UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): November 19, 2020 (November 19, 2020 )
(Exact name of registrant as specified in its charter)
(State or Other Jurisdiction of Incorporation) | (Commission File Number) | (I.R.S. Employer Identification No.) | ||||||||||||
(Address of principal executive offices) | (Zip Code) | |||||||||||||
(615 ) 465-4487
(Registrant’s telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | |||||
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | |||||
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d- 2(b)) | |||||
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e- 4(c)) | |||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company. ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
As provided in General Instruction B.2 of Form 8-K, the information contained in this Current Report on Form 8-K (including the exhibits hereto) shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall they be deemed to be incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such a filing.
Item 2.02. Results of Operations and Financial Condition.
On November 19, 2020, i3 Verticals, Inc. (the “Company”) issued a press release announcing the results of its operations for the three months and year ended September 30, 2020. A copy of the press release is furnished as Exhibit 99.1 hereto and is hereby incorporated by reference into this Item 2.02.
Item 7.01. Regulation FD Disclosure.
The Company has also prepared a supplemental presentation (the “Supplemental Presentation”) containing segment financial performance information for the three months and year ended September 30, 2020. A copy of the Supplemental Presentation is furnished as Exhibit 99.2 hereto and is hereby incorporated by reference into this Item 7.01. A copy of the Supplemental Presentation is also available on the Investors section of the Company’s website.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits:
| Exhibit No. | Description | |||||||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: November 19, 2020
i3 VERTICALS, INC. | ||||||||
By: | /s/ Clay Whitson | |||||||
Name: | Clay Whitson | |||||||
Title: | Chief Financial Officer | |||||||
i3 VERTICALS REPORTS FOURTH QUARTER AND FULL FISCAL YEAR 2020 FINANCIAL RESULTS
Announces Public Sector Acquisition and Inducement Equity Grants
NASHVILLE, Tenn. (November 19, 2020) – i3 Verticals, Inc. (Nasdaq: IIIV) (“i3 Verticals” or the “Company”) today reported its financial results for the fiscal fourth quarter and year ended September 30, 2020.
Greg Daily, Chairman and CEO of i3 Verticals, commented, “We are pleased with our fourth quarter results and the sequential improvement we saw from the third quarter. We continued to execute on our M&A strategy and have completed seven acquisitions since July 1, 2020, all of which are software companies. Our financial results continued to improve, and our payment volume continued to recover, despite COVID-19 related challenges in specific verticals such as Education. We are confident in our ability to deliver solid financial results in 2021 and to capitalize on the significant opportunities ahead of us.
“We are also excited that on November 17, 2020, we closed our most recent acquisition, ImageSoft, which further enhances our product offering to the Public Sector market. ImageSoft sells products that eliminate paper-based systems by creating integrated electronic workflows for courts and government agencies. ImageSoft is an ideal strategic fit, and we are very optimistic about how they will help us deliver cutting-edge products to our Public Sector customers.”
Highlights for the fiscal fourth quarter and full fiscal year of 2020 vs. 2019
•Fourth quarter revenue was $38.3 million, a decrease of 65% over the prior year's fourth quarter; Full year revenue was $150.1 million, a decrease of 60% over the prior year. Results for 2020 reflect the adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers1.
•Fourth quarter adjusted net revenue2, which excludes acquisition revenue adjustments and interchange and related network fees, was $38.4 million, a decrease of 5% over the prior year's fourth quarter; Full year adjusted net revenue2 was $151.0 million, an increase of 10% over the prior year.
•Fourth quarter net loss was $2.0 million; Full year net loss was $1.0 million.
•Fourth quarter net loss attributable to i3 Verticals, Inc. was $0.7 million; Full year net loss attributable to i3 Verticals, Inc. was $0.4 million.
•Fourth quarter adjusted EBITDA2 was $9.7 million, a decrease of 17% over the prior year's fourth quarter; Full year adjusted EBITDA2 was $38.6 million, a decrease of less than 1% over the prior year.
•Fourth quarter adjusted EBITDA2 as a percentage of adjusted net revenue2 was 25%, compared to 29% in the prior year's fourth quarter; Full year adjusted EBITDA2 as a percentage of adjusted net revenue2 was 26%, compared to 28% in the prior year.
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•Fourth quarter diluted net loss per share available to Class A common stock was $0.06, compared to $0.07 in the prior year's fourth quarter; Full year diluted net loss per share available to Class A common stock was $0.03, compared to $0.29 in the prior year.
•Fourth quarter and full year ended September 30, 2020 pro forma adjusted diluted earnings per share2, which gives pro forma effect to the Company's going forward effective tax rate, was $0.20 and $0.77, respectively, compared to $0.24 and $0.83 for the fourth quarter and full year ended September 30, 2019, respectively. Integrated payments3 were 57% and 55% of payment volume for the three months and full year ended September 30, 2020, respectively.
•At September 30, 2020, the ratio of consolidated total debt-to-EBITDA, as defined in the Company's Senior Secured Credit Facility, was 2.59x.
•As previously announced in our press release dated October 5, 2020, the Company completed the acquisition of three companies that strengthen its vertical focus. The first acquisition is within the Company’s Public Sector vertical and provides software services to public safety and law enforcement customers. The second acquisition is within the Company’s Healthcare vertical and offers medical billing and other software. The final acquisition offers proprietary technology that will augment the Company’s existing platform across several verticals. The aggregate purchase price was $59.6 million in cash and an amount of contingent consideration, which is still being valued.
1.Effective October 1, 2019, our revenues are presented net of interchange and network fees in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. This change in presentation affected our reported revenues and operating expenses for the fiscal fourth quarter and year ended September 30, 2020, by the same amount and had no effect on our income from operations.
2.Represents a non-GAAP financial measure. For additional information (including reconciliation information), see the attached schedules to this release.
3.Integrated payments represents payment transactions that are generated in situations where payment technology is embedded within the Company's own proprietary software, a client’s software or critical business process.
Acquisition of ImageSoft
On November 17, 2020, the Company completed the acquisition of substantially all of the assets of ImageSoft, Inc. for a purchase price of $40.0 million in cash and an amount of contingent consideration, which is still being valued. They sell a combination of proprietary and third-party software, which eliminates paper-based systems by creating integrated electronic workflows for courts and government agencies.
