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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended March 31, 2019 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 001-38532
i3 Verticals, Inc.
(Exact name of registrant as specified in its charter)
Delaware82-4052852
(State or other jurisdiction of incorporation or organization) (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) 
N/A 
(Former name, former address and former fiscal year, if changed since last report) 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  x  No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
x
Smaller reporting company
o
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 Section13(a) of the Exchange Act.  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  x
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A Common Stock, $0.0001 Par ValueIIIVNasdaq Global Select Market

As of May 14, 2019, there were 9,192,030 outstanding shares of Class A common stock, $0.0001 par value per share, and 17,112,164 outstanding shares of Class B common stock, $0.0001 par value per share. 



TABLE OF CONTENTS
Page

2


PART I. - FINANCIAL INFORMATION
Item 1.    Financial Statements


3

i3 Verticals, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)

March 31, September 30, 
20192018
(unaudited) 
Assets 
Current assets 
Cash and cash equivalents $1,393 $572 
Accounts receivable, net 11,703 12,500 
Settlement assets 439 863 
Prepaid expenses and other current assets 3,246 2,630 
Total current assets 16,781 16,565 
Property and equipment, net 3,055 2,958 
Restricted cash 666 665 
Capitalized software, net 7,041 3,372 
Goodwill 104,651 83,954 
Intangible assets, net 82,661 66,023 
Other assets 3,644 1,605 
Total assets $218,499 $175,142 
Liabilities and equity 
Liabilities 
Current liabilities 
Accounts payable $3,359 $4,114 
Current portion of long-term debt 5,000 5,000 
Accrued expenses and other current liabilities 15,588 11,538 
Settlement obligations 439 863 
Deferred revenue 4,413 4,927 
Total current liabilities 28,799 26,442 
Long-term debt, less current portion and debt issuance costs, net 70,241 31,776 
Other long-term liabilities 4,724 4,726 
Total liabilities 103,764 62,944 
Commitments and contingencies (see Note 9) 
Stockholders' equity 
Preferred stock, par value $0.0001 per share, 10,000,000 shares authorized; 0 shares issued and outstanding as of March 31, 2019 and September 30, 2018   
Class A common stock, par value $0.0001 per share, 150,000,000 shares authorized; 9,192,030 and 9,112,042 shares issued and outstanding as of March 31, 2019 and September 30, 2018, respectively 1 1 
Class B common stock, par value $0.0001 per share, 40,000,000 shares authorized; 17,112,164 and 17,213,806 shares issued and outstanding as of March 31, 2019 and September 30, 2018, respectively 2 2 
Additional paid-in-capital 41,284 38,562 
Accumulated (deficit) earnings (188)736 
Total Stockholders' equity 41,099 39,301 
Non-controlling interest 73,636 72,897 
Total equity 114,735 112,198 
Total liabilities and stockholders' equity $218,499 $175,142 
See Notes to the Interim Condensed Consolidated Financial Statements

4

i3 Verticals, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share amounts)

Three months ended March 31, Six months ended March 31, 
2019201820192018
Revenue $85,394 $77,699 $170,262 $154,920 
Operating expenses 
Interchange and network fees 54,685 50,634 110,514 102,872 
Other costs of services 10,193 9,505 19,983 19,058 
Selling general and administrative 14,319 10,197 26,835 19,041 
Depreciation and amortization 3,898 3,020 7,450 5,876 
Change in fair value of contingent consideration 2,502 1,747 2,153 2,129 
Total operating expenses 85,597 75,103 166,935 148,976 
Income from operations (203)2,596 3,327 5,944 
Other expenses 
Interest expense, net 1,155 2,618 2,069 5,006 
Change in fair value of warrant liability  6,564  8,245 
Total other expenses 1,155 9,182 2,069 13,251 
(Loss) income before income taxes (1,358)(6,586)1,258 (7,307)
(Benefit from) provision for income taxes (136)250 129 (139)
Net (loss) income (1,222)(6,836)1,129 (7,168)
Net income attributable to non-controlling interest (120) 2,053  
Net (loss) income attributable to i3 Verticals, Inc. $(1,102)$(6,836)$(924)$(7,168)
Net loss per share attributable to Class A common stockholders(1):
Basic $(0.12)$(0.10)
Diluted $(0.12)$(0.10)
Weighted average shares of Class A common stock outstanding(1):
Basic 8,887,050 8,849,431 
Diluted 8,887,050 8,849,431 
__________________________
1.Basic and diluted net income per Class A common stock are presented only for the period after the Company’s Reorganization Transactions. See Note 1 for a description of the Reorganization Transactions. See Note 13 for the calculation of income per common share.
See Notes to the Interim Condensed Consolidated Financial Statements

5

i3 Verticals, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
(In thousands, except share amounts)
Class A Common Stock Class B Common Stock Additional Paid-In Capital Retained Earnings Non-Controlling Interest Total Equity 
Shares Amount Shares Amount 
Balance at September 30, 2018 9,112,042 $1 17,213,806 $2 $38,562 $736 $72,897 $112,198 
Equity-based compensation — — — — 951 — — 951 
Forfeitures of restricted Class A common stock (4,010)— — — — — — — 
Net (loss) income — — — — — 178 2,173 2,351 
Distributions to non-controlling interest holders — — — — — — (934)(934)
Balance at December 31, 2018 9,108,032 $1 17,213,806 $2 $39,513 $914 $74,136 $114,566 
Equity-based compensation — — — — 1,363 — — 1,363 
Forfeitures of restricted Class A common stock (17,644)— — — — — — — 
Net (loss) income — — — — — (1,102)(120)(1,222)
Distributions to non-controlling interest holders — — — — — — (89)(89)
Redemption of common units in i3 Verticals, LLC 101,642 — (101,642)291 — (291)— 
Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis — — — — 117 — — 117 
Balance at March 31, 2019 9,192,030 $1 17,112,164 $2 $41,284 $(188)$73,636 $114,735 
See Notes to the Interim Condensed Consolidated Financial Statements

6

i3 Verticals, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED) (CONTINUED)
(In thousands)
Class A Units Common Units Class P Units Accumulated Deficit Total Members' Equity 
Balance at September 30, 2017 $34,924 $1,240 $ $(33,018)$3,146 
Preferred returns on Class A Units 774 — — (774)— 
Preferred returns on Redeemable Class A Units — — — (168)(168)
Issuance of Common Units — 104 — — 104 
Net loss — — — (332)(332)
Balance at December 31, 2017 $35,698 $1,344 $ $(34,292)$2,750 
Preferred returns on Class A Units 898 — — (898)— 
Preferred returns on Redeemable Class A Units — — — (209)(209)
Net loss — — — (6,836)(6,836)
Balance at March 31, 2018 $36,596 $1,344 $ $(42,235)$(4,295)

See Notes to the Interim Condensed Consolidated Financial Statements

7

i3 Verticals, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)


