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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2019
OR
| | | | | |
☐ | 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)
| | | | | |
Delaware | 82-4052852 |
(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) | |
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class A Common Stock, $0.0001 Par Value | IIIV | Nasdaq Global Select Market |
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 | ☐ | | | Accelerated filer | ☐ |
Non-accelerated Filer | ☒ | | | Smaller reporting company | ☐ |
Emerging growth company | ☒ | | | | |
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
As of August 13, 2019, there were 14,426,424 outstanding shares of Class A common stock, $0.0001 par value per share, and 12,921,637 outstanding shares of Class B common stock, $0.0001 par value per share.
TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
i3 Verticals, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
| | | | | | | | | | | |
| June 30, | | September 30, |
| 2019 | | 2018 |
| (unaudited) | | |
Assets | | | |
Current assets | | | |
Cash and cash equivalents | $ | 1,509 | | $ | 572 |
Accounts receivable, net | 13,173 | | 12,500 |
Settlement assets | 439 | | 863 |
Prepaid expenses and other current assets | 4,940 | | 2,630 |
Total current assets | 20,061 | | 16,565 |
| | | |
Property and equipment, net | 3,835 | | 2,958 |
Restricted cash | 1,616 | | 665 |
Capitalized software, net | 14,999 | | 3,372 |
Goodwill | 165,865 | | 83,954 |
Intangible assets, net | 106,468 | | 66,023 |
Deferred tax asset | 28,344 | | 1,152 |
Other assets | 2,057 | | 453 |
Total assets | $ | 343,245 | | $ | 175,142 |
| | | |
Liabilities and equity | | | |
Liabilities | | | |
Current liabilities | | | |
Accounts payable | $ | 7,409 | | $ | 4,114 |
Current portion of long-term debt | — | | 5,000 |
Accrued expenses and other current liabilities | 15,622 | | 11,538 |
Settlement obligations | 439 | | 863 |
Deferred revenue | 4,916 | | 4,927 |
Total current liabilities | 28,386 | | 26,442 |
| | | |
Long-term debt, less current portion and debt issuance costs, net | 137,645 | | 31,776 |
Long-term tax receivable agreement obligations | 23,904 | | 791 |
Other long-term liabilities | 12,932 | | 3,935 |
Total liabilities | 202,867 | | 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 June 30, 2019 and September 30, 2018 | — | | — |
Class A common stock, par value $0.0001 per share, 150,000,000 shares authorized; 14,420,199 and 9,112,042 shares issued and outstanding as of June 30, 2019 and September 30, 2018, respectively | 1 | | 1 |
Class B common stock, par value $0.0001 per share, 40,000,000 shares authorized; 12,921,637 and 17,213,806 shares issued and outstanding as of June 30, 2019 and September 30, 2018, respectively | 1 | | 2 |
Additional paid-in-capital | 80,344 | | 38,562 |
Accumulated (deficit) earnings | (1,379) | | 736 |
Total Stockholders' equity | 78,967 | | 39,301 |
Non-controlling interest | 61,411 | | 72,897 |
Total equity | 140,378 | | 112,198 |
Total liabilities and stockholders' equity | $ | 343,245 | | $ | 175,142 |
See Notes to the Interim Condensed Consolidated Financial Statements
i3 Verticals, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | | | Nine months ended June 30, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | |
Revenue | $ | 97,483 | | $ | 84,536 | | $ | 267,745 | | $ | 239,455 |
| | | | | | | |
Operating expenses | | | | | | | |
Interchange and network fees | 63,263 | | 55,705 | | 173,777 | | 158,577 |
Other costs of services | 11,431 | | 11,061 | | 31,414 | | 30,119 |
Selling general and administrative | 17,587 | | 10,696 | | 44,422 | | 29,737 |
Depreciation and amortization | 4,425 | | 3,000 | | 11,875 | | 8,876 |
Change in fair value of contingent consideration | (417) | | 1,151 | | 1,736 | | 3,280 |
Total operating expenses | 96,289 | | 81,613 | | 263,224 | | 230,589 |
| | | | | | | |
Income from operations | 1,194 | | 2,923 | | 4,521 | | 8,866 |
| | | | | | | |
Other expenses | | | | | | | |
Interest expense, net | 1,918 | | 2,644 | | 3,987 | | 7,649 |
Change in fair value of warrant liability | — | | 242 | | — | | 8,487 |
Total other expenses | 1,918 | | 2,886 | | 3,987 | | 16,136 |
| | | | | | | |
(Loss) income before income taxes | (724) | | 37 | | 534 | | (7,270) |
| | | | | | | |
(Benefit from) provision for income taxes | (131) | | 692 | | (2) | | 553 |
| | | | | | | |
