I3 Verticals, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended June 30, 2018, compared with the same periods in 2017. I3 Verticals provides integrated payment processing and software solutions, primarily to small and midsize businesses and organizations in education, nonprofit, public-sector, property-management and healthcare markets. More than 85% of gross revenue came from payment-processing fees and related transaction or service fees.
The company completed its IPO on June 25, 2018, and reorganized as a publicly traded holding company. I3 Verticals, Inc. owned 34.6% of i3 Verticals, LLC at quarter-end and consolidates its results; continuing equity owners held the remaining 65.4% economic interest.
Key financial metrics
| Metric | Three months ended June 30, 2018 | Nine months ended June 30, 2018 |
|---|---|---|
| Revenue | $84.5 million, up 27.5% | $239.5 million, up 25.5% |
| Income from operations | $2.9 million; 3.5% margin | $8.9 million; 3.7% margin |
| Net income (loss) | $(0.7) million | $(7.8) million |
| Net income (loss) attributable to I3 Verticals, Inc. | $(0.6) million | $(7.7) million |
| Operating cash flow | Not provided for the quarter alone | $15.0 million |
- Payment volume was $3.0 billion for the quarter, up 14.1%, and $8.6 billion for the nine months, up 14.5%. Integrated payments were 43% of quarterly volume, versus 35% a year earlier; net monthly volume attrition was approximately 1% for the nine-month period.
- Reported processing margin, as defined by the company and adjusted for residual expense, was $21.6 million for the quarter versus $13.7 million; nine-month margin was $61.4 million versus $41.1 million.
- Quarterly interest expense was $2.6 million, up 54.0%. Nine-month interest expense was $7.6 million, up 54.2%.
- Cash and cash equivalents were $2.5 million at June 30, 2018, versus $1.0 million at September 30, 2017. Current assets were $13.2 million and current liabilities $24.5 million.
- Term-loan principal outstanding was $36.3 million; the balance-sheet carrying amount of debt, net of issuance costs, was $34.5 million, including $5.0 million current. No revolver borrowings were outstanding, and $110 million was available under the revolving facility.
- Total assets were $166.7 million, including goodwill of $80.2 million and net intangible assets of $65.8 million. Equity was $108.3 million, including $70.9 million of non-controlling interest.
Material changes versus the prior comparable period
- Revenue growth was principally acquisition-driven: acquisitions completed after June 30, 2017 contributed $15.0 million of quarterly revenue and $40.2 million for the nine-month period. Management attributed the remaining increases mainly to higher payment volume.
- Despite higher revenue and operating income, quarterly net results fell from $0.9 million income to a $0.7 million loss. Nine-month results shifted from $0.5 million income to a $7.8 million loss.
- The nine-month loss included an $8.5 million noncash charge for the increase in fair value of warrant liabilities and a $3.3 million contingent-consideration expense. The warrants were exercised in connection with the IPO.
- Operating expenses increased, including quarterly SG&A of $10.7 million, up 71.7%, primarily from acquisition-related and public-company staffing costs. Other costs of services rose 54.0%, partly reflecting acquired equipment and software businesses.
- Operating cash flow increased to $15.0 million from $5.9 million, while investing cash outflow increased to $31.0 million from $7.7 million, mainly due to acquisitions. The IPO generated approximately $92.5 million in net proceeds; the company reported that all proceeds had been used, principally to repay debt.
- Debt declined substantially from the prior September balance following IPO proceeds and debt repayments. The IPO also converted or repaid the mezzanine and junior subordinated notes.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management said operating cash flow, cash on hand and available revolver capacity should be sufficient for operations, planned capital expenditures and debt service for at least the next 12 months.
- The company’s growth strategy combines organic growth with acquisitions. Integration, acquisition performance and contingent earn-outs remain important uncertainties; contingent consideration liabilities totaled $6.9 million at June 30.
- The senior secured facility matures October 30, 2022, bears variable interest and is secured by substantially all company assets. The company reported covenant compliance at quarter-end. A 1 percentage-point rate change on the term loan would affect results by approximately $0.4 million, according to the filing.
- The Tax Receivable Agreement generally entitles continuing equity owners to 85% of certain tax benefits actually or deemed realized by the company. The company reported a related liability of $0.8 million and expects payments under the agreement to be substantial; potential future payments are not included in its contractual-obligations table.
- A proposed $995,000 settlement of the Expert Auto class action had preliminary approval, subject to final court approval. A related insurer coverage dispute remained ongoing; the court denied the insurer’s motions on August 7, 2018. Management said it intended to defend the matter and pursue its counterclaim.
- Management cited seasonality in payment activity and education revenue. Other identified risks include client attrition, dependence on distribution and processing partners, cybersecurity and technology risks, competition, regulation, and leverage.
- Quarterly and nine-month earnings-per-share figures reflect only the post-reorganization period from June 25 through June 30, 2018; they are not representative per-share results for the full reported periods.
Important facts for investors to verify
- How much of reported growth is organic versus acquired, and whether payment-volume growth and integrated-payment adoption can continue.
- Whether operating profitability and cash generation can cover acquisition spending, capital needs and debt service, given limited cash and variable-rate borrowing.
- The company’s covenant headroom and leverage calculations under the credit agreement, including any acquisition-related covenant adjustments.
- The timing and potential cost of acquisition earn-outs, the Expert Auto settlement and insurer dispute, and future Tax Receivable Agreement payments.
- The impact of continuing equity owners’ 65.4% LLC economic interest, their Class B voting rights, and potential unit redemptions or exchanges on ownership and future share count.