Document


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549  
 

FORM 8-K
 

CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: August 23, 2018
 

 
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12425110&doc=3
i3 Verticals, Inc.
(Exact name of registrant as specified in its charter)  
 

 
 
 
 
 
 
Delaware
 
001-38532
 
82-4052852
(State or Other Jurisdiction
of Incorporation)
 
(Commission
File Number)
 
(I.R.S. Employer
Identification No.)
 
 
40 Burton Hills Blvd., Suite 415
Nashville, TN
 
37215
(Address of principal executive offices)
 
(Zip Code)
(615) 465-4487
(Registrant’s telephone number, including area code)

Not Applicable
(Former name or former address, if changed since last report)

Check the appropriate box if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
 
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d- 2(b))
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e- 4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company.  x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐










Item 7.01.    Regulation FD Disclosure.
i3 Verticals, Inc. (the “Company”) prepared a supplemental presentation (the “Supplemental Presentation”) containing quarterly segment financial performance information for the nine months ended June 30, 2018. A copy of the Supplemental Presentation is attached hereto as Exhibit 99.1 and is incorporated herein by reference. A copy of the Supplemental Presentation is also available on the Investors section of the Company’s website.
Pursuant to the rules and regulations of the Securities and Exchange Commission, the information in this Item 7.01 disclosure, including Exhibit 99.1 and information set forth therein, is deemed to have been furnished and shall not be deemed to be “filed” under the Securities Exchange Act of 1934, as amended.

Item 9.01.     Financial Statements and Exhibits.

(d) Exhibits.

Exhibit No.
 
Description
 
 
 
 







SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: August 23, 2018
 
 
 
i3 Verticals, Inc.
 
 
 
 
 
 
By:
/s/Clay Whitson
 
 
 
Clay Whitson
 
 
 
Chief Financial Officer



segmentsq32018presentati
Q3 Segment Supplemental Information


 
Q3 YTD Segment Performance(1) ($ in thousands) Nine months ended June 30, Period over 2018 2017 period growth Net Revenue(2) Merchant Services, excluding Purchased Portfolios $ 62,442 $ 36,325 72% Purchased Portfolios 7,217 9,339 (23)% Merchant Services 69,659 45,664 53% Proprietary Software and Related Payments 11,222 7,445 51% Corporate (3) 4 nm Other 11,219 7,449 51% Total $ 80,878 $ 53,113 52% Adjusted EBITDA(2) Merchant Services $ 23,585 $ 16,298 45% Proprietary Software and Related Payments 4,508 1,179 282% Corporate (5,593) (3,964) 41% Other (1,085) (2,785) (61)% Total $ 22,500 $ 13,513 67% Adjusted EBITDA as a percentage of Net Revenue 28% 25% 1. i3 Verticals has two segments, “Merchant Services”, which includes Purchased Portfolios (a subset of merchant contracts purchased in 2014 and 2017), and “Other”, which includes Proprietary Software and Related Payments, and Corporate Overhead and other Expenses.” 2. Net Revenue and Adjusted EBITDA are non-GAAP financial measures. Refer to the following slides for the reconciliation of non-GAAP financial measures.


 
Reconciliation of Non-GAAP Financial Measures The reconciliation of our revenue to non-GAAP net revenue is as follows: ($ in thousands) Nine months ended June 30, 2018 Other Proprietary Owned Merchant Corporate Software Total Other Services(1) Total Revenue $ (3) $ 14,787 $ 14,784 $ 224,671 $ 239,455 Interchange and network fees — 3,565 3,565 155,012 158,577 Net Revenue $ (3) $ 11,222 $ 11,219 $ 69,659 $ 80,878 ($ in thousands) Nine months ended June 30, 2017 Other Proprietary Owned Merchant Corporate Software Total Other Services(2) Total Revenue $ 4 $ 10,343 $ 10,347 $ 180,445 $ 190,792 Interchange and network fees — 2,898 2,898 134,781 137,679 Net Revenue $ 4 $ 7,445 $ 7,449 $ 45,664 $ 53,113 1. Merchant Services includes purchased portfolios which had revenue of $14,019 and interchange and network fees of $6,802 for the nine months ended June 30, 2018. 2. Merchant Services includes purchased portfolios which had revenue of $18,009 and interchange and network fees of $8,670 for the nine months ended June 30, 2017.