In accordance with Nasdaq Listing Rule 5635(c)(4), the Company has granted equity awards under its 2020 Acquisition Equity Incentive Plan to the new employees who agreed to join the Company in connection with the November 17, 2020 acquisition. The Company granted options to purchase a total of 250,000 shares of the Company’s Class A common stock to 140 employees as a material inducement to enter into employment with the Company. These stock options will vest ratably over three years, subject to the employees’ continued service to the Company through each applicable vesting date. The stock options have an exercise price equal to $25.31, the closing price per share of the Company’s Class A common stock as reported by Nasdaq on the date of closing.
2021 Outlook
The COVID-19 pandemic has created significant uncertainty in the economy and the extent to which the COVID-19 pandemic will impact the Company's future results is difficult to reasonably estimate at this time. Therefore, the Company is not providing a financial outlook for the fiscal year ending September 30, 2021.
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Conference Call
The Company will host a conference call on Friday, November 20, 2020, at 8:30 a.m. ET, to discuss financial results and operations. To listen to the call live via telephone, participants should dial (929) 477-0577 approximately 10 minutes prior to the start of the call. A telephonic replay will be available from 11:30 a.m. ET on November 20, 2020, through November 27, 2020, by dialing (719) 457-0820 and entering Confirmation Code 4271451.
To listen to the call live via webcast, participants should visit the “Investors” section of the Company’s website, www.i3verticals.com, and go to the “Events & Presentations” page approximately 10 minutes prior to the start of the call. The online replay will be available on this page of the Company’s website beginning shortly after the conclusion of the call and will remain available for 30 days.
Non-GAAP Measures
This press release contains information prepared in conformity with GAAP as well as non-GAAP information. It is management’s intent to provide non-GAAP financial information to enhance understanding of the Company's consolidated financial information as prepared in accordance with GAAP. This non-GAAP information should be considered by the reader in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Each non-GAAP financial measure and the most directly comparable GAAP financial measure are presented so as not to imply that more emphasis should be placed on the non-GAAP measure. The non-GAAP financial information presented may be determined or calculated differently by other companies.
Additional information about non-GAAP financial measures, including, but not limited to, adjusted net revenue, pro forma adjusted net income, adjusted EBITDA and pro forma adjusted diluted EPS, and a reconciliation of those measures to the most directly comparable GAAP measures is included on pages 10 to 13 in the financial schedules of this release.
About i3 Verticals
Helping drive the convergence of software and payments, i3 Verticals delivers integrated payment and software solutions to small- and medium-sized businesses (“SMBs”) and other organizations in strategic vertical markets, such as education, non-profit, the public sector, and healthcare and to the business-to-business payments market. With a broad suite of payment and software solutions that address the specific needs of its clients in each strategic vertical market, i3 Verticals processed approximately $14.4 billion in total payment volume for the 12 months ended September 30, 2020.
Forward-Looking Statements
This release contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact or relating to present facts or current conditions included in this release are forward-looking statements, including any statements of a general economic or industry specific nature. Forward-looking statements give the Company's current expectations and projections relating to its financial condition, results of operations, guidance, plans, objectives, future performance and business. You generally can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “could have,” “exceed,” “significantly,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.
The forward-looking statements contained in this release are based on assumptions that we have made in light of the Company's industry experience and its perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you review and consider information presented herein, you should understand that these statements are not guarantees of future performance or results. They depend upon future events and are subject to risks,
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uncertainties and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect the Company's actual future performance or results and cause them to differ materially from those anticipated in the forward-looking statements. Certain of these factors and other risks are discussed in the Company's filings with the U.S. Securities and Exchange Commission and include, but are not limited to: (i) the anticipated impact to the Company’s business operations, payment volume and volume attrition due to the global pandemic of a novel strain of the coronavirus (COVID-19); (ii) the Company’s indebtedness and the ability to maintain compliance with the financial covenants in the Company’s senior secured credit facility in light of the impacts of the COVID-19 pandemic; (iii) the ability to meet the Company’s liquidity needs in light of the impacts of the COVID-19 pandemic; (iv) the ability to raise additional funds on terms acceptable to us, if at all, whether debt, equity or a combination thereof; (v) the triggering of impairment testing of the Company’s fair-valued assets, including goodwill and intangible assets, in the event of a decline in the price of the Company’s Class A common stock; (vi) the ability to generate revenues sufficient to maintain profitability and positive cash flow; (vii) competition in the Company's industry and the ability to compete effectively; (viii) the dependence on non-exclusive distribution partners to market the Company's products and services; (ix) the ability to keep pace with rapid developments and changes in the Company's industry and provide new products and services; (x) liability and reputation damage from unauthorized disclosure, destruction or modification of data or disruption of the Company's services; (xi) technical, operational and regulatory risks related to the Company's information technology systems and third-party providers’ systems; (xii) reliance on third parties for significant services; (xiii) exposure to economic conditions and political risks affecting consumer and commercial spending, including the use of credit cards; (xiv) the ability to increase the Company's existing vertical markets, expand into new vertical markets and execute the Company's growth strategy; (xv) the ability to successfully identify acquisition targets, complete those acquisitions and effectively integrate those acquisitions into the Company's services; (xvi) potential degradation of the quality of the Company's products, services and support; (xvii) the ability to retain clients, many of which are small- and medium-sized businesses, which can be difficult and costly to retain; (xviii) the Company's ability to successfully manage its intellectual property; (xix) the ability to attract, recruit, retain and develop key personnel and qualified employees; (xx) risks related to laws, regulations and industry standards; (xxi) operating and financial restrictions imposed by the Company's senior secured credit facility; (xxii) risks related to the accounting method for the Company’s 1.0% Exchangeable Senior Notes due February 15, 2025 (the “Exchangeable Notes”); (xxiii) the ability to raise the funds necessary to settle exchanges of the Exchangeable Notes or to repurchase the Exchangeable Notes upon a fundamental change; (xxiv) risks related to the conditional exchange feature of the Exchangeable Notes; and (xxv) the risk factors included in the Company's Annual Report on Form 10-K for the year ended September 30, 2019 and in our subsequent filings. Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove incorrect, the Company's actual results may vary in material respects from those projected in these forward-looking statements.
