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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 March 31, 2020
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)
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) 465-4497
(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 classTrading Symbol(s)Name of each exchange on which registered
Class A Common Stock, $0.0001 Par ValueIIIVNasdaq 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
o
Accelerated filer
Non-accelerated filer
o
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 May 11, 2020, there were 15,048,918 outstanding shares of Class A common stock, $0.0001 par value per share, and 12,401,621 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,
20202019
(unaudited)
Assets
Current assets
Cash and cash equivalents$1,591  $1,119  
Accounts receivable, net13,515  15,335  
Prepaid expenses and other current assets4,662  4,117  
Total current assets19,768  20,571  
Property and equipment, net5,035  5,026  
Restricted cash1,581  2,081  
Capitalized software, net14,472  15,454  
Goodwill167,054  168,284  
Intangible assets, net102,837  107,419  
Deferred tax asset35,334  28,138  
Other assets5,101  2,329  
Total assets$351,182  $349,302  
Liabilities and equity
Liabilities
Current liabilities
Accounts payable$3,520  $3,438  
Accrued expenses and other current liabilities17,884  21,560  
Deferred revenue9,613  10,237  
Total current liabilities31,017  35,235  
Long-term debt, less current portion and debt issuance costs, net123,226  139,298  
Long-term tax receivable agreement obligations25,773  23,204  
Other long-term liabilities4,385  9,124  
Total liabilities184,401  206,861  
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, 2020 and September 30, 2019    
Class A common stock, par value $0.0001 per share, 150,000,000 shares authorized; 15,038,918 and 14,444,115 shares issued and outstanding as of March 31, 2020 and September 30, 2019, respectively1  1  
Class B common stock, par value $0.0001 per share, 40,000,000 shares authorized; 12,411,621 and 12,921,637 shares issued and outstanding as of March 31, 2020 and September 30, 2019, respectively1  1  
Additional paid-in-capital104,122  82,380  
Accumulated (deficit) earnings(1,016) (2,309) 
Total stockholders' equity103,108  80,073  
Non-controlling interest63,673  62,368  
Total equity166,781  142,441  
Total liabilities and stockholders' equity$351,182  $349,302  
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,
2020201920202019
Revenue$39,178  $85,394  $80,289  $170,262  
Operating expenses
Interchange and network fees(1)
54,685  110,514  
Other costs of services11,955  10,193  24,873  19,983  
Selling general and administrative20,786  14,319  40,073  26,835  
Depreciation and amortization4,538  3,898  9,193  7,450  
Change in fair value of contingent consideration(142) 2,502  12  2,153  
Total operating expenses37,137  85,597  74,151  166,935  
Income (loss) from operations2,041  (203) 6,138  3,327  
Interest expense, net2,184  1,155  4,198  2,069  
(Loss) income before income taxes(143) (1,358) 1,940  1,258  
(Benefit from) provision for income taxes(2,062) (136) (1,913) 129  
Net income (loss)1,919  (1,222) 3,853  1,129  
Net income (loss) attributable to non-controlling interest1,182  (120) 3,265  2,053  
Net income (loss) attributable to i3 Verticals, Inc.$737  $(1,102) $588  $(924) 
Net income (loss) per share attributable to Class A common stockholders:
Basic$0.05  $(0.12) $0.04  $(0.10) 
Diluted$0.05  $(0.12) $0.04  $(0.10) 
Weighted average shares of Class A common stock outstanding:
Basic14,456,970  8,887,050  14,344,768  8,849,431  
Diluted16,106,757  8,887,050  15,778,077  8,849,431  
__________________________
1.Effective October 1, 2019, the Company's revenues are presented net of interchange and network fees in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. See Note 2 to our condensed consolidated financial statements for a description of the recently adopted accounting pronouncement.
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 StockClass B Common StockAdditional Paid-In CapitalAccumulated Earnings (Deficit)Non-Controlling InterestTotal Equity
SharesAmountSharesAmount
Balance at September 30, 201914,444,115  $1  12,921,637  $1  $82,380  $(2,309) $62,368  $142,441  
Cumulative effect of adoption of new accounting standard—  —  —  —  —  705  640  1,345  
Equity-based compensation—  —  —  —  2,124  —  —  2,124  
Net (loss) income—  —  —  —  —  (149) 2,083  1,934  
Exercise of equity-based awards53,662  —  —  —  351  —  —  351  
Balance at December 31, 201914,497,777  $1  12,921,637  $1  $84,855  $(1,753) $65,091  $148,195  
Equity-based compensation—  —  —  —  2,510  —  —  2,510  
Forfeitures of restricted Class A common stock  —  —  —  —  —  —  —  
Net (loss) income—  —  —  —  —  737  1,182  1,919  
Distributions to non-controlling interest holders—  —  —  —  —  —  (3) (3) 
Redemption of common units in i3 Verticals, LLC510,016  —  (510,016) —  2,597  —  (2,597) —  
Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis—  —  —  —  596  —  —  596  
Exercise of equity-based awards31,125  $—  —  —  2  —  —  2  
Equity component of exchangeable notes, net of issuance costs and deferred taxes—  $—  —  —  27,569  —  —  27,569  
Purchases of exchangeable note hedges—  $—  —  —  (28,676) —  —  (28,676) 
Issuance of warrants—  $—  —  —  14,669  —  —  14,669  
Balance at March 31, 202015,038,918  $1  12,411,621  $1  $104,122  $(1,016) $63,673  $166,781  
See Notes to the Interim Condensed Consolidated Financial Statements
6