 
Reconciliation of Non-GAAP Financial Measures The reconciliation of our income (loss) from operations to non-GAAP pro forma adjusted net income and non-GAAP adjusted EBITDA is as follows: ($ in thousands) Nine months ended June 30, 2018 Nine months ended June 30, 2017 Other Other Proprietary Proprietary Owned Merchant Owned Merchant Corporate Software Total Other Services Total Corporate Software Total Other Services Total Income (loss) from operations $ (7,190) $ 1,148 $ (6,042) $ 14,908 $ 8,866 $ (4,413) $ 161 $ (4,252) $ 9,774 $ 5,522 Interest expense, net 6,726 — 6,726 923 7,649 4,961 — 4,961 — 4,961 Change in fair value of warrant liability 8,487 — 8,487 — 8,487 (58) — (58) — (58) Provision for income taxes 824 — 824 (271) 553 43 1 44 57 101 Net income (loss) (23,227) 1,148 (22,079) 14,256 (7,823) (9,359) 160 (9,199) 9,717 518 Non-GAAP Adjustments: Provision for income taxes 824 — 824 (271) 553 43 1 44 57 101 Offering-related expenses(1) 124 — 124 — 124 — — — — — Non-cash change in fair value of contingent consideration(2) — 1,745 1,745 1,535 3,280 — (415) (415) 592 177 Non-cash change in fair value of warrant liability(3) 8,487 — 8,487 — 8,487 (58) — (58) — (58) Equity-based compensation(4) 818 — 818 — 818 — — — — — Acquisition-related expenses(5) 478 — 478 — 478 336 — 336 — 336 Acquisition intangible amortization(6) 4 247 251 6,755 7,006 7 189 196 5,470 5,666 Non-cash interest(7) 839 — 839 — 839 329 — 329 — 329 Other taxes(8) 56 — 56 2 58 25 — 25 — 25 Non-GAAP adjusted income before taxes (11,597) 3,140 (8,457) 22,277 13,820 (8,677) (65) (8,742) 15,836 7,094 Pro forma taxes at effective tax rate(9) 2,957 (801) 2,157 (5,681) (3,524) 2,213 17 2,229 (4,038) (1,809) Pro forma adjusted net income(10) (8,640) 2,339 (6,300) 16,596 10,296 (6,464) (48) (6,513) 11,798 5,285 Plus: Cash interest expense, net(11) 5,887 — 5,887 923 6,810 4,632 — 4,632 — 4,632 Pro forma taxes at effective tax rate(9) (2,957) 801 (2,157) 5,681 3,524 (2,213) (17) (2,229) 4,038 1,809 Depreciation and software amortization (12) 117 1,368 1,485 385 1,870 81 1,244 1,325 462 1,787 Adjusted EBITDA $ (5,593) $ 4,508 $ (1,085) $ 23,585 $ 22,500 $ (3,964) $ 1,179 $ (2,785) $ 16,298 $ 13,513 See footnotes continued on the next slide.