Six months ended March 31, 
2019 2018 
Cash flows from operating activities: 
Net income (loss) $1,129 $(7,168)
Adjustments to reconcile net income (loss) to net cash provided by operating activities: 
Depreciation and amortization 7,450 5,876 
Equity-based compensation 2,314  
Provision for doubtful accounts 58 61 
Amortization of deferred financing costs 465 465 
Loss on disposal of assets 8 5 
(Benefit from) provision for deferred income taxes  (468)
Non-cash change in fair value of warrant liability  8,245 
Increase in non-cash contingent consideration expense from original estimate 2,153 2,129 
Changes in operating assets: 
Accounts receivable 2,808 1,460 
Prepaid expenses and other current assets (584)904 
Other assets (1,259)(1,567)
Changes in operating liabilities: 
Accounts payable (755)(311)
Accrued expenses and other current liabilities 852 2,712 
Deferred revenue (1,612)(2,085)
Other long-term liabilities (43)149 
Contingent consideration paid in excess of original estimates (1,560)(814)
Net cash provided by operating activities 11,424 9,593 
Cash flows from investing activities: 
Expenditures for property and equipment (312)(1,005)
Expenditures for capitalized software (782)(483)
Purchases of merchant portfolios and residual buyouts (2,582)(954)
Acquisitions of businesses, net of cash acquired (41,224)(26,862)
Acquisition of other intangibles (45)(802)
Net cash used in investing activities (44,945)(30,106)
See Notes to the Interim Condensed Consolidated Financial Statements

8

i3 Verticals, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
(In thousands)

Six months ended March 31, 
20192018
Cash flows from financing activities: 
Proceeds from revolving credit facility 52,500 15,500 
Payments of revolving credit facility (12,000)(16,350)
Proceeds from notes payable to banks  24,671 
Payments of notes payable to banks (2,500)(2,500)
Payment of debt issuance costs  (261)
Payment of equity issuance costs for Class A unit issuances  (846)
Cash paid for contingent consideration (2,634)(250)
Required distributions to members for tax obligations (1,023) 
Net cash provided by financing activities 34,343 19,964 
Net increase (decrease) in cash, cash equivalents, and restricted cash 822 (549)
Cash, cash equivalents, and restricted cash at beginning of period 1,237 1,968 
Cash, cash equivalents, and restricted cash at end of period $2,059 $1,419 
Supplemental disclosure of cash flow information: 
Cash paid for interest $1,557 $6,000 
Cash paid for income taxes $1,925 $205 
See Notes to the Interim Condensed Consolidated Financial Statements

9


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except warrant, unit, share and per share amounts)
1. ORGANIZATION AND OPERATIONS
i3 Verticals, Inc. (the “Company”) was formed as a Delaware corporation on January 17, 2018. The Company was formed for the purpose of completing an initial public offering (“IPO”) of its Class A common stock and other related transactions in order to carry on the business of i3 Verticals, LLC and its subsidiaries. i3 Verticals, LLC was founded in 2012 and delivers seamlessly integrated payment and software solutions to small- and medium-sized businesses (“SMBs”) and organizations in strategic vertical markets. The Company’s headquarters are located in Nashville, Tennessee, with operations throughout the United States. Unless the context otherwise requires, references to “we,” “us,” “our,” “i3 Verticals” and the “Company” refer to i3 Verticals, Inc. and its subsidiaries, including i3 Verticals, LLC.
Initial Public Offering
On June 25, 2018, the Company completed the IPO of 7,647,500 shares of its Class A common stock at a public offering price of $13.00 per share. The Company received approximately $92.5 million of net proceeds, after deducting underwriting discounts and commissions, which the Company used to purchase newly issued common units from i3 Verticals, LLC (the “Common Units”), and Common Units from a selling Common Unit holder, in each case at a price per Common Unit equal to the price per share paid by the underwriters for shares of the Company's Class A common stock in the IPO.
Reorganization Transactions
In connection with the IPO, the Company completed the following transactions (the “Reorganization Transactions”):
i3 Verticals, LLC amended and restated its existing limited liability company agreement to, among other things, (1) convert all existing Class A units, common units (including common units issued upon the exercise of existing warrants) and Class P units of ownership interest in i3 Verticals, LLC into either Class A voting common units of i3 Verticals, LLC (such holders of Class A voting common units referred to herein as the “Continuing Equity Owners”) or Class B non-voting common units of i3 Verticals, LLC (such holders of Class B non-voting common units referred to herein as the “Former Equity Owners”), and (2) appoint i3 Verticals, Inc. as the sole managing member of i3 Verticals, LLC upon its acquisition of Common Units in connection with the IPO;
the Company amended and restated its certificate of incorporation to provide for, among other things, Class A common stock and Class B common stock;
i3 Verticals, LLC and the Company consummated a merger among i3 Verticals, LLC, i3 Verticals, Inc. and a newly formed wholly-owned subsidiary of i3 Verticals, Inc. (“MergerSub”) whereby: (1) MergerSub merged with and into i3 Verticals, LLC, with i3 Verticals, LLC as the surviving entity; (2) Class A voting common units converted into newly issued Common Units in i3 Verticals, LLC together with an equal number of shares of Class B common stock of i3 Verticals, Inc., and (3) Class B non-voting common units converted into Class A common stock of i3 Verticals, Inc. based on a conversion ratio that provided an equitable adjustment to reflect the full value of the Class B non-voting common units; and
the Company issued shares of its Class A common stock pursuant to a voluntary private conversion of certain subordinated notes (the “Junior Subordinated Notes”) by certain related and unrelated creditors of i3 Verticals, LLC.
10


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except warrant, unit, share and per share amounts)
Following the completion of the IPO and Reorganization Transactions, the Company became a holding company and its principal asset is the Common Units in i3 Verticals, LLC that it owns. i3 Verticals, Inc. operates and controls all of i3 Verticals, LLC's operations and, through i3 Verticals, LLC and its subsidiaries, conducts i3 Verticals, LLC's business. i3 Verticals, Inc. has a minority economic interest in i3 Verticals, LLC.
As of March 31, 2019, i3 Verticals, Inc. owned 34.9% of the economic interest in i3 Verticals, LLC.
As of March 31, 2019, the Continuing Equity Owners owned Common Units in i3 Verticals, LLC representing approximately 65.1% of the economic interest in i3 Verticals, LLC, shares of Class A common stock in the Company representing approximately 0.9% of the economic interest and voting power in the Company, and shares of Class B common stock in i3 Verticals, Inc., representing approximately 65.1% of the voting power in the Company.
The Continuing Equity Owners who own Common Units in i3 Verticals, LLC may redeem at each of their options (subject in certain circumstances to time-based vesting requirements) their Common Units for, at the election of i3 Verticals, LLC, cash or newly-issued shares of the Company's Class A common stock.
Combining the Class A common stock and Class B common stock, the Continuing Equity Owners hold approximately 66.0% of the economic interest and voting power in i3 Verticals, Inc.
i3 Verticals, Inc. is the sole managing member of i3 Verticals, LLC and as a result, consolidates the financial results of i3 Verticals, LLC and reports a non-controlling interest representing the Common Units of i3 Verticals, LLC held by the Continuing Equity Owners.
As the Reorganization Transactions are considered transactions between entities under common control, the financial statements retroactively reflect the accounts of i3 Verticals, LLC for periods prior to the IPO and Reorganization Transactions.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the reporting and disclosure rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for fair presentation of the unaudited condensed consolidated financial statements of the Company and its subsidiaries as of March 31, 2019 and for the three and six months ended March 31, 2019 and 2018. The results of operations for the three and six months ended March 31, 2019 and 2018 are not necessarily indicative of the operating results for the full year. It is recommended that these interim condensed consolidated financial statements be read in conjunction with the Company's consolidated financial statements and related footnotes for the years ended September 30, 2018 and 2017, included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2018.
Principles of Consolidation
These interim condensed consolidated financial statements include the accounts of the Company and its subsidiary companies. All significant intercompany accounts and transactions have been eliminated in consolidation. 
11


