Business Context and Reporting Period
Company: I3 Verticals, Inc. (IIIV)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended June 30, 2024
Business Overview: I3 Verticals delivers integrated software and payment solutions to strategic vertical markets, primarily Public Sector and Healthcare. The Company operates as a holding company with a majority economic interest in i3 Verticals, LLC.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2024 | Nine Months Ended June 30, 2024 |
|---|---|---|
| Revenue (Continuing Ops) | $56,037 | $169,059 |
| Operating Loss (Continuing Ops) | $(669) | $3,300 (Income) |
| Net Loss (Continuing Ops) | $(13,846) | $(20,364) |
| Net Income (Discontinued Ops) | $5,548 | $16,950 |
| Net Loss (Total) | $(8,298) | $(3,414) |
| Net Loss Attributable to i3 Verticals, Inc. | $(7,545) | $(4,569) |
| Cash and Cash Equivalents | $9,745 | $9,745 (as of June 30) |
| Operating Cash Flow (9 months) | N/A | $33,266 |
| Total Debt (Principal) | $377,623 | $377,623 (as of June 30) |
Note: Total Debt includes $351.4 million in Revolver borrowings and $26.2 million in Exchangeable Notes.
Material Changes vs. Prior Period
- Discontinued Operations: The Company reclassified its Merchant Services Business as discontinued operations following the June 26, 2024, agreement to sell the segment to Payroc for $440 million. This significantly alters the comparability of financial results.
- Revenue: Continuing operations revenue decreased 2.1% ($1.2 million) in Q3 2024 compared to Q3 2023, driven by a decline in software license and professional services revenue, partially offset by recurring revenue growth. For the nine months, revenue increased 0.5% ($0.9 million).
- Operating Expenses: Total operating expenses for continuing operations decreased 8.3% in Q3 2024, largely due to a $6.2 million benefit from the change in fair value of contingent consideration (compared to a $6.2 million charge in the prior year).
- Interest Expense: Net interest expense increased 17.6% in Q3 2024 to $7.9 million due to higher average interest rates and outstanding debt balances.
- Debt Repurchase: In January 2024, the Company repurchased $90.8 million of its 1.0% Exchangeable Notes for $87.4 million, recording a gain of $2.4 million.
Guidance, Outlook, and Risks
- Strategic Sale: The sale of the Merchant Services Business is expected to close in Q4 2024 (fiscal Q1 2025). Proceeds are intended to pay down the revolving credit facility and fund general corporate purposes, including a new $50 million share repurchase program announced in August 2024.
- Liquidity: As of June 30, 2024, the Company had $9.7 million in cash and $98.6 million in available borrowing capacity under its $450 million Senior Secured Credit Facility. The Company is in compliance with financial covenants (Interest Coverage: 3.5x; Leverage: 3.6x).
- Key Performance Indicators: Annualized Recurring Revenue (ARR) grew 4% to $181.3 million in Q3 2024. Payment volume from continuing operations grew 21.4% year-over-year in Q3 2024.
- Risks: Risks include the failure to close the Merchant Services sale, integration challenges of recent acquisitions, cybersecurity threats, and the impact of elevated interest rates on debt service costs.
- Subsequent Events: On August 1, 2024, the Company acquired a business to expand permitting and licensing software offerings for $18 million cash plus stock and contingent consideration.
Investor Verification Checklist
- Closing of Merchant Services Sale: Verify the final closing date and any adjustments to the $440 million purchase price.
- Debt Paydown: Confirm the extent to which sale proceeds are used to reduce the $351.4 million revolver balance.
- Share Repurchases: Monitor execution of the new $50 million buyback program, noting it is restricted until the sale closes.
- Continuing Operations Margins: Assess profitability trends of the remaining Software and Services segment excluding the discontinued operations.
- Tax Receivable Agreement: Review the $40.4 million liability and future cash outflows associated with tax benefits realized from unit exchanges.