 
Reconciliation of Non-GAAP Financial Measures 1. Includes costs associated with forming i3 Verticals, Inc. and other expenses directly related to the certain transactions as part of any offering. 2. Non-cash change in fair value of contingent consideration reflects the changes in management’s estimates of future cash consideration to be paid in connection with prior acquisitions from the amount estimated as of the later of the most recent balance sheet date forming the beginning of the income statement period or the original estimates made at the closing of the applicable acquisition. 3. Non-cash change in warrant liability reflects the fair value change in certain warrants for our common units associated with our mezzanine notes in the aggregate principal amount of $10.5 million. These warrants are accounted for as liabilities on our consolidated balance sheets. 4. Equity-based compensation expense recognized during the three and nine months ended June 30, 2018 consisted of $76 related to stock options issued under the Company's 2018 Equity Incentive Plan and $741 related to tax receivables agreement (TRA) non- participation compensatory shares. TRA non-participation compensatory shares were issued to former equity owners as part of the Reorganization Transactions in conjunction with the IPO. 5. Acquisition-related expenses are the professional service and related costs directly related to our acquisitions and are not part of our core performance. 6. Acquisition intangible amortization reflects amortization of intangible assets acquired through business combinations, acquired customer portfolios, acquired referral agreements and related asset acquisitions. 7. Non-cash interest expense reflects amortization of amortization of deferred financing costs. 8. Other taxes consist of franchise taxes, commercial activity taxes and other non-income based taxes. Taxes related to salaries or employment are not included. 9. Pro forma corporate income tax expense is based on Non-GAAP adjusted income before taxes and is calculated using tax rates of 25.5% for 2018 and 2017, based on blended federal and state tax rates, considering the Tax Reform Act for 2018. 10. Pro forma adjusted net income assumes that the effect of the Reorganization Transactions and the Company's IPO occurred prior to the three and nine months ending June 30, 2018, and that all net income during that period is available to the Class A common shareholders. Further, pro forma adjusted diluted earnings per share assumes that all Common Units in i3 Verticals, LLC and the associated non-voting Class B common stock were exchanged for Class A common stock at the beginning of the period on a one for one basis. 11. Cash interest expense, net represents all interest expense recorded on statement of operations other than non-cash interest expense, which represents amortization of deferred financing costs. 12. Depreciation and software amortization reflects depreciation on the Company's property, plant and equipment, net, and amortization expense on its capitalized software.


 
Q3 Segment Performance(1) ($ in thousands) Three months ended June 30, Period over 2018 2017 period growth Net Revenue(2) Merchant Services, excluding Purchased Portfolios $ 23,025 $ 12,737 81% Purchased Portfolios 2,068 2,939 (30)% Merchant Services 25,093 15,676 60% Proprietary Software and Related Payments 3,738 2,121 76% Corporate — (34) nm Other 3,738 2,087 79% Total $ 28,831 $ 17,763 62% Adjusted EBITDA(2) Merchant Services $ 8,276 $ 5,638 47% Proprietary Software and Related Payments 1,462 220 565% Corporate (1,800) (1,422) 27% Other (338) (1,202) (72)% Total $ 7,938 $ 4,436 79% Adjusted EBITDA as a percentage of Net Revenue 28% 25% 1. i3 Verticals has two segments, “Merchant Services”, which includes Purchased Portfolios (a subset of merchant contracts purchased in 2014 and 2017), and “Other”, which includes Proprietary Software and Related Payments, and Corporate Overhead and other Expenses.” 2. Net Revenue and Adjusted EBITDA are non-GAAP financial measures. Refer to the following slides for the reconciliation of non-GAAP financial measures.


 
Reconciliation of Non-GAAP Financial Measures The reconciliation of our revenue to non-GAAP net revenue is as follows: ($ in thousands) Three months ended June 30, 2018 Other Proprietary Owned Merchant Corporate Software Total Other Services(1) Total Revenue $ — $ 4,770 $ 4,770 $ 79,766 $ 84,536 Interchange and network fees — 1,032 1,032 54,673 55,705 Net Revenue $ — $ 3,738 $ 3,738 $ 25,093 $ 28,831 ($ in thousands) Three months ended June 30, 2017 Other Proprietary Owned Merchant Corporate Software Total Other Services(2) Total Revenue $ (34) $ 2,947 $ 2,913 $ 63,413 $ 66,326 Interchange and network fees — 826 826 47,737 48,563 Net Revenue $ (34) $ 2,121 $ 2,087 $ 15,676 $ 17,763 1. Merchant Services includes purchased portfolios which had revenue of $4,218 and interchange and network fees of $2,150 for the three months ended June 30, 2018. 2. Merchant Services includes purchased portfolios which had revenue of $5,890 and interchange and network fees of $2,951 for the three months ended June 30, 2017.