Any forward-looking statement made by us in this release speaks only as of the date of this release. Factors or events that could cause the Company's actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. The Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
Contacts: | |||||
Clay Whitson | |||||
Chief Financial Officer | |||||
(615) 988-9890 | |||||
cwhitson@i3verticals.com | |||||
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i3 Verticals, Inc. Consolidated Statements of Operations
($ in thousands, except share and per share amounts)
| Three months ended September 30, | Year ended September 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | |||||||||||||||||||||||||||||||||
| Revenue | $ | 38,272 | $ | 108,562 | (65)% | $ | 150,134 | $ | 376,307 | (60)% | |||||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||||||||
Interchange and network fees(1) | 69,090 | (100)% | 242,867 | (100)% | |||||||||||||||||||||||||||||||
| Other costs of services | 12,356 | 12,823 | (4)% | 47,230 | 44,237 | 7% | |||||||||||||||||||||||||||||
| Selling general and administrative | 20,117 | 18,438 | 9% | 78,323 | 62,860 | 25% | |||||||||||||||||||||||||||||
| Depreciation and amortization | 4,549 | 4,689 | (3)% | 18,217 | 16,564 | 10% | |||||||||||||||||||||||||||||
| Change in fair value of contingent consideration | 52 | 1,653 | (97)% | (1,409) | 3,389 | n/m | |||||||||||||||||||||||||||||
| Total operating expenses | 37,074 | 106,693 | (65)% | 142,361 | 369,917 | (62)% | |||||||||||||||||||||||||||||
| Income from operations | 1,198 | 1,869 | (36)% | 7,773 | 6,390 | 22% | |||||||||||||||||||||||||||||
| Other expenses | |||||||||||||||||||||||||||||||||||
| Interest expense, net | 2,305 | 2,017 | 14% | 8,926 | 6,004 | 49% | |||||||||||||||||||||||||||||
| Other expense | 1,792 | — | n/m | 2,621 | — | n/m | |||||||||||||||||||||||||||||
| Total other expenses | 4,097 | 2,017 | 103% | 11,547 | 6,004 | 92% | |||||||||||||||||||||||||||||
| (Loss) income before income taxes | (2,899) | (148) | 1,859% | (3,774) | 386 | (1,078)% | |||||||||||||||||||||||||||||
| Benefit from income taxes | (877) | (175) | 401% | (2,795) | (177) | 1,479% | |||||||||||||||||||||||||||||
| Net (loss) income | (2,022) | 27 | (7589)% | (979) | 563 | (274)% | |||||||||||||||||||||||||||||
| Net (loss) income attributable to non-controlling interest | (1,371) | 957 | n/m | (560) | 3,608 | n/m | |||||||||||||||||||||||||||||
| Net loss attributable to i3 Verticals, Inc. | $ | (651) | $ | (930) | (30)% | $ | (419) | $ | (3,045) | (86)% | |||||||||||||||||||||||||
Net loss per share available to Class A common stock: | |||||||||||||||||||||||||||||||||||
| Basic | $ | (0.04) | $ | (0.07) | $ | (0.03) | $ | (0.29) | |||||||||||||||||||||||||||
| Diluted | $ | (0.06) | $ | (0.07) | $ | (0.03) | $ | (0.29) | |||||||||||||||||||||||||||
Weighted average shares of Class A common stock outstanding(1): | |||||||||||||||||||||||||||||||||||
| Basic | 15,780,082 | 14,159,957 | 14,833,378 | 10,490,981 | |||||||||||||||||||||||||||||||
| Diluted | 28,069,996 | 14,159,957 | 27,429,801 | 10,490,981 | |||||||||||||||||||||||||||||||
n/m = not meaningful
__________________________
1.Effective October 1, 2019, our revenues are presented net of interchange and network fees in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers.
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i3 Verticals, Inc. Financial Highlights
(Unaudited)
($ in thousands, except per share amounts)
| Three months ended September 30, | Year ended September 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||||||||||||||
| Adjusted net revenue (non-GAAP) | $ | 38,426 | $ | 40,565 | (5)% | $ | 150,958 | $ | 137,597 | 10% | |||||||||||||||||||||||||
| Adjusted EBITDA (non-GAAP) | 9,682 | 11,726 | (17)% | 38,557 | 38,745 | —% | |||||||||||||||||||||||||||||
| Pro forma adjusted diluted earnings per share (non-GAAP) | $ | 0.20 | $ | 0.24 | (17)% | $ | 0.77 | $ | 0.83 | (7)% | |||||||||||||||||||||||||
i3 Verticals, Inc. Supplemental Volume Information
(Unaudited)
($ in thousands)
| Three months ended September 30, | Year ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Payment volume(1) | $ | 3,979,593 | $ | 3,848,579 | $ | 14,377,148 | $ | 13,144,458 | |||||||||||||||
__________________________
1.Payment volume is the net dollar value of both 1) Visa, Mastercard and other payment network transactions processed by the Company's clients and settled to clients by us and 2) ACH transactions processed by the Company's clients and settled to clients by the Company.
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i3 Verticals, Inc. Segment Summary
(Unaudited)
($ in thousands)
| For the Three Months Ended September 30, 2020 | |||||||||||||||||||||||
| Merchant Services | Proprietary Software and Payments | Other | Total | ||||||||||||||||||||
| Revenue | $ | 24,759 | $ | 13,924 | $ | (411) | $ | 38,272 | |||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Other costs of services | 10,962 | 1,805 | (411) | 12,356 | |||||||||||||||||||
| Selling general and administrative | 6,276 | 7,335 | 6,506 | 20,117 | |||||||||||||||||||
| Depreciation and amortization | 2,774 | 1,603 | 172 | 4,549 | |||||||||||||||||||
| Change in fair value of contingent consideration | (400) | 452 | — | 52 | |||||||||||||||||||
| Income (loss) from operations | $ | 5,147 | $ | 2,729 | $ | (6,678) | $ | 1,198 | |||||||||||||||
| Payment volume | $ | 3,614,766 | $ | 364,827 | $ | — | $ | 3,979,593 | |||||||||||||||
For the Year Ended September 30, 2020(1) | |||||||||||||||||||||||
| Merchant Services | Proprietary Software and Payments | Other | Total | ||||||||||||||||||||
| Revenue | $ | 100,949 | $ | 50,953 | $ | (1,768) | $ | 150,134 | |||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Other costs of services | 43,940 | 5,057 | (1,767) | 47,230 | |||||||||||||||||||
| Selling general and administrative | 26,376 | 28,187 | 23,760 | 78,323 | |||||||||||||||||||
| Depreciation and amortization | 11,796 | 5,723 | 698 | 18,217 | |||||||||||||||||||
| Change in fair value of contingent consideration | (4,691) | 3,282 | — | (1,409) | |||||||||||||||||||
| Income (loss) from operations | $ | 23,528 | $ | 8,704 | $ | (24,459) | $ | 7,773 | |||||||||||||||
| Payment volume | $ | 13,553,263 | $ | 823,885 | $ | — | $ | 14,377,148 | |||||||||||||||
________
1.Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation.