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except warrant, unit, share and per share amounts)
Restricted Cash
Restricted cash represents funds held-on-deposit with processing banks pursuant to agreements to cover potential merchant losses. It is presented as long-term assets on the accompanying condensed consolidated balance sheets since the related agreements extend beyond the next twelve months. Following the adoption of Accounting Standards Update (“ASU”) No. 2016-18, Statement of Cash Flows: Restricted Cash (Topic 230), the Company includes restricted cash along with the cash and cash equivalents balance for presentation in the condensed consolidated statements of cash flows. The reconciliation between the condensed consolidated balance sheet and the condensed consolidated statement of cash flows is as follows:
March 31, 2019 March 31, 2018 
Cash and cash equivalents on condensed consolidated balance sheet $1,393 $755 
Restricted cash 666 664 
Total cash, cash equivalents and restricted cash on condensed consolidated statement of cash flows $2,059 $1,419 
Inventories
Inventories consist of point-of-sale equipment to be sold to customers and are stated at the lower of cost, determined on a weighted average basis, or net realizable value. Inventories were $1,469 and $930 at March 31, 2019 and September 30, 2018, respectively, and are included within prepaid expenses and other current assets on the accompanying condensed consolidated balance sheets.
Acquisitions
Business acquisitions have been recorded using the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”), and, accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair value as of the date of acquisition. When relevant, the fair value of contingent consideration included in an acquisition is calculated using a Monte Carlo simulation. The fair value of merchant relationships and non-compete assets acquired is identified using the Income Approach. The fair values of trade names and internally-developed software acquired are identified using the Relief from Royalty Method. The fair value of deferred revenue is identified using the Adjusted Fulfillment Cost Method. After the purchase price has been allocated, goodwill is recorded to the extent the total consideration paid for the acquisition, including the acquisition date fair value of contingent consideration, if any, exceeds the sum of the fair values of the separately identifiable acquired assets and assumed liabilities. Acquisition costs for business combinations are expensed when incurred and recorded in selling general and administrative expenses in the accompanying condensed consolidated statements of operations.
An acquisition not meeting the accounting criteria to be accounted for as a business combination is accounted for as an asset acquisition. An asset acquisition is recorded at its purchase price, inclusive of acquisition costs, which is allocated among the acquired assets and assumed liabilities based upon their relative fair values at the date of acquisition.
The operating results of an acquisition are included in the Company’s condensed consolidated statements of operations from the date of such acquisition. Acquisitions completed during the six months ended March 31, 2019 contributed $3,671 and $(2,519) to revenue and net loss, respectively, to the results in the Company's condensed consolidated statements of operations for the six months then ended.
Revenue Recognition and Deferred Revenue
Revenue is recognized when it is realized or realizable and earned, in accordance with ASC 605, Revenue Recognition (“ASC 605”). Recognition occurs when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been performed; (3) the seller’s price to the
12


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except warrant, unit, share and per share amounts)
buyer is fixed or determinable; and (4) collectability is reasonably assured. The Company accrues for rights of refund, processing errors or penalties, or other related allowances based on historical experience.
More than 85% of the Company's gross revenue for the six months ended March 31, 2019 and 2018 is derived from volume-based payment processing fees (“discount fees”) and other related fixed transaction or service fees. The remainder is comprised of sales of software licensing subscriptions, ongoing support, and other POS-related solutions the Company provides to its clients directly and through its processing bank relationships.
Discount fees represent a percentage of the dollar amount of each credit or debit transaction processed. Discount fees are recognized at the time the merchants’ transactions are processed. The Company follows the requirements of ASC 605-45 Revenue Recognition—Principal Agent Considerations, in determining its merchant processing services revenue reporting. Generally, when the Company has control over merchant pricing, merchant portability, credit risk and ultimate responsibility for the merchant relationship, revenues are reported at the time of sale on a gross basis equal to the full amount of the discount charged to the merchant. This amount includes interchange fees paid to card issuing banks and assessments paid to payment card networks pursuant to which such parties receive payments based primarily on processing volume for particular groups of merchants. Revenues generated from merchant portfolios when the Company does not have control over merchant pricing, liability for merchant losses or credit risk or rights of portability are reported net of interchange and other fees.
Revenues are also derived from a variety of fixed transaction or service fees, including authorization fees, convenience fees, statement fees, annual fees, and fees for other miscellaneous services, such as handling chargebacks. Revenues derived from service fees are recognized at the time the services are performed and there are no further performance obligations. Revenues from the sale of equipment is recognized upon transfer of ownership and delivery to the customer, after which there are no further performance obligations.
Revenues from sales of the Company’s software licensing subscriptions are recognized when they are realized or realizable and earned. Contractual arrangements are evaluated for indications that multiple element arrangements may exist, including instances in which more-than-incidental software deliverables are included. Arrangements may contain multiple elements, such as hardware, software products, maintenance, and professional installation and training services. Revenues are allocated to each element based on the selling price hierarchy. The selling price for a deliverable is based on vendor specific objective evidence of selling price, if available, third party evidence, or estimated selling price. The Company establishes estimated selling price, based on the judgment of the Company's management, considering internal factors such as margin objectives, pricing practices and controls, customer segment pricing strategies and the product life cycle. In arrangements with multiple elements, the Company determines allocation of the transaction price at inception of the arrangement based on the relative selling price of each unit of accounting.
In multiple element arrangements in which more-than-incidental software deliverables are included, the Company applies the residual method to determine the amount of software license revenues to be recognized. Under the residual method, if fair value exists for undelivered elements in a multiple-element arrangement, such fair value of the undelivered elements is deferred with the remaining portion of the arrangement consideration recognized upon delivery of the software license or services arrangement. The Company allocates the fair value of each element of a software-related multiple-element arrangement based upon its fair value as determined by vendor specific objective evidence of selling price, with any remaining amount allocated to the software license. If evidence of the fair value cannot be established for the undelivered elements of a software arrangement, then the entire amount of revenue under the arrangement is deferred until these elements have been delivered or objective evidence can be established. These amounts, if any, are included in deferred revenue in the condensed consolidated balance sheets. Revenues related to software licensing subscriptions, maintenance or other support services with terms greater than one month are recognized ratably over the term of the agreement.
Revenues from sales of the Companys combined hardware and software element are recognized when they are realized or realizable and earned which has been determined to be upon the delivery of the product. Revenues derived from service fees are recognized at the time the services are performed and there are no
13