 
Reconciliation of Non-GAAP Financial Measures The reconciliation of our income (loss) from operations to non-GAAP pro forma adjusted net income and non-GAAP adjusted EBITDA is as follows: ($ in thousands) Three months ended June 30, 2018 Three months ended June 30, 2017 Other Other Proprietary Proprietary Owned Merchant Owned Merchant Corporate Software Total Other Services Total Corporate Software Total Other Services Total Income (loss) from operations $ (2,721) $ (118) $ (2,839) $ 5,762 $ 2,923 $ (1,535) $ 546 $ (989) $ 3,706 $ 2,717 Interest expense, net 2,284 — 2,284 360 2,644 1,717 — 1,717 — 1,717 Change in fair value of warrant liability 242 — 242 — 242 (58) — (58) — (58) Provision for income taxes 731 — 731 (39) 692 113 1 114 57 171 Net income (loss) (5,978) (118) (6,096) 5,441 (655) (3,307) 545 (2,762) 3,649 887 Non-GAAP Adjustments: Provision for income taxes 731 — 731 (39) 692 113 1 114 57 171 Offering-related expenses(1) — — — — — — — — — — Non-cash change in fair value of contingent consideration(2) — 1,064 1,064 87 1,151 — (775) (775) 29 (746) Non-cash change in fair value of warrant liability(3) 242 — 242 — 242 (58) — (58) — (58) Equity-based compensation(4) 818 — 818 — 818 — — — — — Acquisition-related expenses(5) 30 — 30 — 30 60 — 60 — 60 Acquisition intangible amortization(6) — 79 79 2,297 2,376 3 61 64 1,736 1,800 Non-cash interest(7) 370 — 370 — 370 108 — 108 — 108 Other taxes(8) 14 — 14 2 16 23 — 23 — 23 Non-GAAP adjusted income before taxes (3,773) 1,025 (2,748) 7,788 5,040 (3,058) (168) (3,226) 5,471 2,245 Pro forma taxes at effective tax rate(9) 962 (261) 701 (1,986) (1,285) 780 43 823 (1,395) (572) Pro forma adjusted net income(10) (2,811) 764 (2,047) 5,802 3,755 (2,278) (125) (2,403) 4,076 1,673 Plus: Cash interest expense, net(11) 1,914 — 1,914 360 2,274 1,609 — 1,609 — 1,609 Pro forma taxes at effective tax rate(9) (962) 261 (701) 1,986 1,285 (780) (43) (823) 1,395 572 Depreciation and software amortization (12) 59 437 496 128 624 27 388 415 167 582 Adjusted EBITDA $ (1,800) $ 1,462 $ (338) $ 8,276 $ 7,938 $ (1,422) $ 220 $ (1,202) $ 5,638 $ 4,436 See footnotes continued on the next slide.