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i3 Verticals, Inc. Segment Summary (continued)
(Unaudited)
($ in thousands)
For the Three Months Ended September 30, 2019(1) | |||||||||||||||||||||||
| Merchant Services | Proprietary Software and Payments | Other | Total | ||||||||||||||||||||
| Revenue | $ | 95,584 | $ | 12,978 | $ | — | $ | 108,562 | |||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Interchange and network fees | 66,940 | 2,150 | — | 69,090 | |||||||||||||||||||
| Other costs of services | 11,713 | 1,110 | — | 12,823 | |||||||||||||||||||
| Selling general and administrative | 7,129 | 5,916 | 5,393 | 18,438 | |||||||||||||||||||
| Depreciation and amortization | 3,223 | 1,306 | 160 | 4,689 | |||||||||||||||||||
| Change in fair value of contingent consideration | 895 | 758 | — | 1,653 | |||||||||||||||||||
| Income (loss) from operations | $ | 5,684 | $ | 1,738 | $ | (5,553) | $ | 1,869 | |||||||||||||||
| Payment volume | $ | 3,666,707 | $ | 181,872 | $ | — | $ | 3,848,579 | |||||||||||||||
For the Year Ended September 30, 2019(1) | |||||||||||||||||||||||
| Merchant Services | Proprietary Software and Payments | Other | Total | ||||||||||||||||||||
| Revenue | $ | 338,968 | $ | 37,339 | $ | — | $ | 376,307 | |||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Interchange and network fees | 236,170 | 6,697 | — | 242,867 | |||||||||||||||||||
| Other costs of services | 41,487 | 2,750 | — | 44,237 | |||||||||||||||||||
| Selling general and administrative | 27,275 | 17,059 | 18,526 | 62,860 | |||||||||||||||||||
| Depreciation and amortization | 12,221 | 3,790 | 553 | 16,564 | |||||||||||||||||||
| Change in fair value of contingent consideration | (477) | 3,866 | — | 3,389 | |||||||||||||||||||
| Income (loss) from operations | $ | 22,292 | $ | 3,177 | $ | (19,079) | $ | 6,390 | |||||||||||||||
| Payment volume | $ | 12,533,107 | $ | 611,351 | $ | — | $ | 13,144,458 | |||||||||||||||
________
1.Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation.
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i3 Verticals, Inc. Consolidated Balance Sheets
($ in thousands, except share and per share amounts)
| September 30, | September 30, | ||||||||||
| 2020 | 2019 | ||||||||||
| (unaudited) | |||||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 15,568 | $ | 1,119 | |||||||
| Accounts receivable, net | 17,538 | 15,335 | |||||||||
| Prepaid expenses and other current assets | 4,869 | 4,117 | |||||||||
| Total current assets | 37,975 | 20,571 | |||||||||
| Property and equipment, net | 5,339 | 5,026 | |||||||||
| Restricted cash | 5,033 | 2,081 | |||||||||
| Capitalized software, net | 16,989 | 15,454 | |||||||||
| Goodwill | 187,005 | 168,284 | |||||||||
| Intangible assets, net | 109,233 | 107,419 | |||||||||
| Deferred tax asset | 36,755 | 28,138 | |||||||||
| Other assets | 5,197 | 2,329 | |||||||||
| Total assets | $ | 403,526 | $ | 349,302 | |||||||
| Liabilities and equity | |||||||||||
| Liabilities | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | 3,845 | 3,438 | |||||||||
| Accrued expenses and other current liabilities | 24,064 | 21,560 | |||||||||
| Deferred revenue | 10,986 | 10,237 | |||||||||
| Total current liabilities | 38,895 | 35,235 | |||||||||
| Long-term debt, less current portion and debt issuance costs, net | 90,758 | 139,298 | |||||||||
| Long-term tax receivable agreement obligations | 27,565 | 23,204 | |||||||||
| Other long-term liabilities | 6,140 | 9,124 | |||||||||
| Total liabilities | 163,358 | 206,861 | |||||||||
| Commitments and contingencies | |||||||||||
| Stockholders' equity | |||||||||||
Preferred stock, par value $0.0001 per share,10,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2020 and 2019 | — | — | |||||||||
Class A common stock, par value $0.0001 per share,150,000,000 shares authorized; 18,864,143 and 14,444,115 shares issued and outstanding as of September 30, 2020 and 2019, respectively | 2 | 1 | |||||||||
Class B common stock, par value $0.0001 per share,40,000,000 shares authorized; 11,900,621 and 12,921,637 shares issued and outstanding as of September 30, 2020 and 2019, respectively | 1 | 1 | |||||||||
| Additional paid-in-capital | 157,598 | 82,380 | |||||||||
| Accumulated deficit | (2,023) | (2,309) | |||||||||
| Total stockholders' equity | 155,578 | 80,073 | |||||||||
| Non-controlling interest | 84,590 | 62,368 | |||||||||
| Total equity | 240,168 | 142,441 | |||||||||
| Total liabilities and stockholders' equity | $ | 403,526 | $ | 349,302 | |||||||
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IIIV Reports Fourth Quarter and Full Fiscal Year 2020 Financial Results
Page 10
November 19, 2020
i3 Verticals, Inc. Consolidated Cash Flow Data
($ in thousands)
| Year ended September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| (unaudited) | |||||||||||
| Net cash provided by operating activities | $ | 23,720 | $ | 26,597 | |||||||
| Net cash used in investing activities | $ | (35,431) | $ | (143,728) | |||||||
| Net cash provided by financing activities | $ | 29,112 | $ | 119,094 | |||||||
Reconciliation of GAAP to Non-GAAP Financial Measures
The Company believes that non-GAAP financial measures are important to enable investors to understand and evaluate its ongoing operating results. Accordingly, i3 Verticals includes non-GAAP financial measures when reporting its financial results to shareholders and potential investors in order to provide them with an additional tool to evaluate the Company’s ongoing business operations. i3 Verticals believes that the non-GAAP financial measures are representative of comparative financial performance that reflects the economic substance of i3 Verticals’ current and ongoing business operations.
