Business context and reporting period
i3 Verticals, Inc. provides integrated software and payment solutions, principally in Public Sector (including Education) and Healthcare. This unaudited Form 10-Q covers the quarter and six months ended March 31, 2023, the company’s fiscal second quarter and first half. Dollar figures below are in millions unless stated otherwise.
Key financial results
| Metric | Three months ended March 31, 2023 | Six months ended March 31, 2023 |
|---|---|---|
| Revenue | $93.9; up 20.2% year over year | $179.9; up 18.3% |
| Income (loss) from operations | $5.4, versus $(6.2) | $11.3, versus $(6.9) |
| Net income (loss), consolidated | $(0.2), versus $(10.4) | $(0.02), versus $(14.1) |
| Net income (loss) attributable to i3 Verticals, Inc. | $0.04, versus $(7.4) | $(0.2), versus $(9.9) |
| Net income (loss) per Class A share, basic and diluted | $0.00, versus $(0.33) | $(0.01), versus $(0.45) |
| Net cash provided by operating activities | Not separately presented | $25.5, versus $31.2 |
| Net cash used in investing activities | Not separately presented | $(111.1), versus $(99.6) |
| Net cash provided by financing activities | Not separately presented | $84.2, versus $77.8 |
Second-quarter processing margin, the company’s key segment performance measure, was $84.8 million. Revenue was $33.1 million in Merchant Services and $60.8 million in Software and Services. ARR was $305.7 million, up 20.1%; payment volume was $6.0 billion, up 11.7%. Software and related services represented 50.4% of quarterly revenue.
Financial position, liquidity and debt
At March 31, 2023, cash and cash equivalents were $4.0 million, total assets were $883.0 million, and total liabilities were $571.2 million. Long-term debt, net of issuance costs, was $385.5 million; principal outstanding comprised $271.1 million under the revolving facility and $117.0 million of 1.0% Exchangeable Notes due 2025. The company reported $103.9 million of revolver availability, subject to covenants. It was in compliance with its existing facility covenants, reporting interest coverage of 4.61x, total leverage of 4.00x and senior secured leverage of 2.78x.
On May 8, 2023, after quarter-end, the company replaced that facility with a $450 million senior secured revolving credit facility. Management said operating cash flow, cash and available borrowing capacity were expected to fund operations, planned capital expenditures and debt service for at least the next 12 months. This is management’s expectation, not a guarantee.
Material changes and management commentary
- Quarterly revenue growth reflected acquisitions, which contributed an estimated $6.0 million, and growth in existing businesses, particularly Public Sector software and payment volume. For the six-month period, acquisitions contributed an estimated $12.2 million of revenue.
- The company acquired Celtic for $85.0 million in cash and two other businesses for total consideration of $19.8 million during the six months. Acquisition-related cash outflows contributed to investing cash use of $102.0 million for acquisitions, net of cash acquired.
- Quarterly SG&A increased 17.4% to $57.2 million, mainly from higher employment costs, including acquisition-related headcount and stock compensation. Depreciation and amortization rose 21.1% to $9.0 million, primarily due to acquisitions.
- Interest expense increased 83.6% to $6.2 million for the quarter and 79.0% to $11.7 million for the half year, reflecting higher average borrowing rates and debt balances. The company cited inflation, rising interest rates, geopolitical uncertainty and possible recession as economic risks; it could not predict their financial impact.
- Operating cash flow declined by $5.7 million year over year for the half, despite the substantial reduction in reported net loss. Investing cash use increased, while financing cash flow included significant revolver borrowings and repayments.
- Fiscal second-quarter results may be affected by seasonality: management says the first calendar quarter tends to be weaker on a same-store basis, and Education revenue varies with the school calendar.
Risks, contingencies and unusual items
- The Louisiana S&S litigation alleges cybersecurity deficiencies involving third-party remote-access software and seeks damages including approximately $15 million of state remediation costs and $7 million purportedly spent by sheriffs, plus other amounts and fees. The appeal concerning remand was argued in April 2023. The company cannot predict the outcome; it said it does not expect a material adverse effect on business or financial condition but cannot rule out a material effect on results for the period of resolution.
- Contingent consideration revaluation generated operating expense of $2.3 million for the quarter and $3.7 million for the half year, attributed primarily to some acquired businesses outperforming expectations. Recorded contingent consideration totaled $22.3 million at March 31.
- A conditional third-party sales organization buyout may be triggered by July 2023 or an earlier specified event; the amount is not estimable from the filing and is capped at $29 million, with up to $9 million of additional performance-based consideration.
- The Tax Receivable Agreement liability was approximately $40.9 million. The agreement generally entitles continuing equity owners to 85% of certain realized or deemed tax benefits; future payments depend on multiple factors.
- Debt is exposed to floating-rate risk: management estimated that a 1 percentage-point rate change on the March 31 revolver borrowing would affect results by $2.7 million. The filing also identifies customer retention, chargebacks, cybersecurity, third-party service dependence, acquisition integration, competition and covenant compliance as risks.
- The company adopted ASU 2020-06 on October 1, 2022, increasing reported debt by $11.9 million and reducing additional paid-in capital by $23.4 million while reducing accumulated deficit by $11.4 million; adoption did not affect net income.
Important facts for investors to verify
- How much of reported growth reflects acquired businesses versus growth in existing operations, especially in Software and Services.
- Current borrowing, interest costs, covenant headroom and availability under the May 2023 $450 million credit agreement.
- Cash conversion and the sustainability of operating cash flow given acquisition spending, debt service and contingent consideration.
- Progress and potential exposure in the Louisiana litigation and the timing and size of the conditional buyout.
- The assumptions underlying ARR, contingent consideration valuations, acquisition purchase-price allocations and future Tax Receivable Agreement payments.
- The reason quarterly diluted weighted-average shares were 34.3 million versus 23.1 million basic shares while reported diluted EPS rounded to $0.00; review the filing’s earnings-per-share reconciliation.