 
Reconciliation of Non-GAAP Financial Measures 1. Includes costs associated with forming i3 Verticals, Inc. and other expenses directly related to the certain transactions as part of any offering. 2. Non-cash change in fair value of contingent consideration reflects the changes in management’s estimates of future cash consideration to be paid in connection with prior acquisitions from the amount estimated as of the later of the most recent balance sheet date forming the beginning of the income statement period or the original estimates made at the closing of the applicable acquisition. 3. Non-cash change in warrant liability reflects the fair value change in certain warrants for our common units associated with our mezzanine notes in the aggregate principal amount of $10.5 million. These warrants are accounted for as liabilities on our consolidated balance sheets. 4. Equity-based compensation expense recognized during the three and nine months ended June 30, 2018 consisted of $76 related to stock options issued under the Company's 2018 Equity Incentive Plan and $741 related to tax receivables agreement (TRA) non- participation compensatory shares. TRA non-participation compensatory shares were issued to former equity owners as part of the Reorganization Transactions in conjunction with the IPO. 5. Acquisition-related expenses are the professional service and related costs directly related to our acquisitions and are not part of our core performance. 6. Acquisition intangible amortization reflects amortization of intangible assets acquired through business combinations, acquired customer portfolios, acquired referral agreements and related asset acquisitions. 7. Non-cash interest expense reflects amortization of amortization of deferred financing costs. 8. Other taxes consist of franchise taxes, commercial activity taxes and other non-income based taxes. Taxes related to salaries or employment are not included. 9. Pro forma corporate income tax expense is based on Non-GAAP adjusted income before taxes and is calculated using tax rates of 25.5% for 2018 and 2017, based on blended federal and state tax rates, considering the Tax Reform Act for 2018. 10. Pro forma adjusted net income assumes that the effect of the Reorganization Transactions and the Company's IPO occurred prior to the three and nine months ending June 30, 2018, and that all net income during that period is available to the Class A common shareholders. Further, pro forma adjusted diluted earnings per share assumes that all Common Units in i3 Verticals, LLC and the associated non-voting Class B common stock were exchanged for Class A common stock at the beginning of the period on a one for one basis. 11. Cash interest expense, net represents all interest expense recorded on statement of operations other than non-cash interest expense, which represents amortization of deferred financing costs. 12. Depreciation and software amortization reflects depreciation on the Company's property, plant and equipment, net, and amortization expense on its capitalized software.


 
Q2 Segment Performance(1) ($ in thousands) Three months ended March 31, Period over 2018 2017 period growth Net Revenue(2) Merchant Services, excluding Purchased Portfolios $ 20,628 $ 11,752 76% Purchased Portfolios 2,305 3,076 (25)% Merchant Services 22,933 14,828 55% Proprietary Software and Related Payments 4,131 2,728 51% Corporate — 158 nm Other 4,131 2,886 43% Total $ 27,064 $ 17,714 53% Adjusted EBITDA(2) Merchant Services $ 7,706 $ 5,095 51% Proprietary Software and Related Payments 1,798 705 155% Corporate (1,791) (1,052) 70% Other 7 (347) (102)% Total $ 7,713 $ 4,748 62% Adjusted EBITDA as a percentage of Net Revenue 28% 27% 1. i3 Verticals has two segments, “Merchant Services”, which includes Purchased Portfolios (a subset of merchant contracts purchased in 2014 and 2017), and “Other”, which includes Proprietary Software and Related Payments, and Corporate Overhead and other Expenses.” 2. Net Revenue and Adjusted EBITDA are non-GAAP financial measures. Refer to the following slides for the reconciliation of non-GAAP financial measures.


 
Reconciliation of Non-GAAP Financial Measures The reconciliation of our revenue to non-GAAP net revenue is as follows: ($ in thousands) Three Months Ended March 31, 2018 Other Proprietary Owned Merchant Corporate Software Total Other Services(1) Total Revenue $ — $ 5,472 $ 5,472 $ 72,226 $ 77,698 Interchange and network fees — 1,341 1,341 49,293 50,634 Net Revenue $ — $ 4,131 $ 4,131 $ 22,933 $ 27,064 ($ in thousands) Three Months Ended March 31, 2017 Other Proprietary Owned Merchant Corporate Software Total Other Services(2) Total Revenue $ 410 $ 3,835 $ 4,245 $ 57,890 $ 62,135 Interchange and network fees 252 1,107 1,359 43,062 44,421 Net Revenue $ 158 $ 2,728 $ 2,886 $ 14,828 $ 17,714 1. Merchant Services includes purchased portfolios which had revenue of $4,466 and interchange and network fees of $2,161 for the three months ended March 31, 2018. 2. Merchant Services includes purchased portfolios which had revenue of $5,719 and interchange and network fees of $2,643 for the three months ended March 31, 2017.