Although non-GAAP financial measures are often used to measure the Company's operating results and assess its financial performance, they are not necessarily comparable to similarly titled measures of other companies due to potential inconsistencies in the method of calculation. i3 Verticals believes that its provision of non-GAAP financial measures provides investors with important key financial performance indicators that are utilized by management to assess the Company's operating results, evaluate the business and make operational decisions on a prospective, going-forward basis. Hence, management provides disclosure of non-GAAP financial measures to give shareholders and potential investors an opportunity to see i3 Verticals as viewed by management, to assess i3 Verticals with some of the same tools that management utilizes internally and to be able to compare such information with prior periods. i3 Verticals believes that inclusion of non-GAAP financial measures provides investors with additional information to help them better understand its financial statements just as management utilizes these non-GAAP financial measures to better understand the business, manage budgets and allocate resources.
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IIIV Reports Fourth Quarter and Full Fiscal Year 2020 Financial Results
Page 11
November 19, 2020
i3 Verticals, Inc. Reconciliation of GAAP Net Income to Non-GAAP Pro Forma Adjusted Net Income and Non-GAAP Adjusted EBITDA
(Unaudited)
($ in thousands)
| Three months ended September 30, | Year ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net (loss) income attributable to i3 Verticals, Inc. | $ | (651) | $ | (930) | $ | (419) | $ | (3,045) | |||||||||||||||
| Net (loss) income attributable to non-controlling interest | (1,371) | 957 | (560) | 3,608 | |||||||||||||||||||
Non-GAAP Adjustments: | |||||||||||||||||||||||
| (Benefit from) provision for income taxes | (877) | (175) | (2,795) | (177) | |||||||||||||||||||
Financing-related expenses(1) | 43 | — | 286 | — | |||||||||||||||||||
Non-cash change in fair value of contingent consideration(2) | 52 | 1,653 | (1,409) | 3,389 | |||||||||||||||||||
Equity-based compensation(3) | 3,002 | 2,002 | 10,452 | 6,124 | |||||||||||||||||||
Acquisition revenue adjustments(4) | 154 | 1,093 | 824 | 4,157 | |||||||||||||||||||
Acquisition-related expenses(5) | 508 | 412 | 1,811 | 1,859 | |||||||||||||||||||
Acquisition intangible amortization(6) | 3,624 | 3,819 | 14,497 | 13,570 | |||||||||||||||||||
Non-cash interest expense(7) | 1,429 | 102 | 3,844 | 873 | |||||||||||||||||||
Other taxes(8) | 176 | 8 | 365 | 262 | |||||||||||||||||||
Other expenses related to adjustments of liabilities under Tax Receivable Agreement(9) | 323 | — | 323 | — | |||||||||||||||||||
Non-cash loss on Exchangeable Note repurchases(10) | 1,469 | — | 2,297 | — | |||||||||||||||||||
COVID-19 related expenses(11) | — | — | 239 | — | |||||||||||||||||||
| Non-GAAP pro forma adjusted income before taxes | 7,881 | 8,941 | 29,755 | 30,620 | |||||||||||||||||||
Pro forma taxes at effective tax rate(12) | (1,970) | (2,235) | (7,439) | (7,655) | |||||||||||||||||||
Pro forma adjusted net income(13) | $ | 5,911 | $ | 6,706 | $ | 22,316 | $ | 22,965 | |||||||||||||||
Cash interest expense, net(14) | 876 | 1,915 | 5,082 | 5,131 | |||||||||||||||||||
Pro forma taxes at effective tax rate(12) | 1,970 | 2,235 | 7,439 | 7,655 | |||||||||||||||||||
Depreciation, non-acquired intangible asset amortization and internally developed software amortization(15) | 925 | 870 | 3,720 | 2,994 | |||||||||||||||||||
| Adjusted EBITDA | $ | 9,682 | $ | 11,726 | $ | 38,557 | $ | 38,745 | |||||||||||||||
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IIIV Reports Fourth Quarter and Full Fiscal Year 2020 Financial Results
Page 12
November 19, 2020
________
1.Financing-related expenses includes expenses directly related to certain transactions as part of financing transactions.
2.Non-cash change in fair value of contingent consideration reflects the changes in management’s estimates of future cash consideration to be paid in connection with prior acquisitions from the amount estimated as of the later of the most recent balance sheet date forming the beginning of the income statement period or the original estimates made at the closing of the applicable acquisition.
3.Equity-based compensation expense consisted of $3,002 and $10,452 related to stock options issued under the Company's 2018 Equity Incentive Plan during the three months and year ended September 30, 2020, respectively, and $2,002 and $6,124 during the three months and year ended September 30, 2019, respectively.
4.Under GAAP, companies must adjust, as necessary, beginning balances of acquired deferred revenue to fair value as part of acquisition accounting as defined by GAAP. Acquisition revenue adjustments remove the effect of these adjustments to acquisition date fair value from acquisitions that have closed as of the date of this earnings release.
5.Acquisition-related expenses are the professional service and related costs directly related to the Company's acquisitions and are not part of its core performance.
6.Acquisition intangible amortization reflects amortization of intangible assets and software acquired through business combinations, acquired customer portfolios, acquired referral agreements and related asset acquisitions.
7.Non-cash interest expense reflects amortization of debt discount and debt issuance costs and any write-offs of debt issuance costs.
