Business context and reporting period
i3 Verticals, Inc. provides payment processing and proprietary software solutions to small and midsize businesses and organizations, including in education, public sector, property management, healthcare and nonprofit markets. This Form 10-Q covers the quarter and nine months ended June 30, 2019; dollar amounts below are in millions unless stated otherwise. The company’s fiscal year ends September 30.
Financial performance and position
| Metric | Three months ended June 30, 2019 | Year-over-year change | Nine months ended June 30, 2019 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $97.5 | +15.3% | $267.7 | +11.8% |
| Income from operations | $1.2 | Down from $2.9 | $4.5 | Down from $8.9 |
| Consolidated net income (loss) | $(0.6) | Compared with $(0.7) | $0.5 | Compared with $(7.8) |
| Net income (loss) attributable to i3 Verticals, Inc. | $(1.2) | Compared with $(0.6) | $(2.1) | Compared with $(7.7) |
| Operating cash flow | Not presented for the quarter | $16.3 | Up from $14.7 |
Quarterly processing volume increased 13.7% to $3.4 billion; nine-month volume rose 8.3% to $9.3 billion. Integrated transactions accounted for 51% of quarterly volume, up from 43%. Processing margin, as defined by the company, was $27.4 million for the quarter and $74.7 million for the nine months; the filing reports prior-year figures of $21.6 million and $61.4 million, respectively. Calculated as processing margin divided by revenue, the margin was approximately 28.1% for the quarter and 27.9% for the nine months, versus 25.6% in each prior-year comparable period.
For the nine months, cash used in investing was $131.7 million, mainly for acquisitions; cash provided by financing was $117.3 million. Cash, cash equivalents and restricted cash totaled $3.1 million at period-end, including $1.5 million of unrestricted cash. Gross credit-facility borrowings were $139.6 million; debt net of issuance costs was $137.6 million. The $300 million revolving facility had $160.4 million available to borrow. Total assets were $343.2 million and total liabilities were $202.9 million.
Material changes versus prior comparable periods
- Revenue growth reflected acquisitions and higher payment volume. Acquisitions contributed $10.1 million of quarterly and $21.4 million of nine-month revenue; the remaining increase was primarily attributed to payment volume.
- Proprietary Software and Payments revenue grew 114.2% for the quarter and 75.2% for the nine months, while Merchant Services revenue grew 9.4% and 7.6%, respectively.
- SG&A increased 64.4% for the quarter and 49.4% for the nine months, largely due to employment costs, stock compensation, acquisition-related headcount and corporate staffing. Depreciation and amortization also increased.
- Operating income declined despite revenue growth. For the nine months, lower interest expense and the absence of the prior-year warrant-liability charge helped improve consolidated net income, but the company still reported a loss attributable to i3 Verticals, Inc.
- Goodwill increased from $84.0 million to $165.9 million, and net intangible assets rose from $66.0 million to $106.5 million, largely reflecting acquisitions.
Outlook, management commentary, risks and unusual items
Management stated that operating cash flow, cash on hand and borrowing capacity were expected to be sufficient for operations, planned capital expenditures and debt service for at least the next 12 months. No specific revenue or earnings guidance was provided. Management cited acquisitions, technology investment and expansion in strategic vertical markets as part of its growth strategy.
- During the nine months, the company completed acquisitions with total purchase consideration of $141.6 million, including Pace Payment Systems. Acquisitions added $11.7 million of revenue and a $2.5 million net loss to reported nine-month results. Purchase-price allocations were preliminary; acquisition earn-outs and contingent consideration are subject to reassessment.
- A new $300 million secured revolving facility replaced the prior facility in May 2019 and matures in May 2024. The facility bears floating-rate interest, is secured by substantially all company assets, and includes financial and other covenants. The company reported compliance as of June 30. A 1 percentage-point rate change was estimated to affect results by $1.4 million based on period-end borrowings.
- The June 2019 offering generated approximately $111.6 million of net proceeds before offering expenses. The company used the proceeds to acquire LLC units; i3 Verticals, LLC received $20.9 million and used it to repay debt. The offering also increased tax-related assets and obligations.
- The Tax Receivable Agreement obligation was $23.9 million at June 30. It generally entitles continuing equity owners to 85% of certain realized or deemed tax benefits; expected payments related to exchanges through period-end were estimated at up to $2.2 million annually over 24 years, with future exchanges potentially adding obligations.
- Contingencies include $13.9 million of recorded contingent consideration, processing minimum commitments of $9.6 million, lease commitments of $9.3 million, and ordinary-course legal matters. Management said it did not expect the legal matters or disclosed indemnification obligations to have a material effect.
- Risks include client and payment-volume attrition, dependence on third-party processors and distribution partners, acquisition integration and execution, cybersecurity and technology risks, competition, regulation, seasonality, floating-rate debt and credit-facility restrictions. The company reported approximately 1% net monthly payment-volume attrition during the nine months.
- On August 8, 2019, the company filed a shelf registration statement permitting future offerings of up to $250 million of securities and resale by certain holders of up to 13.1 million Class A shares.
Important facts for investors to verify
- How much of revenue and payment-volume growth is organic versus acquired, and how acquisition integration affects operating costs and profitability.
- Whether rising SG&A and amortization continue to outpace revenue growth, and how operating performance develops beyond reported consolidated net income.
- Debt utilization, covenant headroom, floating-rate exposure and the company’s ability to fund further acquisitions while maintaining liquidity.
- The assumptions, timing and potential cash impact of contingent acquisition consideration and Tax Receivable Agreement payments.
- Client attrition, purchased-portfolio runoff, seasonality and the durability of integrated-payment growth.