i3 Verticals, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED) (CONTINUED)
(In thousands, except share amounts)

Class A Common StockClass B Common StockAdditional Paid-In CapitalAccumulated Earnings (Deficit)Non-Controlling InterestTotal Equity
SharesAmountSharesAmount
Balance at September 30, 20189,112,042  $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, 20189,108,032  $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, LLC101,642  —  (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, 20199,192,030  $1  17,112,164  $2  $41,284  $(188) $73,636  $114,735  

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,
20202019
Cash flows from operating activities:
Net income (loss)$3,853  $1,129  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization9,193  7,450  
Equity-based compensation4,634  2,314  
Provision for doubtful accounts64  58  
Amortization of debt discount and issuance costs838  465  
Debt issuance costs write offs141    
Amortization of capitalized client acquisition costs184    
Loss on disposal of assets  8  
(Benefit from) provision for deferred income taxes(2,668)   
Increase in non-cash contingent consideration expense from original estimate12  2,153  
Changes in operating assets:
Accounts receivable2,087  2,808  
Prepaid expenses and other current assets(617) (584) 
Other assets(1,308) (1,259) 
Changes in operating liabilities:
Accounts payable(110) (755) 
Accrued expenses and other current liabilities(2,464) 852  
Deferred revenue(572) (1,612) 
Other long-term liabilities(65) (43) 
Contingent consideration paid in excess of original estimates(4,355) (1,560) 
Net cash provided by operating activities8,847  11,424  
Cash flows from investing activities:
Expenditures for property and equipment(923) (312) 
Expenditures for capitalized software(1,238) (782) 
Purchases of merchant portfolios and residual buyouts(1,597) (2,582) 
Acquisitions of businesses, net of cash acquired  (41,224) 
Acquisition of other intangibles(123) (45) 
Net cash used in investing activities(3,881) (44,945) 
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,
20202019
Cash flows from financing activities:
Proceeds from revolving credit facility80,991  52,500  
Payments of revolving credit facility(203,135) (12,000) 
Proceeds from borrowings on exchangeable notes138,000    
Payments for purchase of exchangeable senior note hedges(28,676)   
Proceeds from issuance of warrants14,669    
Payments of notes payable to banks  (2,500) 
Payment of debt issuance costs(5,071)   
Cash paid for contingent consideration(2,122) (2,634) 
Payments for required distributions to members for tax obligations(3) (1,023) 
Proceeds from stock option exercises474    
Payments for employee's tax withholdings from net settled stock option exercises(121)   
Net cash (used in) provided by financing activities(4,994) 34,343  
Net increase (decrease) in cash, cash equivalents, and restricted cash(28) 822  
Cash, cash equivalents, and restricted cash at beginning of period3,200  1,237  
Cash, cash equivalents, and restricted cash at end of period$3,172  $2,059  
Supplemental disclosure of cash flow information:
Cash paid for interest$3,281  $1,557  
Cash paid for income taxes$262  $1,925  
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Condensed Consolidated Balance Sheets to that shown in the Condensed Consolidated Statements of Cash Flows:
Six months ended March 31,
20202019
Beginning balance
Cash and cash equivalents$1,119  $572  
Restricted cash2,081  665  
Total cash, cash equivalents, and restricted cash$3,200  $1,237  
Ending balance
Cash and cash equivalents$1,591  $1,393  
Restricted cash1,581  666  
Total cash, cash equivalents, and restricted cash$3,172  $2,059  
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 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 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 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.
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.
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.
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.
As of March 31, 2020, i3 Verticals, Inc. owned 54.8% of the economic interest in i3 Verticals, LLC. As of March 31, 2020, the Continuing Equity Owners owned Common Units in i3 Verticals, LLC representing approximately 45.2% 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 45.2% of the voting power in the Company. Combining the Class A common stock and Class B common stock, the Continuing Equity Owners hold approximately 46.0% of the economic interest and voting power in i3 Verticals, Inc.

