Business context and reporting period
i3 Verticals, Inc. filed this Form 10-K for the fiscal year ended September 30, 2021. The company provides integrated payment processing and vertical-market software, principally in public sector, education, healthcare and nonprofit markets. Its reportable segments are Merchant Services and Proprietary Software and Payments. Software and related services represented 39% of fiscal 2021 revenue. The requested “2021 Q4” is the final quarter of this fiscal year; the filing reports full-year results as well as quarterly data.
Financial performance and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $224.1 million | $150.1 million |
| Operating income (loss) | $(0.0) million | $7.8 million |
| Net income (loss) | $(7.8) million | $(1.0) million |
| Net loss attributable to i3 Verticals, Inc. | $(4.5) million | $(0.4) million |
| Net cash from operating activities | $46.8 million | $23.7 million |
| Net cash used in investing activities | $(156.3) million | $(35.4) million |
Revenue grew 49.3%. Acquisitions completed in fiscal 2020 and 2021 contributed $63.6 million of fiscal 2021 revenue; existing businesses contributed a further $10.4 million increase, which management primarily attributed to recovering consumer spending. Payment volume rose 30.7% to $18.8 billion, and integrated payments increased to 60% of volume from 55%. Average monthly net volume attrition remained below 1%.
Operating expenses rose faster than revenue, leaving operating results near break-even. Selling, general and administrative expense increased 72.2% to $134.9 million, principally reflecting $50.4 million of additional employment expense, including acquisition-related headcount and higher stock compensation. Stock-based compensation was $20.9 million. Depreciation and amortization was $24.4 million. The filing does not present a conventional gross-margin measure; reported segment processing margin was $195.3 million, versus $123.4 million in FY2020.
For the quarter ended September 30, 2021, revenue was $67.2 million, operating income was $0.6 million, and net loss attributable to the company was $0.5 million. Quarterly revenue increased through the fiscal year, from $44.6 million in the December quarter.
At September 30, 2021, cash and cash equivalents were $3.6 million (plus $9.5 million of restricted cash). Current assets were $58.1 million and current liabilities were $96.5 million. The company reported $170.6 million of available revolver capacity, subject to covenants. Revolver borrowings were $104.4 million; Exchangeable Notes had $117.0 million principal outstanding, with a $99.8 million net carrying value. Total debt carrying value, net of issuance costs, was $200.6 million. The company reported covenant compliance, with interest coverage of 10.3x, total leverage of 3.5x and senior secured leverage of 1.6x.
Operating cash flow improved to $46.8 million, while acquisition spending drove most of the $156.3 million investing outflow. Financing activities provided $102.1 million. The company reported $36.2 million of contingent consideration liabilities, with maximum potential payouts of $111.7 million. Its Tax Receivable Agreement liability was $39.1 million.
Material changes versus the prior comparable period
- Revenue increased 49.3%, with the majority of the increase attributable to acquisitions; Proprietary Software and Payments revenue more than doubled to $114.4 million, while Merchant Services revenue increased 10.8% to $111.9 million.
- Operating income declined from $7.8 million to approximately break-even, and the company’s net loss widened from $1.0 million to $7.8 million.
- Operating cash flow nearly doubled, but investing cash outflow increased substantially because net cash used for acquisitions rose to $149.5 million.
- Debt and balance-sheet scale increased with acquisition financing: total assets rose to $651.8 million from $403.5 million, and long-term debt, net, rose to $200.6 million from $90.8 million.
Outlook, commentary, risks and unusual items
Management expects operating cash flow, cash on hand and available borrowing capacity to fund operations, planned capital expenditures and debt service for at least the next 12 months. This is not specific revenue or earnings guidance; the filing provides no quantified forward guidance. Management could not reliably predict the duration or future financial impact of COVID-19.
- Acquisitions: The company completed eight acquisitions in FY2021. After year-end it acquired a healthcare revenue-cycle-management business for $60 million in cash and revolving-credit proceeds, plus contingent consideration of up to $8 million.
- Accounting item: Early adoption of ASU 2021-08 increased FY2021 revenue by $4.5 million and reduced reported net loss by $3.9 million. The filing says the change did not materially affect cash flows.
- Contingent consideration: A $7.1 million charge in FY2021 reflected remeasurement of acquisition-related contingent consideration as certain acquired businesses performed above expectations; FY2020 included a $1.4 million benefit.
- Cybersecurity litigation: Louisiana state and local law-enforcement plaintiffs seek damages relating to alleged cybersecurity deficiencies at a subsidiary, including stated remediation costs of $15 million for the State and $7 million for the Sheriffs, as well as other potential costs. The company could not predict the outcome or estimate the potential loss. The DOJ informed the company in September 2021 that its investigation was concluded as to the company and no criminal charges would be brought.
- Principal risks: COVID-19 and economic volatility; acquisition integration and reliance on continued acquisitions; competition and distribution-partner retention; cybersecurity, privacy and service-provider disruptions; regulatory and payment-network compliance; chargebacks; and debt, covenant, floating-rate and refinancing exposure. The revolver bears variable interest, and the Exchangeable Notes may require cash settlement in certain circumstances.
- Other items: A $2.1 million net gain on investment sales contributed to other income. The company reported no goodwill impairment in FY2021. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal-control effectiveness because the company was an emerging growth company.
Important facts for investors to verify
- How much of future growth and margin performance depends on acquisitions versus organic growth, and whether acquired businesses meet performance expectations.
- The underlying drivers of widening losses and rising SG&A, including the scale and persistence of stock-based compensation and acquisition-related costs.
- Cash generation after acquisitions, debt service and contingent consideration, and the availability of revolver capacity under covenant requirements.
- The outcome and potential financial exposure of the Louisiana cybersecurity litigation, including whether any loss accrual or insurance recovery is recorded.
- The valuation and payment timing of contingent consideration and Tax Receivable Agreement obligations, and the potential effect of Exchangeable Notes and future equity issuance on liquidity and dilution.