I3 Verticals, Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended December 31, 2020; comparisons are with the three months ended December 31, 2019. Financial amounts are in U.S. dollars; unless otherwise noted, dollar figures below are in millions. The company provides integrated payment and software solutions, principally in education, nonprofit, public sector and healthcare markets.
Financial performance
| Metric | Q1 FY2021 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $43.3 | $41.1 | +$2.2 (+5.4%) |
| Operating income (loss) | $(2.3) | $4.1 | $(6.4) |
| Net income (loss), consolidated | $(4.1) | $1.9 | $(6.1) |
| Net income (loss) attributable to i3 Verticals, Inc. | $(2.6) | $(0.1) | $(2.4) |
| Class A diluted loss per share | $(0.13) | $(0.01) | — |
| Operating cash flow | $12.0 | $7.5 | +$4.5 |
| Investing cash flow | $(61.3) | $(1.8) | Primarily acquisitions |
| Financing cash flow | $48.2 | $(6.6) | Higher net revolver borrowings |
Margins and operating measures: Operating margin was approximately (5.3%), versus 10.0% a year earlier; net loss attributable to the company was approximately 5.9% of revenue, versus a 0.4% loss. Company-defined processing margin was $35.4 million, up from $33.5 million. Payment volume was $3.8 billion in both periods, down 1.0% year over year; integrated payments rose to 56% from 55%. Average monthly net volume attrition remained below 2%.
Balance sheet and liquidity: At December 31, 2020, cash and cash equivalents were $10.9 million, restricted cash was $8.6 million, and total assets were $497.7 million. Current assets were $44.5 million and current liabilities $59.9 million. Net carrying debt was $141.4 million, including $49.3 million drawn on the revolving facility and the 1.0% exchangeable notes. The notes had $117.0 million principal outstanding and mature in 2025. The company reported $225.7 million of revolver availability, subject to covenants. It was in compliance with its debt covenants; reported interest coverage, total leverage and senior secured leverage ratios were 16.48x, 3.67x and 0.92x, respectively.
Changes versus the prior comparable period
- Revenue growth reflected $7.5 million of incremental revenue from acquisitions, partly offset by a $5.3 million decline, primarily from lower payment volume amid COVID-19-related reductions in consumer spending.
- Merchant Services revenue declined 11.6% to $25.0 million; Proprietary Software and Payments revenue increased 41.4% to $18.8 million, principally due to acquisitions.
- Operating expenses rose 23.3% to $45.6 million. Selling, general and administrative expense increased 29.4% to $25.0 million, including higher employment costs and professional services. A $1.9 million contingent-consideration revaluation charge also weighed on results, versus $0.2 million a year earlier.
- Operating cash flow increased despite the consolidated net loss, mainly due to changes in operating assets and liabilities, including higher deferred revenue. Acquisition spending drove the increase in investing cash outflows.
- The company completed four acquisitions during the quarter for $70.0 million of total consideration, including contingent consideration. The acquired businesses contributed $5.7 million of revenue and $0.5 million of net loss for the quarter.
Outlook, risks and unusual items
- Outlook: No specific financial guidance was provided. Management said cash, operating cash flow and available revolver capacity should be sufficient for operations, planned capital expenditures and debt service for at least the next twelve months. It could not predict the pandemic’s duration or long-term impact.
- COVID-19: The filing describes continuing effects on payment volume, consumer spending and education and public-sector clients. Monthly payment volume recovered from $0.8 billion in April 2020 to $1.3 billion in December 2020, but remained subject to pandemic-related uncertainty. A furlough and workforce reduction affected approximately 12% of employees; some furloughed employees returned.
- Debt and liquidity risks: The revolving facility is secured by substantially all company assets, bears variable-rate interest and imposes financial and other covenants. Management estimated that a 1.0% rate change on the December 31 revolver borrowings would affect results by approximately $0.5 million. Covenant compliance and available borrowing capacity depend on continued performance.
- Acquisitions and contingent obligations: Contingent consideration was $19.5 million at quarter-end; its fair value is based on management estimates and can change through earnings. After quarter-end, the company acquired BIS for stated consideration of $87.7 million, including $52.5 million in cash and revolver proceeds and 1,202,914 Class A shares valued at approximately $35.2 million; additional contingent consideration was still being valued.
- Other notable items: Early adoption of lease accounting on October 1, 2020 recognized operating lease right-of-use assets and liabilities. The company reported $34.3 million of Tax Receivable Agreement obligations; payments are generally tied to realized tax benefits and may vary. Management reported ordinary-course legal matters were not expected to have a material effect and said there were no material changes to the risk factors in its latest Form 10-K.
Important facts for investors to verify
- Whether payment volume and revenue recover from pandemic-related pressure, and whether acquisition-driven growth translates into improved profitability.
- Acquisition integration, BIS’s final purchase-price allocation and contingent consideration, and the financing and dilution effects of the transaction.
- Future operating cash flow, revolver usage, covenant headroom and sensitivity to variable interest rates.
- The assumptions underlying the $19.5 million contingent-consideration valuation and the $34.3 million Tax Receivable Agreement liability.
- Whether expense growth, including stock-based compensation and acquired-asset amortization, moderates as the business scales.