 
Reconciliation of Non-GAAP Financial Measures The reconciliation of our income (loss) from operations to non-GAAP pro forma adjusted net income and non-GAAP adjusted EBITDA is as follows: ($ in thousands) Three Months Ended March 31, 2018 Three Months Ended March 31, 2017 Other Other Proprietary Proprietary Owned Merchant Owned Merchant Corporate Software Total Other Services Total Corporate Software Total Other Services Total Income (loss) from operations $ (2,174) $ 1,042 $ (1,132) $ 3,728 $ 2,596 $ (1,228) $ (190) $ (1,418) $ 3,126 $ 1,708 Interest expense, net 2,281 — 2,281 338 2,619 1,649 — 1,649 — 1,649 Change in fair value of warrant liability 6,563 — 6,563 — 6,563 — — — — — Provision for income taxes 110 — 110 140 250 10 — 10 — 10 Net income (loss) (11,128) 1,042 (10,086) 3,250 (6,836) (2,887) (190) (3,077) 3,126 49 Non-GAAP Adjustments: Provision for income taxes 110 — 110 140 250 10 — 10 — 10 Offering-related expenses(1) 124 — 124 — 124 — — — — — Non-cash change in fair value of contingent consideration(2) — 174 174 1,573 1,747 — 360 360 — 360 Non-cash change in fair value of warrant liability(3) 6,563 — 6,563 — 6,563 — — — — — Equity-based compensation(4) — — — — — — — — — — Acquisition-related expenses(5) 220 — 220 — 220 145 — 145 — 145 Acquisition intangible amortization(6) 2 88 90 2,280 2,370 2 65 67 1,819 1,886 Non-cash interest(7) 245 — 245 — 245 111 — 111 — 111 Other taxes(8) 6 — 6 — 6 2 — 2 — 2 Non-GAAP adjusted income before taxes (4) 1 (3) 7 5 (3) — (2) 5 3 Pro forma taxes at effective tax rate(9) 1 — 1 (2) (1) 1 — 1 (1) (1) Pro forma adjusted net income(10) (3) 1 (2) 5 3 (2) — (2) 4 2 Plus: Cash interest expense, net(11) 2 — 2 — 2 2 — 2 — 2 Pro forma taxes at effective tax rate(9) (1) — (1) 2 1 (1) — (1) 1 1 Depreciation and software amortization (12) — — 1 — 1 — — — — 1 Adjusted EBITDA $ (1,791) $ 1,798 $ — $ 7,706 $ 8 $ (1,052) $ 705 $ — $ 5,095 $ 5 See footnotes continued on the next slide.


 
Reconciliation of Non-GAAP Financial Measures 1. Includes costs associated with forming i3 Verticals, Inc. and other expenses directly related to the certain transactions as part of any offering. 2. Non-cash change in fair value of contingent consideration reflects the changes in management’s estimates of future cash consideration to be paid in connection with prior acquisitions from the amount estimated as of the later of the most recent balance sheet date forming the beginning of the income statement period or the original estimates made at the closing of the applicable acquisition. 3. Non-cash change in warrant liability reflects the fair value change in certain warrants for our common units associated with our mezzanine notes in the aggregate principal amount of $10.5 million. These warrants are accounted for as liabilities on our consolidated balance sheets. 4. Equity-based compensation expense was not relevant during the three months ended March 31, 2018 or 2017. However, it is expected to be relevant in future periods. 5. Acquisition-related expenses are the professional service and related costs directly related to our acquisitions and are not part of our core performance. 6. Acquisition intangible amortization reflects amortization of intangible assets acquired through business combinations, acquired customer portfolios, acquired referral agreements and related asset acquisitions. 7. Non-cash interest expense reflects amortization of amortization of deferred financing costs. 8. Other taxes consist of franchise taxes, commercial activity taxes and other non-income based taxes. Taxes related to salaries or employment are not included. 9. Pro forma corporate income tax expense is based on Non-GAAP adjusted income before taxes and is calculated using tax rates of 25.5% for 2018 and 2017, based on blended federal and state tax rates, considering the Tax Reform Act for 2018. 10. Pro forma adjusted net income assumes that the effect of the Reorganization Transactions and the Company's IPO occurred prior to the three and nine months ending June 30, 2018, and that all net income during that period is available to the Class A common shareholders. Further, pro forma adjusted diluted earnings per share assumes that all Common Units in i3 Verticals, LLC and the associated non-voting Class B common stock were exchanged for Class A common stock at the beginning of the period on a one for one basis. 11. Cash interest expense, net represents all interest expense recorded on statement of operations other than non-cash interest expense, which represents amortization of deferred financing costs. 12. Depreciation and software amortization reflects depreciation on the Company's property, plant and equipment, net, and amortization expense on its capitalized software.


