i3 Verticals, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2021. The company provides integrated payment and software solutions, primarily to SMBs and organizations in education, non-profit, public sector and healthcare markets. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance
| Metric | Three months ended March 31, 2021 | Prior-year quarter | Six months ended March 31, 2021 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $47.9 | $39.2 | $91.2 | $80.3 |
| Operating income (loss) | $(0.1) | $2.0 | $(2.4) | $6.1 |
| Net income (loss), consolidated | $(0.1) | $1.9 | $(4.2) | $3.9 |
| Net income (loss) attributable to i3 Verticals, Inc. | $0.4 | $0.7 | $(2.1) | $0.6 |
| Operating cash flow | Not separately provided | Not separately provided | $23.9 | $8.8 |
- Quarterly revenue increased 22.2%; six-month revenue increased 13.6%. Payment volume was $4.3 billion for the quarter, up 19.2%, and $8.1 billion for six months, up 8.7%.
- Quarterly processing margin was $43.1 million, compared with $32.4 million; six-month processing margin was $78.5 million, compared with $65.9 million. This is the company’s reported operating metric, not a conventional gross margin.
- Operating expenses rose faster than revenue: quarterly SG&A increased 46.8% to $30.5 million, and six-month SG&A increased 38.4% to $55.5 million. The company cited higher employment costs, acquisition-related headcount and stock compensation. Depreciation and amortization also increased, mainly due to acquisitions.
- Cash, cash equivalents and restricted cash totaled $12.4 million at March 31, including $2.4 million of unrestricted cash. Six-month investing cash outflow was $115.9 million, chiefly $112.1 million for acquisitions; financing cash inflow was $83.9 million.
Material changes and balance sheet
- Acquisitions completed in the six-month period contributed $17.1 million of incremental revenue, partly offset by a $6.2 million decline in existing business lines, which management attributed primarily to COVID-19-related lower consumer spending. Quarterly acquisitions contributed $9.6 million, while existing business lines declined $1.0 million.
- For the six-month period, Merchant Services revenue declined 5.6% to $51.0 million, while Proprietary Software and Payments revenue rose 51.6% to $41.3 million, principally from acquisitions. Integrated payments were 59% of quarterly payment volume, versus 55% a year earlier.
- Total assets were $602.8 million and total liabilities were $321.4 million at March 31, 2021. Goodwill increased to $263.4 million and intangible assets to $165.1 million, reflecting acquisitions.
- Long-term debt, net of issuance costs, was $178.4 million, including $85.0 million drawn on the revolving facility and $97.5 million carrying value of exchangeable notes. The notes have $117.0 million principal outstanding, bear 1.0% interest and mature in 2025. The $275 million revolving facility had $190.0 million available, subject to covenants.
- The company reported compliance with its credit covenants; leverage ratios were 3.80x total leverage, 1.57x senior secured leverage and 6.19x interest coverage. It adopted lease accounting early, recording operating lease right-of-use assets and liabilities; lease liabilities were $15.4 million at quarter-end.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management said operating cash flow, available cash and borrowing capacity were expected to fund operations, planned capital expenditures and debt service for at least the next 12 months.
- Management said COVID-19 continued to affect payment volumes and client activity, particularly in education and public sector markets, and that the duration and longer-term effects remained uncertain. Seasonal patterns, including education calendars, may also affect results.
- Subsequent to quarter-end, the company completed three acquisitions for $37.4 million in cash plus contingent consideration still being valued; potential additional consideration can total up to $40 million. Earlier acquisitions included BIS and ImageSoft, among others, and carried performance-based contingent payments.
- A $2.4 million fair-value gain on the AxiaMed investment, associated with a planned third-party sale, was recorded as other income; AxiaMed was sold on April 1, 2021, for $2.5 million. The quarter’s $0.3 million contingent-consideration revaluation expense and six-month $2.2 million expense were also notable.
- Other risks include acquisition integration and contingent-payment estimates, competition and client retention, cybersecurity and service disruptions, covenant compliance and liquidity, variable-rate debt and LIBOR transition, and the Tax Receivable Agreement. The company recorded $39.6 million of Tax Receivable Agreement obligations; payments are generally 85% of specified realized tax benefits. Management reported no material litigation impact expected and no off-balance-sheet financing arrangements.
Important facts for investors to verify
- How much reported growth is organic versus acquisition-driven, and whether existing-business revenue and Merchant Services performance recover.
- Whether higher SG&A, amortization and contingent-consideration costs moderate enough to restore operating profitability.
- Cash conversion and working-capital movements behind the increase in operating cash flow, alongside the funding and integration of recent and subsequent acquisitions.
- Revolver utilization, covenant headroom and the effect of interest-rate changes; the filing estimates a 1 percentage-point rate change would affect results by about $0.9 million on outstanding revolver borrowings.
- Future contingent acquisition payments, goodwill and intangible-asset assumptions, and the timing and amount of Tax Receivable Agreement payments.