Net (loss) income | (593) | | (655) | | 536 | | (7,823) |
| | | | | | | |
Net income (loss) attributable to non-controlling interest | 598 | | (91) | | 2,651 | | (91) |
Net (loss) attributable to i3 Verticals, Inc. | $ | (1,191) | | $ | (564) | | $ | (2,115) | | $ | (7,732) |
| | | | | | | |
Net loss per share attributable to Class A common stockholders(1): | | | | | | | |
Basic | $ | (0.12) | | $ | (0.01) | | $ | (0.23) | | $ | (0.01) |
Diluted | $ | (0.12) | | $ | (0.01) | | $ | (0.23) | | $ | (0.01) |
Weighted average shares of Class A common stock outstanding(1): | | | | | | | |
Basic | 10,064,785 | | 8,812,630 | | 9,254,549 | | 8,812,630 |
Diluted | 10,064,785 | | 8,812,630 | | 9,254,549 | | 8,812,630 |
__________________________
1.Basic and diluted net loss 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
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 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 | — | | — | | — | | — | | — | | (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 |
Equity-based compensation | — | | — | | — | | — | | 1,808 | | — | | — | | 1,808 |
Forfeitures of restricted Class A common stock | (1,124) | | — | | — | | — | | — | | — | | — | | — |
Net (loss) income | — | | — | | — | | — | | — | | (1,191) | | 598 | | (593) |
Distributions to non-controlling interest holders | — | | — | | — | | — | | — | | — | | (1,037) | | (1,037) |
Redemption of common units in i3 Verticals, LLC | 4,190,527 | | — | | (4,190,527) | | (1) | | 11,786 | | — | | (11,786) | | (1) |
Sale of Class A common stock in public offering, net | 1,000,000 | | — | | — | | — | | 21,660 | | — | | — | | 21,660 |
Capitalization of public offering costs | — | | — | | — | | — | | (771) | | — | | — | | (771) |
Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis | — | | — | | — | | — | | 3,962 | | — | | — | | 3,962 |
Issuance of restricted Class A common stock under Equity Plan | 8,799 | | — | | — | | — | | 225 | | — | | — | | 225 |
Exercise of equity-based awards | 29,967 | | — | | — | | — | | 390 | | | | | | 390 |
Balance at June 30, 2019 | 14,420,199 | | $ | 1 | | 12,921,637 | | $ | 1 | | $ | 80,344 | | $ | (1,379) | | $ | 61,411 | | $ | 140,378 |
See Notes to the Interim Condensed Consolidated Financial Statements
i3 Verticals, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED) (CONTINUED)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Class A Common Stock | | | | Class B Common Stock | | | | | | | | | | | | |
| Class A Units | | Common Units | | Class P Units | | Shares | | Amount | | Shares | | Amount | | Additional Paid-In Capital | | Accumulated Deficit | | Retained Earnings | | Non-Controlling Interest | | Total 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 | — | | — | | — | | — | | — | | — | | — | | — | | (7,168) | | — | | — | | (7,168) |
Balance at December 31, 2017 | 35,698 | | 1,344 | | — | | — | | — | | — | | — | | — | | (41,128) | | — | | — | | (4,086) |
Preferred returns on Class A Units | 898 | | — | | — | | — | | — | | — | | — | | — | | (898) | | — | | — | | — |
Preferred returns on Redeemable Class A Units | — | | — | | — | | — | | — | | — | | — | | — | | (209) | | — | | — | | (209) |
Net loss | — | | — | | — | | — | | — | | — | | — | | — | | (655) | | — | | — | | (655) |
Balance at March 31, 2018 | 36,596 | | 1,344 | | — | | — | | — | | — | | — | | — | | (42,890) | | — | | — | | (4,950) |
Preferred returns on Class A Units | 850 | | — | | — | | — | | — | | — | | — | | — | | (850) | | — | | — | | — |
Preferred returns on Redeemable Class A Units | — | | — | | — | | — | | — | | — | | — | | — | | (175) | | — | | — | | (175) |
Issuance of Common Units | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — |
Net income prior to the Reorganization Transactions | — | | — | | — | | — | | — | | — | | — | | — | | 189 | | — | | — | | 189 |
Exercise of Junior Subordinated Notes Warrants and Mezzanine Warrants | — | | 12,218 | | — | | — | | — | | — | | — | | (116) | | — | | — | | — | | 12,102 |
Equity based compensation recognized prior to the Reorganization Transactions | — | | — | | — | | — | | — | | — | | — | | 38 | | — | | — | | — | | 38 |
Effect of the Reorganization Transactions | (37,446) | | (13,562) | | — | | 824,861 | | — | | 17,597,223 | | 2 | | 804 | | 43,726 | | — | | 15,493 | | 9,017 |
Issuance of Class A common stock in conversion of Junior Subordinated Notes | — | | — | | — | | 619,542 | | — | | — | | — | | 8,054 | | — | | — | | — | | 8,054 |