 
Q1 Segment Performance(1) ($ in thousands) Three months ended December 31, Period over 2017 2016 period growth Net Revenue(2) Merchant Services, excluding Purchased Portfolios $ 18,789 $ 11,835 59% Purchased Portfolios 2,844 3,325 (14)% Merchant Services 21,633 15,160 43% Proprietary Software and Related Payments 3,353 2,596 29% Corporate (3) (120) nm Other 3,350 2,476 35% Total $ 24,983 $ 17,636 42% Adjusted EBITDA(2) Merchant Services $ 7,603 $ 5,565 37% Proprietary Software and Related Payments 1,248 254 391% Corporate (2,002) (1,490) 34% Other (754) (1,236) (39)% Total $ 6,849 $ 4,329 58% Adjusted EBITDA as a percentage of Net Revenue 27% 25% 1. i3 Verticals has two segments, “Merchant Services”, which includes Purchased Portfolios (a subset of merchant contracts purchased in 2014 and 2017), and “Other”, which includes Proprietary Software and Related Payments, and Corporate Overhead and other Expenses.” 2. Net Revenue and Adjusted EBITDA are non-GAAP financial measures. Refer to the following slides for the reconciliation of non-GAAP financial measures.


 
Reconciliation of Non-GAAP Financial Measures The reconciliation of our revenue to non-GAAP net revenue is as follows: ($ in thousands) Three Months Ended December 31, 2017 Other Proprietary Owned Merchant Corporate Software Total Other Services(1) Total Revenue $ (3) $ 4,545 $ 4,542 $ 72,679 $ 77,221 Interchange and network fees — 1,192 1,192 51,046 52,238 Net Revenue $ (3) $ 3,353 $ 3,350 $ 21,633 $ 24,983 ($ in thousands) Three Months Ended December 31, 2016 Other Proprietary Owned Merchant Corporate Software Total Other Services(2) Total Revenue $ (372) $ 3,561 $ 3,189 $ 59,142 $ 62,331 Interchange and network fees (252) 965 713 43,982 44,695 Net Revenue $ (120) $ 2,596 $ 2,476 $ 15,160 $ 17,636 1. Merchant Services includes purchased portfolios which had revenue of $5,335 and interchange and network fees of $2,491 for the three months ended December 31, 2017. 2. Merchant Services includes purchased portfolios which had revenue of $6,401 and interchange and network fees of $3,076 for the three months ended December 31, 2016.