8.Other taxes consist of franchise taxes, commercial activity taxes, employer payroll taxes related to stock exercises and other non-income based taxes. Taxes related to salaries are not included.
9.Under our Tax Receivable Agreement we have a liability equal to 85% of certain deferred tax assets resulting from an increase in the tax basis of our investment in i3 Verticals, LLC. Other expenses related to adjustments of liabilities under our Tax Receivable Agreement relate to the remeasurement of the underlying deferred tax asset for changes in estimated income tax rates.
10.Non-cash loss on Exchangeable Note repurchases reflects the loss on retirement of debt the Company recorded during the relevant periods due to the carrying value exceeding the fair value of the repurchased portion of the 1.0% Exchangeable Senior Notes due 2025 (the “Exchangeable Notes”) at the dates of repurchases.
11.COVID-19 related expenses reflects incremental expenses incurred as a result of the COVID-19 pandemic, including employee severance expenses and legal expenses.
12.Pro forma corporate income tax expense is based on Non-GAAP adjusted income before taxes and is calculated using tax rates of 25.0% for 2020 and 2019, based on blended federal and state tax rates, considering the Tax Reform Act for 2018.
13.Pro forma adjusted net income assumes that all net income during the period is available to the holders of the Company’s Class A common stock.
14.Cash interest expense, net represents all interest expense net of interest income recorded on the Company's statement of operations other than non-cash interest expense, which represents amortization of debt discount and debt issuance costs and any write-offs of debt issuance costs.
15.Depreciation, non-acquired intangible asset amortization and internally developed software amortization reflects depreciation on the Company's property, plant and equipment, net, and amortization expense on its internally developed capitalized software.
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IIIV Reports Fourth Quarter and Full Fiscal Year 2020 Financial Results
Page 13
November 19, 2020
i3 Verticals, Inc. GAAP Diluted EPS and Non-GAAP Pro Forma Adjusted Diluted EPS
(Unaudited)
($ in thousands, except share and per share amounts)
| Three months ended September 30, | Year ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Diluted net loss available to Class A common stock per share | $ | (0.06) | $ | (0.07) | $ | (0.03) | $ | (0.29) | |||||||||||||||
Pro forma adjusted diluted earnings per share (non-GAAP)(1) | $ | 0.20 | $ | 0.24 | $ | 0.77 | $ | 0.83 | |||||||||||||||
Pro forma adjusted net income(2) | $ | 5,911 | $ | 6,706 | $ | 22,316 | $ | 22,965 | |||||||||||||||
Pro forma weighted average shares of adjusted diluted Class A common stock outstanding(3) | 29,390,270 | 28,485,235 | 28,814,308 | 27,640,495 | |||||||||||||||||||
__________
1.Pro forma adjusted diluted earnings per share is calculated using pro forma adjusted net income and the pro forma weighted average shares of adjusted diluted Class A common stock outstanding.
2.Pro forma adjusted net income assumes that all net income during the period is available to the holders of the Company's Class A common stock. Further, pro forma adjusted diluted earnings per share assumes that all Common Units in i3 Verticals, LLC and the associated non-voting Class B common stock were exchanged for Class A common stock at the beginning of the period on a one-for-one basis.
3.Pro forma weighted average shares of adjusted diluted Class A common stock outstanding include 12,289,914 and 12,596,423 weighted average outstanding shares of Class A common stock issuable upon the exchange of Common Units in i3 Verticals, LLC and 1,320,274 and 1,384,507 shares of unvested Class A common stock and options for the three months and year ended September 30, 2020, respectively. Pro forma weighted average shares of adjusted diluted Class A common stock outstanding include 12,921,637 outstanding shares of Class A common stock issuable upon the exchange of Common Units in i3 Verticals, LLC and 1,403,641 and 1,292,659 shares of unvested Class A common stock and options for the for the three months and year ended September 30, 2019, respectively.
i3 Verticals, Inc. Reconciliation of GAAP Revenue to Non-GAAP Adjusted Net Revenue
(Unaudited)
($ in thousands)
| Three months ended September 30, | Year ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Revenue | $ | 38,272 | $ | 108,562 | $ | 150,134 | $ | 376,307 | |||||||||||||||
Acquisition revenue adjustments(1) | 154 | 1,093 | 824 | 4,157 | |||||||||||||||||||
Interchange and network fees(2) | (69,090) | (242,867) | |||||||||||||||||||||
| Adjusted Net Revenue | $ | 38,426 | $ | 40,565 | $ | 150,958 | $ | 137,597 | |||||||||||||||
__________
1.Under GAAP, companies must adjust, as necessary, beginning balances of acquired deferred revenue to fair value as part of acquisition accounting as defined by GAAP. Acquisition revenue adjustments remove the effect of these adjustments to acquisition date fair value from acquisitions that have closed as of the date of this earnings release.
2.Effective October 1, 2019, our revenues are presented net of interchange and network fees in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers.
-END-
Q4 Fiscal 2020 Supplemental Information
Q4 Fiscal 2020 Segment Performance(1)(3) ($ in thousands) Three months ended September 30, Period over period 2020 2019 growth Adjusted Net Revenue(2) Merchant Services, excluding Purchased Portfolios $ 23,882 $ 27,421 (13)% Purchased Portfolios 877 1,273 (31)% Merchant Services 24,759 28,694 (14)% Proprietary Software and Payments 14,078 11,871 19% Other (411) — nm Total $ 38,426 $ 40,565 (5)% Adjusted EBITDA(2) Merchant Services $ 7,525 $ 9,810 (23)% Proprietary Software and Payments 4,937 4,845 2% Other (2,780) (2,929) 5% Total $ 9,682 $ 11,726 (17)% Adjusted EBITDA as a percentage of Net Revenue 25.2 % 28.9 % Volume Merchant Services $ 3,614,766 $ 3,666,707 (1)% Proprietary Software and Payments 364,827 181,872 101% Total $ 3,979,593 $ 3,848,579 3% 1. i3 Verticals has two segments, “Merchant Services,” which includes Purchased Portfolios (a subset of merchant contracts purchased in 2014 and 2017) and "Proprietary Software and Payments." i3 Verticals also has an “Other” category, which includes corporate overhead. 2. Adjusted Net Revenue and Adjusted EBITDA are non-GAAP financial measures. Refer to the following slides for the reconciliation of non-GAAP financial measures. 2 3. Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation.