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except warrant, unit, share and per share amounts)
further performance obligations. The Company’s training, installation, and repair services are recognized as revenue as these services are performed.
Deferred revenue represents amounts billed to customers by the Company for services contracts. The initial prepaid contract agreement balance is deferred. The balance is then recognized as the services are provided over the contract term. Deferred revenue that is expected to be recognized as revenue within one year is recorded as short-term deferred revenue and the remaining portion is recorded as other long-term liabilities in the condensed consolidated balance sheets.
Interchange and Network Fees and Other Cost of Services
Interchange and network fees consist primarily of fees that are directly related to discount fee revenue. These include interchange fees paid to issuers and assessment fees payable to card associations, which are a percentage of the processing volume the Company generates from Visa and Mastercard, as well as fees charged by card-issuing banks. Other costs of services include costs directly attributable to processing and bank sponsorship costs, which may not be based on a percentage of volume. These costs also include related costs such as residual payments to sales groups, which are based on a percentage of the net revenues generated from merchant referrals. In certain merchant processing bank relationships, the Company is liable for chargebacks against a merchant equal to the volume of the transaction. Losses resulting from chargebacks against a merchant are included in other cost of services on the accompanying condensed consolidated statement of operations. The Company evaluates its risk for such transactions and estimates its potential loss from chargebacks based primarily on historical experience and other relevant factors. The reserve for merchant losses is included within accrued expenses and other current liabilities on the accompanying condensed consolidated balance sheets. The cost of equipment sold is also included in other cost of services. Interchange and other costs of services are recognized at the time the merchant's transactions are processed.
The Company accounts for all governmental taxes associated with revenue transactions on a net basis.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include, but are not limited to, the value of purchase consideration paid and identifiable assets acquired and assumed in acquisitions, goodwill and intangible asset impairment review, warrant valuation, revenue recognition for multiple element arrangements, loss reserves, assumptions used in the calculation of equity-based compensation and in the calculation of income taxes, and certain tax assets and liabilities as well as the related valuation allowances. Actual results could differ from those estimates.
During the first quarter of fiscal year 2019, management determined it was appropriate to change the amortization rate for certain of our merchant contract intangible assets to reflect the expected distribution of future cash flows. This change was applied prospectively beginning on October 1, 2018.
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (Subtopic 350-40). The amendments in ASU No. 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. As a public business entity, the Company is an emerging growth company and has elected to use the extended transition period provided for such companies. As a result, the Company is not required to adopt this ASU until October 1, 2021. Early adoption is permitted,
14


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except warrant, unit, share and per share amounts)
including adoption in an interim period. The Company elected to early adopt this standard using the prospective method as of October 1, 2018. There was no impact on the Company’s condensed consolidated financial statements for the adoption of ASU No. 2018-15.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement: Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820). The amendments in ASU No. 2018-13 provide clarification and modify the disclosure requirements on fair value measurement in Topic 820, Fair Value Measurement. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. As a public business entity, the Company is an emerging growth company and has elected to use the extended transition period provided for such companies. As a result, the Company will not be required to adopt this ASU until October 1, 2021. The Company is currently evaluating the impact of the adoption of this principle on the Company’s condensed consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting (Topic 718). The amendments in ASU No. 2018-07 expand the scope of Topic 718, Compensation—Stock Compensation to include share-based payments issued to nonemployees for goods or services. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. As a public business entity, the Company is an emerging growth company and has elected to use the extended transition period provided for such companies. As a result, the Company will not be required to adopt this ASU until October 1, 2020. Early adoption is permitted, but no earlier than a company’s adoption date of ASU No. 2014-09. The Company is currently evaluating the impact of the adoption of this principle on the Company’s condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326). The amendments in ASU No. 2016-13 require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. As a public business entity, the Company is an emerging growth company and has elected to use the extended transition period provided for such companies. As a result, the Company will not be required to adopt this ASU until October 1, 2021. The Company is currently evaluating the impact of the adoption of this principle on the Company’s condensed consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). This ASU amends the existing guidance by recognizing all leases, including operating leases, with a term longer than twelve months on the balance sheet and disclosing key information about the lease arrangements. The effective date of this update is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. As a public business entity, the Company is an emerging growth company and has elected to use the extended transition period provided for such companies. As a result, the Company will not be required to adopt this ASU until October 1, 2020. The update requires modified retrospective transition, with the option to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment and elect various practical expedients. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, which narrows aspects of the guidance issued in the amendments in ASU 2016-02, and ASU 2018-11, LeasesTargeted Improvements (Topic 842), by allowing lessees and lessors to recognize and measure existing leases at the beginning of the period of adoption without modifying the comparative period financial statements (which therefore will remain under prior GAAP, Topic 840, Leases). In December 2018, the FASB issued ASU 2018-20, Narrow-Scope Improvements for Lessors, which clarifies or simplifies certain narrows aspects of the guidance issued in the amendments in ASU 2016-02 for lessors. Since the Company has not yet adopted ASU 2016-02, the effective date and transition requirements will be the same as the effective date and transition requirements in ASU 2016-02. In March 2019, the FASB issued ASU 2019-01, Codification
15


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except warrant, unit, share and per share amounts)
Improvements, which clarifies certain aspects of the guidance issued in the amendments in ASU 2016-02. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of these principles on the Company’s condensed consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue From Contracts With Customers (Topic 606) (“ASU 2014-09”). The ASU supersedes the revenue recognition requirements in ASC 605. The new standard provides a five-step analysis of transactions to determine when and how revenue is recognized, based upon the core principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also requires additional disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard, as amended, is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. As an emerging growth company, the Company will not be required to adopt this ASU until October 1, 2019. The amendment allows companies to use either a full retrospective or a modified retrospective approach to adopt this ASU. The FASB issued updates and clarifications to ASU 2014-09, including ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Gross versus Net) issued in March 2016, ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing issued in April 2016 and ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients issued in May 2016. Since the Company has not yet adopted ASU 2014-09, the effective date and transition requirements of the related ASUs will be the same as the effective date and transition requirements in ASU 2014-09.
The Company has formed a project team, is developing a plan for adoption and is determining the impact on its revenue recognition policies, procedures and control framework and the resulting impact on its consolidated financial position, results of operations and cash flows. The Company has reviewed revenue sources and evaluated revenue populations by type to determine the appropriate distribution into portfolios that will result in materially consistent conclusions as if each revenue type was evaluated on a contract-by-contract basis under the new standard. The analysis of these portfolios is ongoing. This ASU could have a material impact on the amounts presented in certain categories on our consolidated statements of operations, but we do not expect it to have a material effect on our consolidated financial position, results of operations and cash flows. This analysis is subject to change as the Company continues to refine its assessment of the standard. The Company anticipates adopting this ASU on October 1, 2019 using the modified retrospective approach.