 
Reconciliation of Non-GAAP Financial Measures The reconciliation of our income (loss) from operations to non-GAAP pro forma adjusted net income and non-GAAP adjusted EBITDA is as follows: ($ in thousands) Three Months Ended December 31, 2017 Three Months Ended December 31, 2016 Other Other Proprietary Proprietary Owned Merchant Owned Merchant Corporate Software Total Other Services Total Corporate Software Total Other Services Total Income (loss) from operations $ (2,295) $ 224 $ (2,071) $ 5,418 $ 3,347 $ (1,650) $ (195) $ (1,845) $ 2,942 $ 1,097 Interest expense, net 2,161 — 2,161 225 2,386 1,595 — 1,595 — 1,595 Change in fair value of warrant liability 1,682 — 1,682 — 1,682 — — — — — Provision for income taxes (17) — (17) (372) (389) (80) — (80) — (80) Net income (loss) (6,121) 224 (5,897) 5,565 (332) (3,165) (195) (3,360) 2,942 (418) Non-GAAP Adjustments: Provision for income taxes (17) — (17) (372) (389) (80) — (80) — (80) Offering-related expenses(1) — — — — — — — — — — Non-cash change in fair value of contingent consideration(2) — 507 507 (125) 382 — — — 563 563 Non-cash change in fair value of warrant liability(3) 1,682 — 1,682 — 1,682 — — — — — Equity-based compensation(4) — — — — — — — — — — Acquisition-related expenses(5) 228 — 228 — 228 131 — 131 — 131 Acquisition intangible amortization(6) 2 80 82 2,178 2,260 2 63 65 1,915 1,980 Non-cash interest(7) 224 — 224 — 224 110 — 110 — 110 Other taxes(8) 36 — 36 — 36 — — — — — Non-GAAP adjusted income before taxes (3,966) 811 (3,155) 7,246 4,091 (3,002) (132) (3,134) 5,420 2,286 Pro forma taxes at effective tax rate(9) 1,011 (207) 805 (1,848) (1,043) 766 34 799 (1,382) (583) Pro forma adjusted net income(10) (2,955) 604 (2,350) 5,398 3,048 (2,236) (98) (2,335) 4,038 1,703 Plus: Cash interest expense, net(11) 1,937 — 1,937 225 2,162 1,485 — 1,485 — 1,485 Pro forma taxes at effective tax rate(9) (1,011) 207 (805) 1,848 1,043 (766) (34) (799) 1,382 583 Depreciation and software amortization (12) 27 437 464 132 596 27 386 413 145 558 Adjusted EBITDA $ (2,002) $ 1,248 $ (754) $ 7,603 $ 6,849 $ (1,490) $ 254 $ (1,236) $ 5,565 $ 4,329 See footnotes continued on the next slide.


 
Reconciliation of Non-GAAP Financial Measures 1. Includes costs associated with forming i3 Verticals, Inc. and other expenses directly related to the certain transactions as part of any offering. 2. Non-cash change in fair value of contingent consideration reflects the changes in management’s estimates of future cash consideration to be paid in connection with prior acquisitions from the amount estimated as of the later of the most recent balance sheet date forming the beginning of the income statement period or the original estimates made at the closing of the applicable acquisition. 3. Non-cash change in warrant liability reflects the fair value change in certain warrants for our common units associated with our mezzanine notes in the aggregate principal amount of $10.5 million. These warrants are accounted for as liabilities on our consolidated balance sheets. 4. Equity-based compensation expense was not relevant during the three months ended March 31, 2018 or 2017. However, it is expected to be relevant in future periods. 5. Acquisition-related expenses are the professional service and related costs directly related to our acquisitions and are not part of our core performance. 6. Acquisition intangible amortization reflects amortization of intangible assets acquired through business combinations, acquired customer portfolios, acquired referral agreements and related asset acquisitions. 7. Non-cash interest expense reflects amortization of amortization of deferred financing costs. 8. Other taxes consist of franchise taxes, commercial activity taxes and other non-income based taxes. Taxes related to salaries or employment are not included. 9. Pro forma corporate income tax expense is based on Non-GAAP adjusted income before taxes and is calculated using tax rates of 25.5% for 2018 and 2017, based on blended federal and state tax rates, considering the Tax Reform Act for 2018. 10. Pro forma adjusted net income assumes that the effect of the Reorganization Transactions and the Company's IPO occurred prior to the three and nine months ending June 30, 2018, and that all net income during that period is available to the Class A common shareholders. Further, pro forma adjusted diluted earnings per share assumes that all Common Units in i3 Verticals, LLC and the associated non-voting Class B common stock were exchanged for Class A common stock at the beginning of the period on a one for one basis. 11. Cash interest expense, net represents all interest expense recorded on statement of operations other than non-cash interest expense, which represents amortization of deferred financing costs. 12. Depreciation and software amortization reflects depreciation on the Company's property, plant and equipment, net, and amortization expense on its capitalized software.