I3 Verticals, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018. The filing also provides unaudited fourth-quarter results; this is an annual report, not a standalone Q4 filing. Unless noted, amounts below are in millions of dollars.
Business context and reporting period
I3 Verticals provides integrated payment processing and software solutions, primarily to small and medium-sized businesses and organizations in education, public sector, non-profit, property management, healthcare, and B2B markets. It reported Merchant Services and Proprietary Software and Payments segments. The company processed $11.6 billion in payment volume in FY2018 and completed its IPO in June 2018.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $323.5 | $262.6 |
| Income from operations | $12.4 | $7.6 |
| Operating margin | 3.8% | 2.9% |
| Consolidated net income (loss) | $(5.0) | $0.9 |
| Net income (loss) attributable to i3 Verticals, Inc. | $(6.9) | $0.9 |
| Net cash from operating activities | $18.1 | $8.3 |
| Net cash used in investing activities | $(38.1) | $(47.9) |
| Net cash from financing activities | $19.2 | $37.4 |
Revenue increased 23.2%. The filing’s processing margin measure was $83.2 million, compared with $56.8 million in FY2017; the company defines this measure as revenue less interchange and network fees and other costs of services, with certain residual expenses added back. At September 30, 2018, cash and cash equivalents were $0.6 million, restricted cash was $0.7 million, and current assets and current liabilities were $16.6 million and $26.4 million, respectively.
Gross borrowings under the senior secured facility were $38.3 million ($35.0 million term loan and $3.3 million revolver); the balance-sheet debt carrying amount, including current portion and net of issuance costs, was $36.8 million. Revolver availability was approximately $106.8 million. The facility matures October 30, 2022, bears floating-rate interest, and the company reported covenant compliance at year-end. The IPO generated approximately $92.5 million after underwriting discounts and commissions; proceeds were used in part to repay prior mezzanine and subordinated debt.
For the unaudited fourth quarter ended September 30, 2018, revenue was $84.1 million versus $71.8 million in Q4 FY2017; operating income was $3.5 million versus $2.1 million. The quarterly table reports net income attributable to i3 Verticals of $0.8 million in Q4 FY2018 versus $0.4 million in Q4 FY2017.
Material changes versus prior year
- FY2018 revenue growth was driven primarily by acquisitions: management attributed $53.0 million of the year-over-year increase to acquisitions, with the remainder mainly from higher payment volume. Payment volume rose 12.5% to $11.6 billion, while integrated payments increased to 43% of volume from 36%.
- Merchant Services revenue rose 22.1% to $302.9 million; Proprietary Software and Payments revenue rose 41.1% to $20.6 million.
- SG&A increased 49.2% to $40.6 million, largely reflecting acquisition-related headcount and corporate staffing in preparation for public-company requirements. Interest expense increased 22.5% to $8.5 million.
- The company moved from consolidated net income of $0.9 million to a consolidated net loss of $5.0 million. A $8.5 million non-cash warrant-liability fair-value charge and a $3.9 million contingent-consideration charge were significant items. Net loss attributable to the parent was $6.9 million, reflecting the non-controlling interest presentation following the IPO reorganization.
- Operating cash flow increased to $18.1 million. Investing outflows remained substantial, including $32.4 million for business acquisitions, net of cash acquired.
Outlook, risks, contingencies, and unusual items
- No quantified revenue or earnings guidance is provided. 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. Its stated strategy includes organic growth, product investment, partner expansion, and further acquisitions.
- After year-end, on October 31, 2018, the company acquired two businesses. Consideration included $21.0 million funded from the revolver, with up to $14.0 million of additional earn-out consideration tied to performance targets.
- Key risks include intense competition and pricing pressure; dependence on non-exclusive distribution partners, sponsor banks, payment networks, and third-party processors; cybersecurity, data privacy, service interruption, chargeback and fraud exposure; extensive and changing regulation; and acquisition integration and financing risks.
- The company recorded a $1.0 million reserve for the Expert Auto class-action settlement, subject to final court approval. It also disclosed ongoing litigation with its insurer over coverage for that matter; trial was scheduled for November 2019. Management said other indemnification matters were not expected to have a material impact.
- The Tax Receivable Agreement generally requires payment to certain continuing equity owners of 85% of specified realized or deemed tax benefits; the recorded liability was $0.8 million at year-end. Payments may reduce available cash, and acceleration provisions could increase or bring forward obligations.
- The company reported effective disclosure controls, but the filing did not include management’s internal-control effectiveness assessment or an auditor attestation, citing its newly public company transition and emerging-growth-company status. The financial statement audit opinion was unqualified.
Important facts for investors to verify
- How much future growth is organic versus acquisition-driven, and whether payment-volume attrition—reported at approximately 1% per month under the company’s stated measure—stabilizes.
- Whether acquisitions deliver expected returns and how earn-outs, including the post-year-end potential $14.0 million, affect cash needs and reported earnings.
- Cash generation, floating-rate debt costs, covenant headroom, and actual availability under the revolver as acquisition activity continues.
- The timing and amount of Tax Receivable Agreement payments, and the effects of the dual-class structure: continuing equity owners held approximately 66.3% of combined voting power at year-end.
- Final resolution and insurance recovery, if any, for the Expert Auto settlement and related coverage litigation; also monitor cybersecurity, regulatory, and payment-network compliance exposures.