3. ACQUISITIONS
On January 14, 2019, the Company made an investment of $1,000 in the equity of a hospitality software and payments company. The acquired asset is accounted for as a cost method investment.
During the six months ended March 31, 2019, the Company also acquired the following intangible assets and businesses:
Residual Buyouts
From time to time, the Company acquires future commission streams from sales agents in exchange for an upfront cash payment. This results in an increase in overall gross processing volume to the Company. The residual buyouts are treated as asset acquisitions, resulting in recording a residual buyout intangible asset at cost on the date of acquisition. These assets are amortized using a method of amortization that reflects the pattern in which the economic benefits of the intangible asset are expected to be utilized over their estimated useful lives.
During the six months ended March 31, 2019, the Company purchased $2,582 in residual buyouts using a combination of cash on hand and borrowings on the Company's revolving line of credit. The acquired residual buyout intangible assets have a weighted-average amortization period of seven years.
16


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except warrant, unit, share and per share amounts)
Business Combinations
During the six months ended March 31, 2019, the Company completed the acquisitions of four unrelated businesses. These four acquisitions expanded the Company’s software offerings in the public sector vertical market, provided technology that enhances the Company’s Burton Platform and expanded the Company's merchant base. Total purchase consideration was $45,829, including $41,224 in revolving line of credit proceeds and $4,605 of contingent consideration. Certain of the purchase price allocations assigned for these acquisitions are preliminary.
The goodwill associated with the acquisitions of the four businesses is deductible for tax purposes. The acquired merchant relationships intangible assets have estimated amortization periods of between thirteen and sixteen years. The non-compete agreement and trade names have weighted-average amortization periods of three and six years, respectively. The weighted-average amortization period for all intangibles acquired is fifteen years. The acquired capitalized software has an estimated amortization period of six years.
Acquisition-related costs for these businesses amounted to approximately $372 and were expensed as incurred.
Certain provisions in the purchase agreements provide for additional consideration of up to $15,100, in the aggregate, to be paid based upon the achievement of specified financial performance targets, as defined in the purchase agreements, through no later than February 2021. The Company determined the acquisition date fair values of the liabilities for the contingent consideration based on discounted cash flow analyses. In each subsequent reporting period, the Company will reassess its current estimates of performance relative to the targets and adjust the contingent liabilities to their fair values through earnings. See additional disclosures in Note 7.
Summary of Business Combinations
The preliminary fair values assigned to certain assets and liabilities assumed, as of the acquisition dates, during the six months ended March 31, 2019 were as follows:
Accounts receivable $2,099 
Inventories 26 
Prepaid expenses and other current assets 7 
Property and equipment 301 
Capitalized software 4,000 
Acquired merchant relationships 19,200 
Non-compete agreements 40 
Trade name 600 
Goodwill 20,666 
Total assets acquired 46,939 
Accrued expenses and other current liabilities 12 
Deferred revenue, current 1,098 
Net assets acquired $45,829 
Pro Forma Results of Operations for Business Combinations
The following unaudited supplemental pro forma results of operations have been prepared as though each of the businesses that were acquired during the six month period ended March 31, 2019 had occurred on October 1, 2017. Pro forma adjustments were made to reflect the impact of depreciation and amortization, changes to
17


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except warrant, unit, share and per share amounts)
executive compensation and the revised debt load, all in accordance with ASC 805. This supplemental pro forma information does not purport to be indicative of the results of operations that would have been attained had the acquisitions been made on these dates, or of results of operations that may occur in the future.
Six months ended March 31, 
20192018
Revenue$173,098 $163,213 
Net income (loss)$1,417 $(5,905)

4. GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill are as follows:
Merchant Services Proprietary Software and Payments Other Total 
Balance at September 30, 2018 (net of accumulated impairment losses of $11,458, $0 and $0, respectively) $69,666 $14,288 $ $83,954 
Goodwill attributable to acquisition activity during the six months ended March 31, 2019(1)
2,284 18,413  20,697 
Balance at March 31, 2019 $71,950 $32,701 $ $104,651 
____________________
1.Includes $31 of measurement period adjustments related to acquisitions in the previous fiscal year.
Intangible assets consisted of the following as of March 31, 2019:
Cost 
Accumulated
Amortization
Carrying
Value
Amortization Life and Method
Finite-lived intangible assets: 
Merchant relationships $113,991 $(38,468)$75,523 12 to 16 years – accelerated or straight-line 
Non-compete agreements 1,930 (745)1,185 2 to 5 years – straight-line 
Website development costs 63 (22)41 3 years – straight-line 
Trade names 4,317 (2,359)1,958 2 to 7 years – straight-line 
Residual buyouts 4,625 (1,425)3,200 2 to 8 years – straight-line 
Referral and exclusivity agreements 915 (193)722 1 to 10 years – straight-line 
Total finite-lived intangible assets 125,841 (43,212)82,629 
Indefinite-lived intangible assets: 
Trademarks 32 — 32 
Total identifiable intangible assets $125,873 $(43,212)$82,661 

Amortization expense for intangible assets amounted to $3,019 and $5,821 during the three and six months ended March 31, 2019, respectively, and $2,370 and $4,630 during the three and six months ended March 31, 2018, respectively.
18


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except warrant, unit, share and per share amounts)
Based on net carrying amounts at March 31, 2019, the Company's estimate of future amortization expense for intangible assets are presented in the table below for fiscal years ending September 30:
2019 (six months remaining) $5,794 
20209,852 
20218,299 
20227,187 
20236,274 
Thereafter 45,223 
$82,629 

5. LONG-TERM DEBT, NET
A summary of long-term debt, net as of March 31, 2019 and September 30, 2018 is as follows:
March 31,September 30,
Maturity20192018
Term loans to bank under the 2017 Senior Secured Credit Facility October 30, 202232,500 35,000 
Revolving lines of credit to banks under the 2017 Senior Secured Credit Facility October 30, 202243,750 3,250 
Debt issuance costs, net (1,009)(1,474)
Total long-term debt, net of issuance costs 75,241 36,776 
Less current portion of long-term debt (5,000)(5,000)
Long-term debt, net of current portion $70,241 $31,776 
2017 Senior Secured Credit Facility
On October 30, 2017, the Company replaced its existing credit facility with the 2017 Senior Secured Credit Facility (the “2017 Senior Secured Credit Facility”). The Company concluded that the 2017 Senior Secured Credit Facility should be accounted for as a debt modification based on the guidance in ASC 470-50. The 2017 Senior Secured Credit Facility consists of term loans in the original principal amount of $40,000 and a $110,000 revolving line of credit. The 2017 Senior Secured Credit Facility accrues interest, payable monthly, at the prime rate plus a margin of 0.50% to 2.00% (0.50% as of March 31, 2019) or at the 30-day LIBOR rate plus a margin of 2.75% to 4.00% (2.75% as of March 31, 2019), in each case depending on the ratio of consolidated debt-to-EBITDA, as defined in the agreement. Additionally, the 2017 Senior Secured Credit Facility requires the Company to pay unused commitment fees of 0.15% to 0.30% (0.15% as of March 31, 2019) on any undrawn amounts under the revolving line of credit. The maturity date of the 2017 Senior Secured Credit Facility is October 30, 2022. Principal payments of $1,250 are due on the last day of each calendar quarter until the maturity date, when all outstanding principal and accrued and unpaid interest are due. At March 31, 2019, there was $66,250 available for borrowing under the revolving line of credit.
The 2017 Senior Secured Credit Facility is secured by substantially all assets of the Company. The lenders under the 2017 Senior Secured Credit Facility hold senior rights to collateral and principal repayment over all other creditors.
The provisions of the 2017 Senior Secured Credit Facility place certain restrictions and limitations upon the Company. These include, among others, restrictions on liens, investments, indebtedness, fundamental changes and dispositions; maintenance of certain financial ratios; and certain non-financial covenants pertaining to the activities of the Company during the period covered. The Company was in compliance with such covenants as of
19


