I3 Verticals, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended September 30, 2023; comparisons are with the year ended September 30, 2022. The company provides vertical-market software and payment processing, principally in Public Sector and Healthcare. Figures below are in U.S. dollars; “million” is used for amounts reported in thousands.
Key financial results
| Metric | FY2023 | FY2022 | Change / context |
|---|---|---|---|
| Revenue | $370.2 million | $317.9 million | Up 16.5% |
| Software and related services revenue | $184.0 million | $154.8 million | About 50% of FY2023 revenue, versus 49% in FY2022 |
| Software and Services segment revenue | $233.0 million | $193.4 million | Up 20.5% |
| Merchant Services segment revenue | $137.3 million | $124.5 million | Up 10.3% |
| Operating income (loss) | $22.7 million | $(2.4) million | Improved by $25.2 million; FY2023 operating margin was about 6.1% |
| Consolidated net loss | $(2.7) million | $(23.2) million | Loss narrowed; net loss attributable to i3 Verticals, Inc. was $(0.8) million versus $(17.1) million |
| Diluted loss per Class A share | $(0.07) | $(0.77) | Improved |
| Processing margin | $333.3 million | $282.7 million | Up 17.9%; company-defined measure |
| Payment volume | $24.4 billion | $22.6 billion | Up 8% |
| Cash from operating activities | $34.5 million | $45.8 million | Down $11.3 million |
| Cash used in investing activities | $(121.5) million | $(113.0) million | Primarily reflected acquisitions |
Liquidity, debt and balance sheet
- At September 30, 2023, cash and cash equivalents were $3.1 million; available capacity under the revolving facility was $177.5 million, subject to financial covenants. Current assets were $85.5 million and current liabilities $93.5 million.
- Outstanding principal comprised $272.5 million under the senior secured revolving facility and $117.0 million of 1.0% exchangeable notes due February 2025. Debt was reported at $385.1 million net of issuance costs. The $450 million revolving facility matures in May 2028 and bears floating-rate interest; the SOFR-based margin was 3.0% at year-end.
- The company reported covenant compliance at year-end: interest coverage of 4.39x against a 3.0x minimum and total leverage of 3.77x against a 5.0x maximum. A 1 percentage-point rate change would affect annual results by an estimated $2.7 million, based on year-end borrowing.
- Operating cash flow decreased despite the narrower net loss, principally due to changes in operating assets and liabilities and timing of collections and payments. Acquisition spending, net of acquired cash, was $102.0 million.
- The Tax Receivable Agreement liability was $40.1 million; payments may extend over 24 years and future exchanges could add obligations. The company paid no common dividends and said it does not expect to do so in the foreseeable future.
Material changes and unusual items
- Revenue growth reflected both acquisitions and growth in existing businesses. Acquisitions completed in FY2022 and FY2023 contributed $21.5 million of FY2023 revenue. Celtic, acquired October 1, 2022 for $85.0 million in cash, expanded Public Sector software; two additional FY2023 acquisitions had total consideration of $19.8 million.
- Interest expense rose 70.1% to $25.1 million, reflecting higher average interest rates and debt balances. Selling, general and administrative expense increased 13.4% to $219.7 million, principally from higher employment costs, acquisitions, inflation and stock compensation.
- Contingent-consideration remeasurement expense was $10.8 million, down from $23.7 million in FY2022. A $2.7 million internal-use software project write-down was recorded in other expense. Year-end contingent consideration fair value was $8.2 million, with maximum potential payouts of $18.9 million.
- Annualized recurring revenue (ARR), a company-defined non-GAAP operating indicator and not a forecast, was $312.9 million for the quarter ended September 30, 2023, up 11.3% from $281.2 million a year earlier.
- The company adopted ASU 2020-06 for exchangeable-note accounting in FY2023. Adoption changed balance-sheet classifications and opening equity but did not affect net income.
Outlook, risks and contingencies
Management said operating cash flow, cash and available borrowing capacity were expected to fund operations, planned capital expenditures and debt service for at least the next 12 months. This is subject to covenant availability and is not a quantified revenue or earnings forecast. Management highlighted inflation, elevated interest rates, geopolitical uncertainty and difficulty forecasting economic conditions.
- Key risks include floating-rate debt and covenant compliance, limited cash on hand, acquisition funding and integration, customer retention, competitive pressure, and reliance on bank sponsors, distribution partners and third-party processors.
- Cybersecurity, privacy and service interruptions are significant risks. A Louisiana lawsuit alleges cybersecurity deficiencies involving third-party remote-access software and seeks remediation-related and other damages; the filing describes approximately $22 million in claimed remediation costs, plus other potential expenses and relief. The company said the outcome could not be predicted and that the matter could affect results or cash flows when resolved. The case was remanded to state court; a rehearing petition was pending.
- Healthcare operations face extensive privacy, billing, anti-kickback and interoperability requirements, with potential substantial penalties. The company also faces payment-network, chargeback, regulatory and litigation risks.
- Goodwill was $409.6 million and intangible assets were $227.0 million at year-end. No reporting unit was impaired in FY2023, but valuations depend on estimates and could be affected by weaker outlooks or market conditions.
Most important facts for investors to verify
- Whether revenue growth and recurring software expansion continue organically, apart from acquisitions; review ARR definitions and renewal assumptions.
- Cash generation, acquisition spending and leverage trends, including covenant headroom and the effect of floating rates on interest expense.
- The timing and potential financial outcome of the Louisiana cybersecurity litigation and any related insurance coverage or additional claims.
- Potential cash demands from the 2025 exchangeable notes, contingent consideration and Tax Receivable Agreement, including restrictions imposed by credit-facility covenants.
- Acquisition performance, integration progress and the carrying values of goodwill and acquired intangible assets.
Audit and controls: Deloitte & Touche issued unqualified opinions on the FY2023 consolidated financial statements and internal control over financial reporting. The auditor identified valuation of customer relationships and capitalized software acquired in the Celtic transaction as a critical audit matter.