Sale of Class A common stock in initial public offering, net | — | | — | | — | | 7,647,500 | | 1 | | — | | — | | 92,446 | | — | | — | | — | | 92,447 |
Purchase of common units in i3 Verticals, LLC from selling shareholder | — | | — | | — | | — | | — | | (383,417) | | — | | — | | — | | — | | (4,635) | | (4,635) |
Capitalization of initial public offering costs | — | | — | | — | | — | | — | | — | | — | | (3,792) | | — | | — | | — | | (3,792) |
Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis | — | | — | | — | | — | | — | | — | | — | | 144 | | — | | — | | — | | 144 |
Non-controlling interests related to purchase of Common Units in i3 Verticals, LLC | — | | — | | — | | — | | — | | — | | — | | (60,102) | | — | | — | | 60,102 | | — |
Equity based compensation recognized subsequent to the Reorganization Transactions | — | | — | | — | | — | | — | | — | | — | | 38 | | — | | — | | — | | 38 |
Net loss subsequent to the Reorganization Transactions | — | | — | | — | | — | | — | | — | | — | | — | | — | | (98) | | (91) | | (189) |
Balance at June 30, 2018 | $ | — | | $ | — | | $ | — | | 9,091,903 | | $ | 1 | | 17,213,806 | | $ | 2 | | $ | 37,514 | | $ | — | | $ | (98) | | $ | 70,869 | | $ | 108,288 |
See Notes to the Interim Condensed Consolidated Financial Statements
i3 Verticals, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
| | | | | | | | | | | |
| Nine months ended June 30, | | |
| 2019 | | 2018 |
Cash flows from operating activities: | | | |
Net income (loss) | $ | 536 | | $ | (7,823) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Depreciation and amortization | 11,875 | | 8,876 |
Equity-based compensation | 4,122 | | 817 |
Provision for doubtful accounts | 43 | | 33 |
Amortization of deferred financing costs | 619 | | 835 |
Debt extinguishment costs | 152 | | — |
Loss on disposal of assets | 8 | | 5 |
(Benefit from) deferred income taxes | (36) | | (468) |
Non-cash change in fair value of warrant liability | — | | 8,487 |
Increase in non-cash contingent consideration expense from original estimate | 1,736 | | 3,280 |
Changes in operating assets: | | | |
Accounts receivable | 3,758 | | 2,205 |
Prepaid expenses and other current assets | (1,779) | | 1,433 |
Other assets | (2,369) | | (2,994) |
Changes in operating liabilities: | | | |
Accounts payable | 2,489 | | 724 |
Accrued expenses and other current liabilities | (616) | | 2,936 |
Deferred revenue | (2,633) | | (3,033) |
Other long-term liabilities | (48) | | 160 |
Contingent consideration paid in excess of original estimates | (1,560) | | (814) |
Net cash provided by operating activities | 16,297 | | 14,659 |
| | | |
Cash flows from investing activities: | | | |
Expenditures for property and equipment | (585) | | (1,309) |
Expenditures for capitalized software | (1,478) | | (760) |
Purchases of merchant portfolios and residual buyouts | (2,708) | | (1,207) |
Acquisitions of businesses, net of cash acquired | (126,862) | | (26,862) |
Acquisition of other intangibles | (72) | | (818) |
Net cash used in investing activities | (131,705) | | (30,956) |
| | | |
See Notes to the Interim Condensed Consolidated Financial Statements
i3 Verticals, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
(In thousands)
| | | | | | | | | | | |
| Nine months ended June 30, | | |
| 2019 | | 2018 |
Cash flows from financing activities: | | | |
Proceeds from revolving credit facility | 149,919 | | 19,250 |
Payments of revolving credit facility | (14,862) | | (90,850) |
Proceeds from notes payable to banks | — | | 24,671 |
Payments of notes payable to banks | (35,000) | | (3,750) |
Payment of notes payable to mezzanine lenders | — | | (10,486) |
Payment of unsecured notes payable to related and unrelated creditors | — | | (5,489) |
Payment of debt issuance costs | (152) | | (266) |
Proceeds from the exercise of Mezzanine Warrants and Junior Subordinated Notes Warrants | — | | 270 |
Proceeds from issuance of Class A common stock sold in public offering, net of underwriting discounts and offering costs | 21,660 | | — |
Proceeds from issuance of Class A common stock sold in initial public offering, net of underwriting discounts and offering costs | — | | 89,729 |
Payments for Common Units in i3 Verticals, LLC from selling shareholder | — | | (4,635) |
Cash paid for contingent consideration | (2,634) | | (977) |
Required distributions to members for tax obligations | (2,025) | | — |
Proceeds from stock option exercises | 390 | | — |
Net cash provided by financing activities | 117,296 | | 17,467 |
