I3 Verticals, Inc. — Q1 FY2022 Form 10-Q
Reporting period: Three months ended December 31, 2021; comparative period is the three months ended December 31, 2020. Financial amounts are in U.S. dollars. The company provides integrated payment and software solutions, primarily in education, nonprofit, public sector, and healthcare markets.
Financial performance and liquidity
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Revenue | $73.9 million | $44.6 million |
| Processing margin | $65.9 million | $36.7 million |
| Operating loss | $0.8 million | $1.0 million |
| Net loss | $3.7 million | $3.0 million |
| Net loss attributable to i3 Verticals, Inc. | $2.5 million | $2.0 million |
| Operating cash flow | $21.9 million | $12.0 million |
| Cash used in investing activities | $62.4 million | $61.3 million |
Revenue increased 65.7%. Proprietary Software and Payments revenue was $44.8 million, up 123.9%; Merchant Services revenue was $29.2 million, up 16.4%. Reported payment volume was $5.3 billion, up 39.7%, and annualized recurring revenue (ARR) was $240.4 million, up 52.7%. These company-defined operating measures are not forecasts or standardized measures.
Operating expenses rose 63.7% to $74.7 million. Selling, general and administrative expense increased 85.8% to $46.4 million, including higher employment and stock-compensation costs. Stock-based compensation was $6.6 million versus $3.4 million. A $4.9 million increase in the fair value of acquisition contingent consideration was recorded as an expense. Interest expense increased to $3.2 million from $2.0 million.
At December 31, 2021, cash and cash equivalents were $3.4 million; cash, cash equivalents, settlement assets, and restricted cash together totaled $26.7 million. Debt, net of issuance costs, was $257.1 million, including $159.5 million outstanding under the revolving facility and approximately $101.0 million carrying value for exchangeable notes. The company reported $115.5 million of available revolving capacity, subject to covenants. It was in covenant compliance, with interest coverage of 9.18x, total leverage of 3.82x, and senior secured leverage of 2.18x.
Material changes and transactions
- Revenue growth reflected $22.2 million of incremental revenue from acquisitions, with the remainder principally from existing-business growth, including payment volume and public-sector software.
- The company completed two acquisitions to expand public-sector and healthcare software offerings. Total consideration was $100.5 million, including $95.0 million in cash and $5.5 million in contingent consideration. Acquisitions accounted for $60.0 million of investing cash outflow; $35.0 million of purchase consideration was accrued at quarter-end and paid January 3, 2022.
- Goodwill increased to $349.6 million from $292.2 million, primarily reflecting the quarter’s acquisitions. Total assets increased to $776.4 million from $651.8 million.
- Operating cash flow improved year over year, while investing outflows remained high because of acquisitions. Financing cash flow was $49.2 million, primarily reflecting revolving-facility borrowing and repayment activity.
Outlook, risks, and unusual items
The filing provides no quantified revenue, earnings, or cash-flow guidance. Management stated that 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. The company expects to pursue acquisitions, potentially using operating cash flow, debt, or equity. It also cautioned that COVID-19 and variants could affect payment volume and that the duration and impact remained uncertain.
- Leverage and rates: The revolving facility bears variable-rate interest and matures May 9, 2024; the $138.0 million original-principal exchangeable notes mature February 15, 2025. A 1 percentage-point rate change on facility borrowings was estimated to affect results by $1.6 million.
- Contingent consideration: The company carried $36.9 million of acquisition contingent consideration, including $26.7 million current. Revaluation depends on acquired-business performance estimates and affected quarterly earnings.
- Litigation and cybersecurity: Louisiana parties allege cybersecurity deficiencies relating to a third-party remote-access product and seek $15.0 million in state remediation costs, $7.0 million in sheriff remediation costs, return of purchase prices, and other damages. The company said it could not predict the outcome. The DOJ concluded its investigation as to the company and said it would bring no criminal charges.
- Other obligations: The company reported a $39.2 million Tax Receivable Agreement liability, generally payable to continuing equity owners for 85% of certain realized tax benefits. Payments for exchanges through quarter-end were estimated at $0 to $3.2 million annually over 26 years; future exchanges may add obligations. Processor minimum commitments were $6.1 million.
- Business risks: Management identified acquisition integration, client retention, competition, supply-chain disruption, technology and third-party service dependence, cybersecurity, regulatory matters, and covenant and liquidity needs among relevant risks. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Assess how much revenue and ARR growth is organic versus acquisition-driven, and whether acquisition contributions persist.
- Track operating expense growth, stock-based compensation, amortization, and contingent-consideration remeasurement against processing-margin growth.
- Verify cash conversion and acquisition funding needs, including the quarter-end $35.0 million accrued purchase payment and subsequent borrowing.
- Monitor leverage, covenant headroom, variable-rate exposure, and the 2024 revolving-facility maturity.
- Follow the Louisiana litigation, any related claims or costs, and the company’s cybersecurity controls and disclosures.
- Review the assumptions behind contingent consideration and Tax Receivable Agreement estimates, which can change over time.