I3 Verticals, Inc. — Form 10-Q Summary
Business context and period: The company provides integrated software and payment solutions to small and midsize businesses and organizations, with a focus on public sector, education, healthcare and nonprofit markets. This unaudited report covers the three and six months ended March 31, 2022 (fiscal second quarter and first half), compared with the corresponding 2021 periods. Unless noted otherwise, amounts below are in millions.
Financial and operating performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $78.1, up 58.8% from $49.2 | $152.1, up 62.1% from $93.8 |
| Operating income (loss) | $(6.2), versus $1.2 | $(6.9), versus $0.2 |
| Net income (loss) | $(10.4), versus $1.3 | $(14.1), versus $(1.7) |
| Net loss attributable to i3 Verticals, Inc. | $(7.4), versus income of $1.3 | $(9.9), versus loss of $0.7 |
| Operating cash flow | Not separately presented | $31.2, versus $29.9 |
| Cash used in investing activities | Not separately presented | $(99.6), versus $(115.9) |
- First-half operating expenses rose 69.8% to $159.0 million, outpacing revenue growth. Selling, general and administrative expense increased 71.4% to $95.1 million; management attributed most of the increase to acquisition-related headcount and higher stock compensation.
- The contingent-consideration fair-value charge was $11.5 million in the quarter and $16.4 million in the first half, largely reflecting acquired businesses performing above expectations. The charge is noncash when recognized; cash payments are recorded separately.
- Management’s segment metric, processing margin, was $70.0 million for the quarter and $135.9 million for the first half. These equate to approximately 89.6% and 89.4% of revenue, respectively; the filing defines processing margin as revenue less other service costs plus residuals expense.
- First-half operating cash flow included significant noncash expenses. Acquisitions used $94.3 million of cash, while capitalized software and property and equipment expenditures totaled $5.3 million. Cash and cash equivalents were $6.3 million at March 31; restricted cash and settlement assets are separate balances and are not equivalent to unrestricted cash.
- At March 31, total debt was reported net of issuance costs at $287.4 million: $188.3 million drawn on the revolving credit facility and $102.1 million carrying value for exchangeable notes. The notes have $117.0 million principal outstanding and mature in 2025. The revolver matures May 9, 2024.
- Available revolver capacity was $86.7 million, subject to covenants. The company reported compliance with its debt covenants and ratios of 8.66x interest coverage, 3.89x total leverage and 2.37x senior secured leverage. Total assets were $772.7 million and total liabilities $485.2 million.
Changes, outlook and risks
- Revenue growth was substantially acquisition-driven: acquisitions contributed $18.5 million in the quarter and $40.7 million in the first half, net of intercompany eliminations. Proprietary Software and Payments revenue grew 106.0% in the quarter and 114.2% in the first half; Merchant Services revenue grew 11.8% and 14.1%, respectively.
- Operating results also reflected higher amortization, interest expense and contingent-consideration charges. The prior-year quarter included $2.4 million of other income from a fair-value increase in an AxiaMed investment, which did not recur.
- Key operating indicators: quarterly ARR was $254.5 million, up 46.8%; quarterly payment volume was $5.3 billion, up 25.2%. Integrated payments represented 62% of payment volume in both the quarter and first half. Average net monthly payment-volume attrition remained below 2% during the first half. ARR is a company-defined metric, not a forecast.
- 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 filing provides no specific revenue or earnings guidance.
- After quarter-end, the company acquired a healthcare business; purchase consideration was still being valued and was expected to be below $10 million, including cash funded from the revolver and contingent consideration.
- Risks include acquisition integration and contingent payments, leverage and covenant restrictions, floating-rate debt and LIBOR transition, payment volume and client attrition, inflation and supply-chain disruption, cybersecurity and third-party technology exposure, and COVID-19 uncertainty. A Louisiana lawsuit alleges cybersecurity deficiencies and seeks remediation costs, return of purchase prices and other damages; the company said it could not predict the outcome and could not assure the matter would not materially affect results when resolved.
- The company reported a $39.5 million Tax Receivable Agreement liability; payments tied to exchanges through March 31 were expected to range from zero to $3.2 million annually over 26 years. Future exchanges could add obligations.
Important facts for investors to verify
- How much of continued revenue and ARR growth comes from acquired businesses versus organic growth, and whether acquisition synergies and integration plans are being achieved.
- The assumptions behind contingent-consideration valuations and the timing and cash impact of the $47.9 million recorded obligation.
- Cash availability after settlement and restricted balances, acquisition spending, debt repayments and Tax Receivable Agreement payments; also monitor revolver capacity and covenant headroom.
- The outcome and potential financial exposure of the Louisiana S&S litigation, including whether any loss is accrued or estimable.
- The comparability of prior-year results: the company early adopted ASU 2021-08, which affected 2021 acquisition-related revenue and balances, and corrected prior cash-flow classification of settlement assets.