Business context and reporting period
i3 Verticals, Inc. provides integrated payment and software solutions, primarily in education, nonprofit, public-sector and healthcare markets. This unaudited Form 10-Q covers the fiscal quarter and nine months ended June 30, 2021 (the company’s fiscal third quarter, not calendar Q3). Financial amounts below are in U.S. dollars; unless noted, figures are in millions.
Financial performance and position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $62.0; +96.3% year over year | $153.1; +36.9% |
| Operating income (loss) | $(2.0), versus $0.4 income | $(4.4), versus $6.6 income |
| Net income (loss) | $(4.6), versus $(2.8) | $(8.8), versus $1.0 income |
| Net income (loss) attributable to i3 Verticals, Inc. | $(3.3), versus $(0.4) | $(5.4), versus $0.2 income |
| Operating margin | Approximately -3.2%, versus 1.4% | Approximately -2.9%, versus 5.9% |
| Operating cash flow | Not separately presented in the supplied filing text | $36.1, versus $10.1 |
Quarterly payment volume was $5.1 billion, up 72.3%; nine-month volume was $13.2 billion, up 27.0%. Integrated payments represented 60% of quarterly volume and 58% of nine-month volume. Average monthly net payment-volume attrition remained below 1% for the nine-month period. Nine-month processing margin, the company’s stated segment performance measure, was $132.5 million, versus $91.8 million.
At June 30, cash and cash equivalents were $4.7 million, with an additional $10.6 million of restricted cash. The revolver had $117.8 million drawn and $157.2 million available, subject to covenants. Long-term debt, net of issuance costs, was $212.6 million; this included the revolver and exchangeable notes. The notes had $117.0 million principal outstanding and a 1% coupon, due in 2025. Total liabilities were $362.5 million. The current ratio was approximately 0.61x ($49.3 million current assets / $80.6 million current liabilities).
Cash and restricted cash declined by $5.3 million over the nine months to $15.3 million. Investing used $156.9 million, principally $149.5 million for acquisitions; financing provided $115.5 million. Capitalized software expenditures were $4.5 million. These figures and balance-sheet amounts are not directly comparable to unrestricted cash alone.
Material changes versus the prior comparable period
- Quarterly revenue rose $30.4 million; management attributed $20.3 million of the increase to acquisitions and $10.1 million to existing businesses, principally reflecting recovery in consumer spending. Nine-month revenue growth was largely acquisition-driven: acquired businesses contributed $37.4 million, while existing-business revenue increased $3.9 million.
- Proprietary Software and Payments revenue increased 233.9% in the quarter and 99.7% for nine months, reflecting acquisitions and recovery. Merchant Services revenue increased 34.6% in the quarter and 6.1% for nine months.
- Operating expenses grew faster than revenue in the quarter and nine-month period. SG&A increased 105.7% for the quarter and 59.4% for nine months, reflecting higher employment costs, acquisition-related headcount and stock compensation. Depreciation and amortization also increased, mainly due to acquisitions.
- Contingent-consideration remeasurement shifted from a benefit in the prior-year periods to expenses of $3.6 million for the quarter and $5.8 million for nine months, as certain acquired businesses performed above expectations. This contributed to the operating losses.
- The company completed eight business acquisitions during the nine months, including BIS and ImageSoft. Total consideration for the acquisitions summarized in the filing was approximately $207.1 million, including cash, stock and contingent consideration. Acquired businesses contributed $32.0 million of revenue and $0.9 million of net income during the period.
Outlook, risks and unusual items
- Outlook: The filing provides no numerical revenue, earnings or other formal guidance. Management expects operating cash flow, cash and available revolver capacity to fund operations, planned capital expenditures and debt service for at least the next twelve months. It also expects to continue pursuing acquisitions and may fund them with cash flow, borrowing or securities issuance.
- COVID-19: Management reported a partial recovery but cautioned that renewed restrictions, including those related to variants, could affect payment volume and clients in education, public sector and other verticals. The duration and financial impact remain uncertain.
- Cybersecurity litigation and investigation: A Louisiana class-action petition concerning alleged unauthorized access to law-enforcement customers’ networks seeks $15 million for remediation, return of purchase prices and other potential costs. The company is also cooperating with a DOJ investigation. It said outcomes cannot be predicted and it cannot assure the matters will not materially affect results when resolved; it did not believe they would materially adversely affect business or financial condition. The filing does not provide a clear estimate of total potential exposure.
- Debt and liquidity risks: The secured revolving facility matures in 2024, bears variable-rate interest and is secured by substantially all company assets. The company reported compliance with covenants and leverage ratios of 3.81x total leverage, 1.87x senior secured leverage and 8.23x interest coverage at June 30. Management estimated that a 1 percentage-point change in the applicable rate on revolver borrowings would affect results by about $1.2 million.
- Other obligations and items: The company recorded $34.8 million of contingent consideration, including $19.9 million current. The Tax Receivable Agreement liability was $39.6 million; payments related to exchanges through June 30 are estimated at $0–$3.2 million annually over as long as 25 years, with future exchanges potentially adding obligations. A possible purchase of a third-party sales organization is capped at $29 million, with up to $9 million additional performance-based consideration; the amount was not estimable. Management said ordinary-course legal matters were not expected to have a material impact. No off-balance-sheet financing arrangements were reported.
- The company early adopted lease accounting on October 1, 2020. At June 30 it reported $15.1 million of operating lease liabilities. The filing also notes seasonality, acquisition integration and valuation risks, and reliance on third parties and cybersecurity controls.
Important facts for investors to verify
- How much of reported growth is organic versus acquired, and whether existing-business payment volume and revenue continue to recover.
- Whether operating performance improves after elevated SG&A, amortization and contingent-consideration charges; the filing reports losses despite higher revenue and operating cash flow.
- Acquisition integration, purchase-price allocations, acquired-business performance and the potential cash and earnings effects of contingent consideration.
- Revolver availability and covenant headroom as debt-funded acquisitions, variable interest rates and cash requirements evolve.
- Developments and potential financial exposure from the Louisiana litigation and DOJ investigation, including any required remediation or customer notification.
- The timing and amount of Tax Receivable Agreement payments, which are not included in the contractual-obligations table, and any additional obligations triggered by future unit exchanges.