Q4 Fiscal 2020 Segment Performance(1)(3) ($ in thousands) Years ended September 30, Period over period 2020 2019 growth Adjusted Net Revenue(2) Merchant Services, excluding Purchased Portfolios $ 96,850 $ 97,058 —% Purchased Portfolios 4,099 6,238 (34)% Merchant Services 100,949 103,296 (2)% Proprietary Software and Payments 51,777 34,301 51% Other (1,768) — nm Total $ 150,958 $ 137,597 10% Adjusted EBITDA(2) Merchant Services $ 30,754 $ 34,527 (11)% Proprietary Software and Payments 18,642 14,497 29% Other (10,839) (10,279) (5)% Total $ 38,557 $ 38,745 —% Adjusted EBITDA as a percentage of Net Revenue 25.5 % 28.2 % Volume Merchant Services $ 13,553,263 $ 12,533,107 8% Proprietary Software and Payments 823,885 611,351 35% Total $ 14,377,148 $ 13,144,458 9% 1. i3 Verticals has two segments, “Merchant Services,” which includes Purchased Portfolios (a subset of merchant contracts purchased in 2014 and 2017) and "Proprietary Software and Payments." i3 Verticals also has an “Other” category, which includes corporate overhead. 2. Adjusted Net Revenue and Adjusted EBITDA are non-GAAP financial measures. Refer to the following slides for the reconciliation of non-GAAP financial measures. 3 3. Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation.
Reconciliation of Non-GAAP Financial Measures The reconciliation of our revenue to non-GAAP adjusted net revenue is as follows: ($ in thousands) Three months ended September 30, 2020 Proprietary Software Merchant Services(2) and Payments Other Total Revenue $ 24,759 $ 13,924 $ (411) $ 38,272 Acquisition revenue adjustments(1) — 154 — 154 Adjusted Net Revenue $ 24,759 $ 14,078 $ (411) $ 38,426 ($ in thousands) Three months ended September 30, 2019(4) Proprietary Software Merchant Services(3) and Payments Other Total Revenue $ 95,584 $ 12,978 $ — $ 108,562 Acquisition revenue adjustments(1) 50 1,043 — 1,093 Interchange and nework fees (66,940) (2,150) — (69,090) Adjusted Net Revenue $ 28,694 $ 11,871 $ — $ 40,565 1. Under GAAP, companies must adjust, as necessary, beginning balances of acquired deferred revenue to fair value as part of acquisition accounting as defined by GAAP. Acquisition revenue adjustments remove the effect of these adjustments to acquisition date fair value from acquisitions that have closed as of the date of the earnings release. 2. Merchant Services includes purchased portfolios which had revenue of $877 and acquisition revenue adjustments of $0 for the three months ended September 30, 2020. 3. Merchant Services includes purchased portfolios which had revenue of $2,666, acquisition revenue adjustments of $0 and interchange and network fees of $1,393 for the three months ended September 30, 2019. 4 4. Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation.
Reconciliation of Non-GAAP Financial Measures The reconciliation of our revenue to non-GAAP adjusted net revenue is as follows: ($ in thousands) Year ended September 30, 2020(4) Proprietary Software Merchant Services(2) and Payments Other Total Revenue $ 100,949 $ 50,953 $ (1,768) $ 150,134 Acquisition revenue adjustments(1) — 824 — 824 Adjusted Net Revenue $ 100,949 $ 51,777 $ (1,768) $ 150,958 ($ in thousands) Year ended September 30, 2019(4) Proprietary Software Merchant Services(3) and Payments Other Total Revenue $ 338,968 $ 37,339 $ — $ 376,307 Acquisition revenue adjustments(1) 498 3,659 — 4,157 Interchange and nework fees (236,170) (6,697) — (242,867) Adjusted Net Revenue $ 103,296 $ 34,301 $ — $ 137,597 1. Under GAAP, companies must adjust, as necessary, beginning balances of acquired deferred revenue to fair value as part of acquisition accounting as defined by GAAP. Acquisition revenue adjustments remove the effect of these adjustments to acquisition date fair value from acquisitions that have closed as of the date of the earnings release. 2. Merchant Services includes purchased portfolios which had revenue of $4,099 and acquisition revenue adjustments of $0 for the year ended September 30, 2020. 3. Merchant Services includes purchased portfolios which had revenue of $12,427, acquisition revenue adjustments of $0 and interchange and network fees of $6,189 for the year ended September 30, 2019. 5 4. Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation.