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except warrant, unit, share and per share amounts)
March 31, 2019. In addition, the 2017 Senior Secured Credit Facility restricts the Company's ability to make dividends or other distributions to the holders of the Company's equity. The Company is permitted to (i) make cash distributions to the holders of the Company's equity in order to pay taxes incurred by owners of equity in i3 Verticals, LLC, by reason of such ownership, (ii) move intercompany cash between subsidiaries that are joined to the 2017 Senior Secured Credit Facility, (iii) repurchase equity from employees, directors, officers or consultants after the Reorganization Transactions in an aggregate amount not to exceed $1,500 per year, and (iv) make other dividends or distributions in an aggregate amount not to exceed 5% of the net cash proceeds received from any additional common equity issuance after the IPO. The Company is also permitted to make non-cash dividends in the form of additional equity issuances. All other forms of dividends or distributions are prohibited under the 2017 Senior Secured Credit Facility.
On May 9, 2019, the Company replaced its existing 2017 Senior Secured Credit Facility with a new credit agreement. See additional disclosures in Note 15.
Mezzanine Warrants
During 2013, the Company issued notes payable in the aggregate principal amount of $10,500 (the “Mezzanine Notes”) to three creditors. In June 2018, all of the outstanding aggregate principal balance and accrued interest on the Mezzanine Notes was repaid with proceeds from the Company’s IPO.
In connection with the issuance of the Mezzanine Notes, the Company granted warrants (the “Mezzanine Warrants”) to purchase 1,423,688 common units in i3 Verticals, LLC. The Mezzanine Warrants were determined to have no material value as of the grant date. On June 25, 2018, in conjunction with the Reorganization Transactions described in Note 1, all existing Mezzanine Warrants were exercised for common units in i3 Verticals, LLC. The intrinsic value of the Mezzanine Warrants at that date was $9,241. The change in the fair market value of the warrants for the three and six months ended March 31, 2018 is reflected within the condensed consolidated statement of operations.
Debt issuance costs
The Company incurred no debt issuance costs during the three and six months ended March 31, 2019. During the three and six months ended March 31, 2018, the Company incurred debt issuance costs totaling $53 and $1,166, respectively, in connection with the issuance of long-term debt. The debt issuance costs are being amortized over the related term of the debt using the straight-line method and are presented net against long-term debt in the condensed consolidated balance sheets. As part of the April 2016 amendment to the Company’s previous senior credit facility (the “2016 Senior Secured Credit Facility”), the Company expensed a nominal amount of unamortized debt issuance costs related to the exit of a participating bank from the 2016 Senior Secured Credit Facility. The amortization of deferred debt issuance costs is included in interest expense and amounted to approximately $232 and $465 during the three and six months ended March 31, 2019, respectively, and $244 and $465 during the three and six months ended March 31, 2018, respectively.

6. INCOME TAXES
i3 Verticals, Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from i3 Verticals, LLC based on i3 Verticals, Inc.’s economic interest in i3 Verticals, LLC. i3 Verticals, LLC's members, including the Company, are liable for federal, state and local income taxes based on their share of i3 Verticals, LLC's pass-through taxable income. i3 Verticals, LLC is not a taxable entity for federal income tax purposes but is subject to and reports entity level tax in both Tennessee and Texas. In addition, certain subsidiaries of i3 Verticals, LLC are corporations that are subject to state and federal income taxes.
The Company’s tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, the Company updates its estimate of the annual effective tax rate, and if the Company’s estimated tax rate changes, it
20


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except warrant, unit, share and per share amounts)
makes a cumulative adjustment in that period. The Company’s provision for income taxes was a benefit of $136 and an expense of $129 for the three and six months ended March 31, 2019, respectively, and an expense of $250 and a benefit of $139 for the three and six months ended March 31, 2018, respectively.
On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law. The legislation contains several key tax provisions, including the reduction of the federal corporate income tax rate to 21% effective January 1, 2018, as well as a variety of other changes, including limitation of the tax deductibility of interest expense, acceleration of expensing of certain business assets and reductions in the amount of executive pay that could qualify for a tax deduction. The SEC staff issued Staff Accounting Bulletin No. 118, which allowed us to record provisional amounts during a measurement period not to extend beyond one year after the enactment date. As of December 22, 2018, the Company has completed its accounting for all of the enactment-date income tax effects of the Tax Cuts and Jobs Act. The Company made no material adjustments to the provisional amounts recorded.
Tax Receivable Agreement
On June 25, 2018, the Company entered into a Tax Receivable Agreement with i3 Verticals, LLC and each of the Continuing Equity Owners (the “Tax Receivable Agreement”) that provides for the payment by the Company to the Continuing Equity Owners of 85% of the amount of certain tax benefits, if any, that it actually realizes, or in some circumstances, is deemed to realize in its tax reporting, as a result of (i) future redemptions funded by the Company or exchanges, or deemed exchanges in certain circumstances, of Common Units of i3 Verticals, LLC for Class A common stock of i3 Verticals, Inc. or cash, and (ii) certain additional tax benefits attributable to payments made under the Tax Receivable Agreement. These tax benefit payments are not conditioned upon one or more of the Continuing Equity Owners maintaining a continued ownership interest in i3 Verticals, LLC. If a Continuing Equity Owner transfers Common Units but does not assign to the transferee of such units the rights of the Continuing Equity Owner under the Tax Receivable Agreement, such Continuing Equity Owner generally will continue to be entitled to receive payments under the Tax Receivable Agreement arising in respect of a subsequent exchange of such Common Units. In general, the Continuing Equity Owners’ rights under the Tax Receivable Agreement may not be assigned, sold, pledged or otherwise alienated to any person, other than certain permitted transferees, without (a) the Company's prior written consent, which should not be unreasonably withheld, conditioned or delayed, and (b) such persons becoming a party to the Tax Receivable Agreement and agreeing to succeed to the applicable Continuing Equity Owner’s interest therein. The Company expects to benefit from the remaining 15% of the tax benefits, if any, that the Company may realize.
During the six months ended March 31, 2019, the Company acquired an aggregate of 101,642 common units of i3 Verticals, LLC in connection with the redemption of common units, which resulted in an increase in the tax basis of our investment in i3 Verticals, LLC subject to the provisions of the Tax Receivable Agreement. As a result of these exchanges, during the six months ended March 31, 2019, the Company recognized an increase to its net deferred tax assets in the amount of $780, and corresponding Tax Receivable Agreement liabilities of $663, representing 85% of the tax benefits due to the Continuing Equity Owners. The results of these transactions brought the deferred tax asset and corresponding Tax Receivable Agreement liability balances to $1,740 and $1,479, respectively, as of March 31, 2019.