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, 2020 and for the three and six months ended March 31, 2020 and 2019. The results of operations for the three and six months ended March 31, 2020 and 2019 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
11


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
Company's consolidated financial statements and related footnotes for the years ended September 30, 2019 and 2018, 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.
Inventories
Inventories consist of point-of-sale equipment to be sold to clients and are stated at the lower of cost, determined on a weighted average basis, or net realizable value. Inventories were $1,662 and $1,294 at March 31, 2020 and September 30, 2019, respectively, and are included within prepaid expenses and other current assets on the accompanying condensed consolidated balance sheets.
Notes Receivable
Notes receivable consist of loans made to unrelated entities. Notes receivable were $1,195 and $195 at March 31, 2020 and September 30, 2019, respectively, and are included within other 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. No acquisitions were completed during the six months ended March 31, 2020.
12


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
Revenue Recognition and Deferred Revenue
For the six months ended March 31, 2020, revenue is recognized as each performance obligation is satisfied, in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). The Company accrues for rights of refund, processing errors or penalties, or other related allowances based on historical experience. The Company utilized the portfolio approach practical expedient within ASC 606-10-10-4 Revenue from Contracts with Customers—Objectives and the significant financing component practical expedient within ASC 606-10-32-18 Revenue from Contracts with Customers—The Existence of a Significant Financing Component in the Contract in performing the analysis. The Company adopted ASC 606 on October 1, 2019, using the modified retrospective method and applying the standard to all contracts not completed on the date of adoption. Results for the reporting period beginning October 1, 2019 are presented under ASC 606, while prior period amounts continue to be reported in accordance with the Company's historic accounting practices under previous guidance.
The majority of the Company's revenue for the six months ended March 31, 2020 and 2019 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 or a specified per transaction amount, depending on the card type. The Company frequently enters into agreements with client under which the client engages the Company to provide both payment authorization services and transaction settlement services for all of the cardholder transactions of the client, regardless of which issuing bank and card network to which the transaction relates. The Company’s core performance obligations are to stand ready to provide continuous access to the Company’s payment authorization services and transaction settlement services in order to be able to process as many transactions as its clients require on a daily basis over the contract term. These services are stand ready obligations, as the timing and quantity of transactions to be processed is not determinable. Under a stand-ready obligation, the Company’s performance obligation is defined by each time increment rather than by the underlying activities satisfied over time based on days elapsed. Because the service of standing ready is substantially the same each day and has the same pattern of transfer to the client, the Company has determined that its stand-ready performance obligation comprises a series of distinct days of service. Discount fees are recognized each day based on the volume or transaction count at the time the merchants’ transactions are processed.
The Company follows the requirements of ASC 606-10-55 Revenue from Contracts with Customers—Principal versus Agent Considerations, which states that the determination of whether a company should recognize revenue based on the gross amount billed to a client or the net amount retained is a matter of judgment that depends on the facts and circumstances of the arrangement. The determination of gross versus net recognition of revenue requires judgment that depends on whether the Company controls the good or service before it is transferred to the merchant or whether the Company is acting as an agent of a third party. The assessment is provided separately for each performance obligation identified. Under its agreements, the Company incurs interchange and network pass-through charges from the third-party card issuers and card networks, respectively, related to the provision of payment authorization services. The Company has determined that it is acting as an agent with respect to these payment authorization services, based on the following factors: (1) the Company has no discretion over which card issuing bank will be used to process a transaction and is unable to direct the activity of the merchant to another card issuing bank, and (2) interchange and card network rates are pre-established by the card issuers or card networks, and the Company has no latitude in determining these fees. Therefore, revenue allocated to the payment authorization performance obligation is presented net of interchange and card network fees paid to the card issuing banks and card networks, respectively, for the six months ended March 31, 2020, subsequent to the adoption of ASC 606.
13