| | | |
Net increase (decrease) in cash, cash equivalents, and restricted cash | 1,888 | | 1,170 |
Cash, cash equivalents, and restricted cash at beginning of period | 1,237 | | 1,968 |
Cash, cash equivalents, and restricted cash at end of period | $ | 3,125 | | $ | 3,138 |
| | | |
Supplemental disclosure of cash flow information: | | | |
Cash paid for interest | $ | 2,980 | | $ | 8,961 |
Cash paid for income taxes | $ | 24,611 | | $ | 137 |
See Notes to the Interim Condensed Consolidated Financial Statements
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.
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 majority economic interest in i3 Verticals, LLC.
Public Offering
On June 10, 2019, the Company completed a secondary public offering (the “June 2019 Secondary Public Offering”) of 5,165,527 shares of its Class A common stock, at a public offering price of $22.75 per share, which included a full exercise of the underwriters' option to purchase 673,764 additional shares of Class A Common Stock from the Company. The Company received approximately $111,640 of net proceeds, after deducting underwriting discounts and commissions, but before offering expenses. The Company used the net proceeds to purchase (1) 1,000,000 Common Units directly from i3 Verticals, LLC, and (2) 4,165,527 Common Units (including 673,764 Common Units due to the exercise of the underwriters' option to purchase additional shares in full) and an equivalent number of Class B common stock (which shares were then canceled) from certain Continuing Equity Owners, in each case at a price per Common Unit equal to the price per share paid by the underwriters for shares of our Class A common stock in the offering. i3 Verticals, LLC received $20,870 in net proceeds from the sale of Common Units to the Company, which it used to repay outstanding indebtedness.
•As of June 30, 2019, i3 Verticals, Inc. owned 52.7% of the economic interest in i3 Verticals, LLC.
•As of June 30, 2019, the Continuing Equity Owners owned Common Units in i3 Verticals, LLC representing approximately 47.3% of the economic interest in i3 Verticals, LLC, shares of Class A common stock in the Company representing approximately 0.8% of the economic interest and voting power in the Company, and shares of Class B common stock in i3 Verticals, Inc., representing approximately 47.3% 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 48.1% 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 June 30, 2019 and for the
i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except warrant, unit, share and per share amounts)
three and nine months ended June 30, 2019 and 2018. The results of operations for the three and nine months ended June 30, 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.
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:
| | | | | | | | | | | |
| June 30, 2019 | | June 30, 2018 |
Cash and cash equivalents on condensed consolidated balance sheet | $ | 1,509 | | $ | 2,473 |
Restricted cash | 1,616 | | 665 |
Total cash, cash equivalents and restricted cash on condensed consolidated statement of cash flows | $ | 3,125 | | $ | 3,138 |
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 $1,803 and $930 at June 30, 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 material 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.
i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except warrant, unit, share and per share amounts)
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 nine months ended June 30, 2019 contributed $11,679 and $(2,490) to revenue and net loss, respectively, to the results in the Company's condensed consolidated statements of operations for the nine 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 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.
The majority of the Company's gross revenue for the nine months ended June 30, 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
i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except warrant, unit, share and per share amounts)
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 Company’s 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 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.
i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except warrant, unit, share and per share amounts)
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, 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