21


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except warrant, unit, share and per share amounts)
7. FAIR VALUE MEASUREMENTS
The Company applies the provisions of ASC 820, Fair Value Measurement, which defines fair value, establishes a framework for its measurement and expands disclosures about fair value measurements. Fair value is the price that would be received to sell an asset or the price paid to transfer a liability as of the measurement date. A three-tier, fair-value reporting hierarchy exists for disclosure of fair value measurements based on the observability of the inputs to the valuation of financial assets and liabilities. The three levels are:
Level 1 — Quoted prices for identical instruments in active markets.
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable in active exchange markets.
The carrying value of the Company’s financial instruments, including cash and cash equivalents, restricted cash, settlement assets and obligations, accounts receivable, other assets, accounts payable, and accrued expenses, approximated their fair values as of March 31, 2019 and 2018, because of the relatively short maturity dates on these instruments. The carrying amount of debt approximates fair value as of March 31, 2019 and 2018, because interest rates on these instruments approximate market interest rates.
The Company has no Level 1 or Level 2 financial instruments. The following tables present the changes in the Company's Level 3 financial instruments that are measured at fair value on a recurring basis.
Accrued Contingent Consideration 
Balance at September 30, 2018 5,999 
Contingent consideration accrued at time of business combination 4,605 
Change in fair value of contingent consideration included in Operating expenses 2,153 
Contingent consideration paid (4,194)
Balance at March 31, 2019 $8,563 

Mezzanine Warrants Accrued Contingent Consideration 
Balance at September 30, 2017 $767 $3,340 
Change in the fair value of warrant liabilities, included in Other expenses 8,245 — 
Contingent consideration accrued at time of business combination — 2,084 
Change in fair value of contingent consideration included in Operating expenses — 2,129 
Contingent consideration paid — (1,064)
Balance at March 31, 2018 $9,012 $6,489 
22


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except warrant, unit, share and per share amounts)
Approximately $6,965 and $3,813 of contingent consideration was recorded in accrued expenses and other current liabilities as of March 31, 2019 and September 30, 2018, respectively. Approximately $1,598 and $2,186 of contingent consideration was recorded in other long-term liabilities as of March 31, 2019 and September 30, 2018, respectively.

8. EQUITY-BASED COMPENSATION
A summary of equity-based compensation expense recognized during the three and six months ended March 31, 2019 and 2018 is as follows:
Three months ended March 31, Six months ended March 31, 
2019201820192018
Stock options $1,363 $ $2,314 $ 
Amounts are included in general and administrative expense on the condensed consolidated statements of operations. No income tax benefits were recognized related to equity-based compensation during the three and six months ended March 31, 2019 and 2018.
Stock Options
In May 2018, the Company adopted the 2018 Equity Incentive Plan (the “2018 Plan”) under which the Company may grant up to 3,500,000 stock options and other equity-based awards to employees, directors and officers. The number of shares of Class A common stock available for issuance under the 2018 Plan includes an annual increase on the first day of each year, beginning with the 2019 calendar year, equal to 4.0% of the outstanding shares of all classes of the Company's common stock as of the last day of the immediately preceding calendar year, unless the Company’s board of directors determines prior to the last trading day of December of the immediately preceding calendar year that the increase shall be less than 4%. As of March 31, 2019, there are 4,552,873 options available to grant under the 2018 Plan.
In connection with the IPO, the Company granted 2,045,000 stock options to its directors and certain employees. The stock options were granted with an exercise price of $13.00 per share and vest ratably over a three-year period.
The fair value of the stock option awards during the six months ended March 31, 2019 and from June 20, 2018 through September 30, 2018 was determined on the grant date using the Black-Scholes valuation model based on the following weighted-average assumptions:
March 31, 2019  September 30, 2018  
Expected volatility(1)
26.5 %26.3 %
Expected dividend yield(2)
 % %
Expected term(3)
6 years6 years
Risk-free interest rate(4)
2.8 %2.8 %
_________________
1.Expected volatility is based on the historical volatility of a selected peer group over a period equivalent to the expected term.
2.The Company has assumed a dividend yield of zero as management has no plans to declare dividends in the foreseeable future.
3.Expected term represents the estimated period of time until an award is exercised and was determined using the simplified method.
4.The risk-free rate is an interpolation of yields on U.S. Treasury securities with maturities equivalent to the expected term.

23


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except warrant, unit, share and per share amounts)
A summary of stock option activity for the six months ended March 31, 2019 is as follows:
Stock OptionsWeighted Average Exercise Price
Outstanding at beginning of period 2,138,500 $13.13 
Granted 1,499,916 21.45 
Exercised   
Forfeited (51,500)16.59 
Outstanding at end of period 3,586,916 $21.63 
The weighted-average grant date fair value of stock options granted during the six months ended March 31, 2019 was $6.91. As of March 31, 2019, there were 3,586,916 stock options outstanding, of which none were exercisable. As of March 31, 2019, total unrecognized compensation expense related to unvested stock options, including an estimate for pre-vesting forfeitures, was $15,901, which is expected to be recognized over a weighted-average period of 2.6 years.

9. COMMITMENTS AND CONTINGENCIES
Leases
The Company utilizes office space and equipment under operating leases. Rent expense under these leases amounted to $532 and $1,025 during the three and six months ended March 31, 2019, respectively, and $363 and $686 three and six months ended March 31, 2018, respectively.
A summary of approximate future minimum payments under these leases as of March 31, 2019 is as follows:
Years ending September 30: 
2019 (six months remaining) $1,182 
2020 2,240 
2021 1,761 
2022 1,592 
2023 1,477 
Thereafter 1,396 
Total $9,648 
24