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
With regards to the Company's discount fees, generally, where 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 equal to the full amount of the discount charged to the merchant, less interchange and network fees. Revenues generated from merchant portfolios where 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 network fees as well as third-party processing costs directly attributable to processing and bank sponsorship costs.
Revenues are also derived from a variety of fixed transaction or service fees, including authorization fees, convenience fees, statement fees, annual fees, gateway fees, which are charged for accessing our payment and software solutions, 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. Revenue from fixed transactions, which principally relates to the sale of equipment, is recognized upon transfer of ownership and delivery to the client, after which there are no further performance obligations.
Revenues from sales of the Company’s software are recognized when the related performance obligations are satisfied. Sales of software licenses are categorized into one of two categories of intellectual property in accordance with ASC 606, functional or symbolic. The key distinction is whether the license represents a right to use (functional) or a right to access (symbolic) intellectual property. The Company generates sales of one-time software licenses, which is functional intellectual property. Revenue from functional intellectual property is recognized at a point in time, when delivered to the client. The Company also offers access to its software under software-as-a-service (“SaaS”) arrangements, which represent services arrangements. Revenue from SaaS arrangements is recognized over time, over the term of the agreement.
Arrangements may contain multiple performance obligations, such as payment authorization services, transaction settlement services, hardware, software products, maintenance, and professional installation and training services. Revenues are allocated to each performance obligation based on the standalone selling price of each good or service. The selling price for a deliverable is based on standalone selling price, if available, the adjusted market assessment approach, estimated cost plus margin approach, or residual approach. 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, client segment pricing strategies and the product life cycle. In arrangements with multiple performance obligations, the Company determines allocation of the transaction price at inception of the arrangement and uses the standalone selling prices for the majority of our revenue recognition.
Revenues from sales of the Companys combined hardware and software element are recognized when each performance obligation has been satisfied 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 professional services, including training, installation, and repair services are recognized as revenue as these services are performed.
14


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
The tables below present a disaggregation of the Company's revenue from contracts with clients by product by segment. Refer to Note 11 for discussion of the Company's segments. The Company's products are defined as follows:
Payments Includes discount fees, gateway fees and other related fixed transaction or service fees.
Other — Includes sales of software, sales of equipment, professional services and other revenues.

For the Three Months Ended March 31, 2020
Merchant ServicesProprietary Software and PaymentsOtherTotal
Payments revenue$20,863  $6,050  $(527) $26,386  
Other revenue4,155  8,641  (4) 12,792  
Total revenue$25,018  $14,691  $(531) $39,178  

For the Three Months Ended March 31, 2019
Merchant Services