I3 Verticals, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2020; filed August 10, 2020. Unless noted, amounts are USD millions. The company provides payment processing and proprietary software solutions, primarily in education, nonprofit, public sector, property management and healthcare.
Financial results and liquidity
| Metric | Three months ended June 30, 2020 | Nine months ended June 30, 2020 |
|---|---|---|
| Reported revenue | $31.6, versus $97.5 | $111.9, versus $267.7 |
| Operating income | $0.4, versus $1.2 | $6.6, versus $4.5 |
| Consolidated net income (loss) | $(2.8), versus $(0.6) | $1.0, versus $0.5 |
| Net income (loss) attributable to i3 Verticals, Inc. | $(0.4), versus $(1.2) | $0.2, versus $(2.1) |
| Operating cash flow | Not separately provided in the filing text | $10.1, versus $16.3 |
Revenue comparability: Effective October 1, 2019, ASC 606 requires interchange and network fees to be presented net against revenue. The company reported $49.3 million of such fees for the quarter and $181.6 million for the nine-month period as reductions to revenue; these presentation changes reduced revenue and operating expenses equally and did not affect operating income. On a presentation basis excluding ASC 606’s netting, revenue was $80.9 million for the quarter, down 17.0%, and $293.5 million for nine months, up 9.6%, year over year.
Operating measures: Payment volume was $3.0 billion for the quarter, down 12.6%, and $10.4 billion for nine months, up 11.9%. Monthly volume rose from $0.8 billion in April to $1.2 billion in June. Processing margin, the company’s operating measure, was $26.0 million for the quarter versus $27.4 million and $91.8 million for nine months versus $74.7 million. Integrated payments were 51% of volume for the quarter and 54% for nine months. Average monthly net volume attrition remained below 1.6% in the nine-month period.
Cash, debt and liquidity: At June 30, cash and cash equivalents were $9.1 million, restricted cash was $1.6 million, and the revolver had $240.0 million available, subject to covenants. Net cash provided by operations was $10.1 million; investing used $5.7 million and financing provided $3.1 million. Long-term debt, net of issuance costs, was $134.1 million, comprising $35.0 million under the revolver and $104.3 million carrying value for exchangeable notes. The notes have $138.0 million face value, a 1.0% coupon and a 2025 maturity. The company repurchased $8.5 million face value of notes for $6.8 million and recorded a $0.8 million loss.
The company reported covenant compliance: interest coverage of 7.00x, total leverage of 3.69x and senior secured leverage of 0.61x, against required minimum coverage of 3.00x and maximum leverage ratios of 5.00x and 3.25x, respectively. Total assets were $360.5 million and total liabilities were $193.0 million. No conventional gross-margin figure is clearly presented in the filing text.
Material changes versus the prior comparable period
- COVID-19 reduced payment activity and revenue, particularly in Merchant Services. The company attributed the quarterly payment-volume decline to the pandemic; acquisitions partly offset the impact.
- On the comparable revenue presentation excluding ASC 606 netting, quarterly revenue declined, while nine-month revenue grew mainly due to 2019 acquisitions. Proprietary Software and Payments revenue increased on that basis; Merchant Services revenue declined in the quarter.
- Nine-month reported revenue and operating expenses are not directly comparable with 2019 because of ASC 606. The company stated adoption did not materially affect net income.
- Interest expense rose to $6.6 million for nine months from $4.0 million, reflecting exchangeable-note discount amortization and a higher average debt balance. SG&A increased 31% to $58.2 million, partly reflecting acquisitions and stock compensation.
- Operating cash flow fell $6.2 million year over year. Investing cash use fell sharply because the prior-year period included $126.9 million of acquisitions.
Outlook, risks and unusual items
- Management said the pandemic was expected to materially adversely affect the business for the remainder of fiscal 2020, but could not reliably estimate its duration or full financial effect. No numerical earnings or revenue guidance was provided.
- Management expected cash from operations, cash on hand and available revolver capacity to fund operations, planned capital expenditures and debt service for at least the next 12 months. Acquisition and capital-spending plans were being reassessed; acquisitions could be paused or terminated to preserve liquidity.
- Approximately 12% of the workforce was affected by temporary furloughs and workforce reductions announced in April 2020. Education and public-sector activity was exposed to school and government-facility closures.
- COVID-19 risks include weaker customer activity, further closures, fraud and cybersecurity threats, third-party service disruptions, liquidity pressure, covenant compliance and potential impairment testing. A May 1 interim goodwill test found no impairment; management cautioned that estimates could change.
- After quarter-end, the company acquired two businesses for $16.4 million in cash and revolver proceeds, plus contingent consideration; additional earn-outs may total up to $13.2 million.
- Tax items included a $2.7 million reduction in the deferred-tax-asset valuation allowance and a policy change allocating stock compensation expense to Class B shareholders. The latter reduced the tax benefit by $0.6 million and changed allocation of quarterly loss between the company and non-controlling interests.
- The company disclosed $9.9 million of minimum processing commitments, $13.2 million of lease payments and $25.9 million of Tax Receivable Agreement obligations. It also committed to a possible loan of up to $2.5 million and a conditional future business buyout capped at $29.0 million, with up to $9.0 million of additional performance consideration; the eventual amount was not estimable.
Investor verification priorities
- Reconcile reported revenue year over year using the ASC 606 net presentation, and assess underlying payment volume and processing-margin trends.
- Track COVID-19 exposure, especially education and public-sector transaction activity, and whether the partial recovery continued after June.
- Confirm liquidity and covenant headroom as cash flow, acquisitions and debt service evolve; distinguish notes’ face amount from their carrying value.
- Review dilution and cash-settlement implications of the exchangeable notes, note hedges and warrants, including the $40.87 exchange price and $62.88 warrant exercise price.
- Assess contingent acquisition payments, the post-quarter acquisitions and the Tax Receivable Agreement’s uncertain timing and amount of future payments.
- Check the filing’s comparative cash-tax disclosure: management corrected 2019 cash taxes paid from $24.6 million to $1.3 million, stating there was no impact on other disclosures.