay Whitson
Clay Whitson
Chief Financial Officer (Principal Financial Officer)
Certification of Principal Executive Officer
Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1
In connection with the Annual Report of i3 Verticals, Inc. (the “Company”) on Form 10-K for the year ended September 30, 2019,
as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officer hereby certifies,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: November 22, 2019
By:
/s/ Gregory S. Daily
Gregory S. Daily
Chief Executive Officer (Principal Executive Officer)
Certification of Principal Financial Officer
Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2
In connection with the Annual Report of i3 Verticals, Inc. (the “Company”) on Form 10-K for the year ended September 30, 2019,
as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officer hereby certifies,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: November 22, 2019
By:
/s/ Clay Whitson
Clay Whitson
Chief Financial Officer (Principal Financial Officer)