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except warrant, unit, share and per share amounts)
Minimum Processing Commitments
The Company has non-exclusive agreements with several processors to provide services related to transaction processing and transmittal, transaction authorization and data capture, and access to various reporting tools. Certain of these agreements require the Company to submit a minimum monthly number of transactions for processing. If the Company submits a number of transactions that is lower than the minimum, it is required to pay to the processor the fees it would have received if the Company had submitted the required minimum number of transactions. As of March 31, 2019, such minimum fee commitments were as follows:
Years ending September 30: 
2019 (six months remaining) $1,269 
20202,541 
20211,457 
20222,046 
20232,646 
Thereafter 243 
Total $10,202 
Litigation
With respect to all legal, regulatory and governmental proceedings, and in accordance with ASC 450-20, Contingencies—Loss Contingencies, the Company considers the likelihood of a negative outcome. If the Company determines the likelihood of a negative outcome with respect to any such matter is probable and the amount of the loss can be reasonably estimated, the Company records an accrual for the estimated amount of loss for the expected outcome of the matter. If the likelihood of a negative outcome with respect to material matters is reasonably possible and the Company is able to determine an estimate of the amount of possible loss or a range of loss, whether in excess of a related accrued liability or when there is no accrued liability, the Company discloses the estimate of the amount of possible loss or range of loss. However, the Company in some instances may be unable to estimate an amount of possible loss or range of loss based on the significant uncertainties involved in, or the preliminary nature of, the matter, and in these instances the Company will disclose the nature of the contingency and describe why the Company is unable to determine an estimate of possible loss or range of loss.
In addition, the Company is involved in ordinary course legal proceedings, which include all claims, lawsuits, investigations and proceedings, including unasserted claims, which are probable of being asserted, arising in the ordinary course of business and otherwise not described below. The Company has considered all such ordinary course legal proceedings in formulating its disclosures and assessments.
On June 14, 2016, Expert Auto Repair, Inc., for itself and on behalf of a class of additional plaintiffs, and Jeff Straight initiated a class action lawsuit against the Company, as alleged successor to Merchant Processing Solutions, LLC, in the Los Angeles County Superior Court of California, seeking damages, restitution and declaratory and injunctive relief (the “Expert Auto Litigation”). The plaintiffs alleged that Merchant Processing Solutions, LLC, the Company's alleged predecessor, engaged in unfair business practices in the merchant services sector including unfairly inducing merchants to obtain credit and debit card processing services and thereafter assessing them with improper fees. On April 10, 2018, the Court granted conditional class certification and preliminary approval of an agreed settlement of $995 and scheduled a final fairness hearing for December 2018. After notice class members expiration of the opt-out/objection deadline, on December 14, 2018, the Court gave final class certification and approval of the agreed settlement. The final judgment and order was entered by the Court on January 23, 2019. The reserved amount is reflected in accrued expenses and other current liabilities as of March 31, 2019. The amount was included in general and administrative expenses in the consolidated statement of operations for the year ended September 30, 2017. The settlement was funded on April 8, 2019 and this matter is concluded.
25


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except warrant, unit, share and per share amounts)
In connection with the Expert Auto Litigation, on November 3, 2016 the Company's insurance carrier, Starr Indemnity and Liability Company, Inc. (“Starr”), filed a complaint against the Company in the United States District Court for the Middle District of Tennessee, seeking a declaration from the court that Starr's policy provided no coverage for the Expert Auto Litigation. On April 13, 2018, following the revival of Starr's complaint after it was initially dismissed for lack of subject matter jurisdiction, the court issued an order to (i) stay discovery in the matter, (ii) allow Starr to file a motion for judgment on the pleadings by May 21, 2018 (which was filed) and (iii) require the Company to respond to such motion by June 8, 2018 (which the Company did). In the meantime, the Company filed its answer and counterclaim to Starr’s complaint and Starr then filed a motion to dismiss a portion of this counterclaim. On August 7, 2018, the court denied Starr's motion for judgment on the pleadings and also denied Starr's motion to dismiss in relation to the Company's counterclaim.
Following the denial of Starr’s motion, Starr requested the court’s permission to file a motion for leave to file a first amended complaint to allege an additional basis for denying coverage. The court granted Starr’s request to file such motion. Following the briefing by the parties, the court granted Starr’s motion and ordered it to file and serve its first amended complaint within ten days, which Starr did. In response, the Company filed its answer to Starr’s first amended complaint in which the Company again asserted its counterclaim against Starr.
On December 26, 2018, Starr filed a motion for partial summary judgment. The parties held a mediation on March 15, 2019 in Nashville, Tennessee and an agreement was reached to settle the litigation with a payment of $95 from Starr to the Company. The settlement is reflected in accounts receivable, net as of March 31, 2019. The amount was included as a reduction in general and administrative expenses in the consolidated statements of operations for the three and six months ended March 31, 2019. The settlement amount was collected on April 16, 2019 and this matter is concluded.
Other
The Company's subsidiary CP-PS, LLC has certain indemnification obligations in favor of FDS Holdings, Inc. related to the acquisition of certain assets of Merchant Processing Solutions, LLC in February 2014. The Company has incurred expenses related to these indemnification obligations in prior periods and may have additional expenses in the future. However, after taking into consideration the evaluation of such matters by the Company’s legal counsel, the Company’s management believes at this time that the anticipated outcome of any existing or potential indemnification liabilities related to this matter will not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

10. RELATED PARTY TRANSACTIONS
Prior to the Company's IPO and Reorganization Transactions, portions of the Junior Subordinated Notes held by related creditors were outstanding. Interest expense to related parties for the Company’s Junior Subordinated Notes amounted to $154 and $311 during the three and six months ended March 31, 2018, respectively.
Prior to the Company's IPO and Reorganization Transactions, the Mezzanine Notes held by related creditors were outstanding. Interest expense to related parties for the Company’s Mezzanine Notes amounted to $315 and $637 during the three and six months ended March 31, 2018, respectively.
In April, 2016, the Company entered into a purchase agreement to purchase certain assets of Axia, LLC. On April 29, 2016, the Company entered into a Processing Services Agreement (the “Axia Tech Agreement”) with Axia Technologies, LLC (“Axia Tech”), an entity controlled by the previous owner of Axia, LLC. Under the Axia Tech Agreement, the Company agreed to provide processing services for certain merchants as designated by Axia Tech from time to time. In accordance with ASC 605-45, revenue from the processing services is recognized net of interchange, residual expense and other fees. The Company earned net revenues related to the Axia Tech Agreement of $20 and $38 during the three and six months ended March 31, 2019, respectively, and $13 and $24 during the three and six months ended March 31, 2018, respectively. i3 Verticals, LLC, Greg Daily, the Company’s CEO and Clay Whitson, the Company’s CFO, own 2.0%, 10.5% and 0.4%, respectively, of the outstanding equity of Axia Tech.
26


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except warrant, unit, share and per share amounts)
In connection with the Company’s IPO, the Company and i3 Verticals, LLC entered into a Tax Receivable Agreement with the Continuing Equity Owners that provides for the payment by the Company to the Continuing Equity Owners of 85% of the amount of certain tax benefits, if any, that it actually realizes, or in some circumstances, is deemed to realize in its tax reporting, as a result of (i) future redemptions funded by the Company or exchanges, or deemed exchanges in certain circumstances, of Common Units of i3 Verticals, LLC for Class A common stock of i3 Verticals, Inc. or cash, and (ii) certain additional tax benefits attributable to payments made under the Tax Receivable Agreement. See Note 6 for further information. As of March 31, 2019, the total amount due under the Tax Receivable Agreement was $1,479.

11. SEGMENTS
The Company determines its operating segments based on ASC 280, Segment Reporting, how the chief operating decision making group monitors and manages the performance of the business and the level at which financial information is reviewed. The Company’s operating segments are strategic business units that offer different products and services.
The Company's core business is delivering seamlessly integrated payment and software solutions to SMBs and organizations in strategic vertical markets. This is accomplished through the Merchant Services and Proprietary Software and Payments segments.
The Merchant Services segment provides comprehensive payment solutions to businesses and organizations. The Merchant Services segment includes third-party integrated payment solutions as well as traditional payment services across the Company's strategic vertical markets.