i3 Verticals, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019. The filing also reports the fourth fiscal quarter; it is an annual report, not a standalone Q4 filing. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless stated otherwise.
Business context
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 other verticals. Its reportable segments are Merchant Services and Proprietary Software and Payments. Growth strategy relies substantially on acquisitions and distribution partners.
Key financial results
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $376.3 | $323.5 |
| Income from operations | $6.4 | $12.4 |
| Consolidated net income (loss) | $0.6 | $(5.0) |
| Net loss attributable to i3 Verticals, Inc. | $(3.0) | $(6.9) |
| Net cash provided by operating activities | $26.6 | $18.1 |
| Net cash used in investing activities | $(143.7) | $(38.1) |
| Net cash provided by financing activities | $119.1 | $19.2 |
Revenue increased 16.3%, primarily from acquisitions; acquired businesses contributed $41.2 million of incremental revenue, with another $11.6 million attributed primarily to increased payment volume. Payment volume grew 13.8% to $13.1 billion, and integrated payments rose to 50% of volume from 43%. The reported processing margin, a company-defined measure that adds back certain residual expenses, was $106.9 million versus $83.2 million. Operating income declined 48.3%; operating margin was approximately 1.7%, compared with 3.8%. Higher SG&A, including employment costs and stock compensation, and higher depreciation and amortization contributed to the decline.
Q4 comparison: Revenue was $108.6 million versus $84.1 million in the prior-year quarter. Operating income was $1.9 million versus $3.5 million; net loss attributable to i3 Verticals, Inc. was $0.9 million versus net income of $0.8 million.
Liquidity, debt and material changes
At September 30, 2019, cash and cash equivalents were $1.1 million, current assets $20.6 million and current liabilities $35.2 million. The company reported $141.1 million outstanding under its $300 million revolving credit facility and $158.9 million of available borrowing capacity. Balance-sheet debt, net of issuance costs, was $139.3 million. The facility matures May 9, 2024, bears floating-rate interest, is secured by substantially all assets and includes financial and other covenants; the company reported compliance at year-end. Management said available cash, operating cash flow and borrowing capacity should fund operations, planned capital expenditures and debt service for at least 12 months.
Investing cash use rose sharply, primarily because cash used for acquisitions increased to $137.0 million. The company completed multiple acquisitions, including Pace Payment Systems, and recorded $18.2 million of contingent consideration. Goodwill increased to $168.3 million from $84.0 million; no goodwill impairment was recorded. The June 2019 public offering generated approximately $111.6 million in net proceeds before offering expenses, largely used to acquire LLC units; the LLC used $20.9 million of proceeds to repay debt.
Outlook, risks and unusual items
- No specific financial guidance or quantified forward outlook is provided. Management expects operating cash flow and available credit to support the business for at least the next 12 months.
- Management expects adoption of ASC 606 in fiscal 2020 to present interchange and network fees primarily net rather than gross, significantly changing reported revenue presentation; it does not expect a material net-income impact. The company estimated a $1.8 million cumulative increase to retained earnings on adoption.
- Key risks include acquisition execution and integration, client and distribution-partner retention, competition and pricing pressure, cybersecurity and service interruptions, payment-network and regulatory compliance, chargebacks, and dependence on bank sponsors and third-party processors.
- Debt creates floating-rate and covenant risks; a 1 percentage-point rate change was estimated to affect results by $1.4 million. The Tax Receivable Agreement liability was $23.2 million, and the company generally owes continuing equity owners 85% of realized or, in certain circumstances, deemed tax benefits.
- Contingent-consideration fair-value expense was $3.4 million. The prior-year results included an $8.5 million warrant-liability fair-value expense, making year-over-year net-income comparisons less directly comparable. Acquisitions completed in FY2019 contributed $27.8 million of revenue and $2.2 million of net loss during the periods included.
- The company reported no off-balance-sheet financing arrangements. Management considered ordinary-course legal proceedings not expected to have a material impact; the filing does not provide a clear quantified loss range for these matters.
Investor verification points
- Separate underlying growth from acquisition contributions and monitor monthly payment-volume attrition, reported at approximately 1% net per month.
- Reconcile gross-revenue trends with the expected ASC 606 net presentation and assess segment processing-margin definitions.
- Track whether acquisitions deliver expected growth and cash returns, and how contingent payments and integration costs develop.
- Review debt utilization, floating-rate exposure, covenant headroom and the adequacy of liquidity given low year-end cash.
- Assess the timing and cash demands of Tax Receivable Agreement payments, alongside potential dilution from continuing equity owners’ redemption rights.
- Note that the auditor gave an unqualified opinion on the financial statements; the auditor did not attest to internal control effectiveness. Management reported controls effective, and no material control changes during the year.