i3 Verticals, Inc. — FY2022 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2022. The filing is an annual report, not a standalone fourth-quarter financial statement; it does provide selected fourth-quarter operating indicators. Amounts below are in U.S. dollars.
Business context
i3 Verticals develops, acquires and operates vertical-market software and payment solutions, primarily for public-sector and healthcare customers. It reports Merchant Services and Software and Services segments. Software and related services represented 49% of annual revenue, up from 39% in FY2021.
Financial and operating performance
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Revenue | $317.9 million | $224.1 million | +41.8% |
| Operating loss | $2.4 million | $0.01 million | Wider loss |
| Net loss attributable to i3 Verticals, Inc. | $17.1 million | $4.5 million | Wider loss |
| Basic loss per share | $0.77 | $0.21 | Wider loss |
| Cash from operating activities | $45.8 million | $44.5 million | + $1.3 million |
| Cash used in investing activities | $113.0 million | $149.3 million | Use decreased |
| Cash from financing activities | $73.0 million | $102.1 million | Lower inflow |
- Revenue mix: Software and Services revenue was $193.4 million, up 69.0%; Merchant Services revenue was $124.5 million, up 11.3%. The company attributed growth to acquisitions, software-related revenue and higher payment volume.
- Fourth-quarter indicators: Annualized recurring revenue was $281.2 million, up 33.4% year over year. This is a company-defined, non-standardized measure, not a revenue forecast.
- Payment activity: Annual payment volume was $22.6 billion, up 20%; Merchant Services payment volume was $20.5 billion, up 19.5%.
- Processing margin: $282.7 million, compared with $195.3 million in FY2021. The company defines this measure as revenue less other costs of services plus residuals expense.
- Expenses and unusual item: Selling, general and administrative expense rose 43.7% to $193.8 million, including higher employment costs and stock compensation. A $23.7 million charge for remeasuring acquisition-related contingent consideration contributed to the operating loss; the comparable charge was $7.1 million.
- Cash and liquidity: Cash and cash equivalents were $3.5 million at year-end. The company reported about $90.0 million of available revolver capacity, subject to covenants. Operating cash flow was slightly higher despite a larger net loss, which management said was substantially driven by non-cash items.
- Debt: Year-end revolver borrowings were about $185.0 million; $117.0 million principal remained on 1.0% exchangeable notes due 2025. The balance sheet reported $287.0 million of long-term debt net of issuance costs and discounts. The revolving facility was $275 million at September 30, 2022; an October 3, 2022 amendment increased its maximum to $375 million.
- Covenants and rates: At September 30, 2022, the company reported compliance with its financial covenants: interest coverage 8.17x, total leverage 3.68x and senior secured leverage 2.24x. Revolver borrowings bear floating-rate interest; management estimated that a 1 percentage-point rate change would affect results by $1.9 million.
Material changes versus FY2021
- Revenue increased 41.8%, with $61.8 million of incremental revenue attributed to businesses acquired in FY2021 and FY2022.
- Software and Services expanded faster than Merchant Services, increasing its share of revenue to 49% from 39%.
- Net loss attributable to the company increased to $17.1 million from $4.5 million. Higher operating expenses, contingent-consideration remeasurement and interest expense were significant factors.
- Operating cash flow increased modestly, while acquisition-related investing outflows fell to $100.7 million from $142.5 million.
- The company sold 722,000 Class A shares through its at-the-market program, raising $17.9 million net during FY2022; it reported no share repurchases in the September quarter.
Outlook, risks and contingencies
- Management expected operating cash flow, cash and available revolver capacity to fund operations, planned capital expenditures and debt service for at least the next 12 months. The filing does not provide formal revenue or earnings guidance.
- The company completed three acquisitions in FY2022 for total consideration of $107.7 million, including $6.3 million contingent consideration. After year-end, it completed two more acquisitions for $89.5 million in cash consideration, funded with cash and revolver proceeds.
- Contingent consideration was valued at $22.8 million at year-end, with maximum potential payouts of $81.3 million tied to performance targets. Revaluations depend on management estimates and can cause earnings volatility.
- A Louisiana lawsuit alleges cybersecurity deficiencies involving a third-party remote-access product used by a subsidiary. Plaintiffs seek, among other amounts, $15 million for state remediation and $7 million for sheriffs’ remediation, plus other damages and costs. The company said it could not predict the outcome and could not assure the matter would not materially affect results for the period resolved.
- Principal risks include acquisition integration and financing, floating-rate debt and covenant compliance, customer and distribution-partner retention, competition, cybersecurity and service interruptions, chargebacks, and complex payment, privacy and healthcare regulation. COVID-19, inflation, supply-chain disruption and economic uncertainty are also discussed as potential pressures.
- The company reported no goodwill impairment in FY2022. Management concluded internal control over financial reporting was effective; the auditor did not attest to that assessment because the company was an emerging growth company. The company expected to lose that status after FY2023.
Important facts for investors to verify
- How much revenue and operating cash flow is organic versus acquisition-driven, and whether the acquired businesses meet performance expectations.
- Cash available after acquisition spending, contingent-consideration payments, debt service and any future acquisitions.
- Floating-rate borrowing costs, revolver availability and covenant headroom following the October 2022 facility amendment.
- The final exposure and timing of the Louisiana litigation, and any related cybersecurity remediation or insurance recovery.
- The assumptions behind contingent-consideration valuations and the potential impact of maximum payouts on future cash needs and earnings.
- Whether the company’s shift toward software and recurring revenue continues, and how its non-GAAP-style ARR measure reconciles with reported revenue.
- The impact on reported results and comparability of the disclosed prior-period cash-flow reclassification involving settlement assets and restricted cash.