Reconciliation of Non-GAAP Financial Measures The reconciliation of our income (loss) from operations to non-GAAP pro forma adjusted net income and non-GAAP adjusted EBITDA is as follows: ($ in thousands) Three months ended September 30, 2020 Three months ended September 30, 2019(1) Proprietary Proprietary Merchant Software and Merchant Software and Services Payments Other Total Services Payments Other Total Income (loss) from operations $ 5,147 $ 2,729 $ (6,678) $ 1,198 $ 5,684 $ 1,738 $ (5,553) $ 1,869 Interest expense (income), net — — 2,305 2,305 (1) — 2,018 2,017 Other expense — — 1,792 1,792 — — — — Benefit from income taxes — — (877) (877) — — (175) (175) Net income (loss) 5,147 2,729 (9,898) (2,022) 5,685 1,738 (7,396) 27 Non-GAAP Adjustments: Benefit from income taxes — — (877) (877) — — (175) (175) Financing-related expenses(2) — — 43 43 — — — — Non-cash change in fair value of contingent consideration(3) (400) 452 — 52 895 758 — 1,653 Equity-based compensation(4) — — 3,002 3,002 — — 2,002 2,002 Acquisition revenue adjustments(5) — 154 — 154 50 1,043 — 1,093 Acquisition-related expenses(6) — — 508 508 — — 412 412 Acquisition intangible amortization(7) 2,539 1,085 — 3,624 3,017 802 — 3,819 Non-cash interest expense(8) — — 1,429 1,429 — — 102 102 Other taxes(9) 3 — 173 176 (43) 1 50 8 Other expenses related to adjustments of liabilities under tax receivable agreement(10) — — 323 323 — — — — Non-cash loss on Exchangeable Note repurchases(11) — — 1,469 1,469 — — — — COVID-19 related expenses(12) — — — — — — — — Non-GAAP adjusted income (loss) before taxes 7,289 4,420 (3,828) 7,881 9,604 4,342 (5,005) 8,941 Pro forma taxes at effective tax rate(13) (1,822) (1,105) 957 (1,970) (2,401) (1,085) 1,251 (2,235) Pro forma adjusted net income (loss)(14) 5,467 3,315 (2,871) 5,911 7,203 3,257 (3,754) 6,706 Plus: Cash interest expense (income), net(15) — — 876 876 (1) — 1,916 1,915 Pro forma taxes at effective tax rate(13) 1,822 1,105 (957) 1,970 2,401 1,085 (1,251) 2,235 Depreciation, non-acquired intangible asset amortization and internally developed software amortization(16) 236 517 172 925 207 503 160 870 Adjusted EBITDA $ 7,525 $ 4,937 $ (2,780) $ 9,682 $ 9,810 $ 4,845 $ (2,929) $ 11,726 See footnotes continued on the next slide. 6
Reconciliation of Non-GAAP Financial Measures 1. Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation. 2. Financing-related expenses includes expenses directly related to certain transactions as part of financing transactions. 3. Non-cash change in fair value of contingent consideration reflects the changes in management’s estimates of future cash consideration to be paid in connection with prior acquisitions from the amount estimated as of the later of the most recent balance sheet date forming the beginning of the income statement period or the original estimates made at the closing of the applicable acquisition. 4. Equity-based compensation expense consisted of $3,002 and $2,002 related to stock options issued under the Company's 2018 Equity Incentive Plan during the three months ended September 30, 2020 and 2019, respectively. 5. Under GAAP, companies must adjust, as necessary, beginning balances of acquired deferred revenue to fair value as part of acquisition accounting as defined by GAAP. Acquisition revenue adjustments remove the effect of these adjustments to acquisition date fair value from acquisitions that have closed as of the date of the earnings release. 6. Acquisition-related expenses are the professional service and related costs directly related to our acquisitions and are not part of our core performance. 7. Acquisition intangible amortization reflects amortization of intangible assets and software acquired through business combinations, acquired customer portfolios, acquired referral agreements and related asset acquisitions. 8. Non-cash interest expense reflects amortization of debt discount and debt issuance costs and any write-offs of debt issuance costs. 9. Other taxes consist of franchise taxes, commercial activity taxes, employer payroll taxes related to stock exercises and other non-income based taxes. Taxes related to salaries are not included. 10. Under our Tax Receivable Agreement we have a liability equal to 85% of certain deferred tax assets resulting from an increase in the tax basis of our investment in i3 Verticals, LLC. Other expenses related to adjustments of liabilities under our Tax Receivable Agreement relate to the remeasurement of the underlying deferred tax asset for changes in estimated income tax rates. 11. Non-cash loss on Exchangeable Note repurchases reflects the loss on retirement of debt the Company recorded during the relevant periods due to the carrying value exceeding the fair value of the repurchased portion of the 1.0% Exchangeable Senior Notes due 2025 (the “Exchangeable Notes”) at the dates of repurchases. 12. COVID-19 related expenses reflects incremental expenses incurred as a result of the COVID-19 pandemic, including employee severance expenses and legal expenses. 13. Pro forma corporate income tax expense is based on Non-GAAP adjusted income before taxes and is calculated using a tax rate of 25.0% for both 2020 and 2019, based on blended federal and state tax rates, considering the Tax Reform Act for 2018. 14. Pro forma adjusted net income assumes that all net income during the period is available to the holders of the Company’s Class A common stock. 15. Cash interest expense, net represents all interest expense net of interest income recorded on the Company's statement of operations other than non-cash interest expense, which represents amortization of debt discount and debt issuance costs and any write-offs of debt issuance costs. 16. Depreciation, non-acquired intangible asset amortization and internally developed software amortization reflects depreciation on the Company's property, plant and equipment, net, and amortization expense on its internally developed capitalized software. 7
Reconciliation of Non-GAAP Financial Measures The reconciliation of our income (loss) from operations to non-GAAP pro forma adjusted net income and non-GAAP adjusted EBITDA is as follows: ($ in thousands) Year ended September 30, 2020(1) Year ended September 30, 2019(1) Proprietary Proprietary Merchant Software and Merchant Software and Services Payments Other Total Services Payments Other Total Income (loss) from operations $ 23,528 $ 8,704 $ (24,459) $ 7,773 $ 22,292 $ 3,177 $ (19,079) $ 6,390 Interest expense, net (1) — 8,927 8,926 (3) (8) 6,015 6,004 Other expense — — 2,621 2,621 — — — — Benefit from income taxes — — (2,795) (2,795) — — (177) (177) Net income (loss) 23,529 8,704 (33,212) (979) 22,295 3,185 (24,917) 563 Non-GAAP Adjustments: Benefit from income taxes — — (2,795) (2,795) — — (177) (177) Financing-related expenses(2) — — 286 286 — — — — Non-cash change in fair value of contingent consideration(3) (4,691) 3,282 — (1,409) (477) 3,866 — 3,389 Equity-based compensation(4) — — 10,452 10,452 — — 6,124 6,124 Acquisition revenue adjustments(4) — 824 — 824 498 3,659 — 4,157 Acquisition-related expenses(6) — — 1,811 1,811 — — 1,859 1,859 Acquisition intangible amortization(7) 10,780 3,717 — 14,497 11,466 2,103 1 13,570 Non-cash interest expense(8) — — 3,844 3,844 — — 873 873 Other taxes(9) 14 — 351 365 (7) 5 264 262 Other expenses related to adjustments of liabilities under Tax Receivable Agreement(10) — — 323 323 — — — — Non-cash loss on Exchangeable Note repurchases(11) — — 2,297 2,297 — — — — COVID-19 related expenses(12) 107 109 23 239 — — — — Non-GAAP adjusted income (loss) before taxes 29,739 16,636 (16,620) 29,755 33,775 12,818 (15,973) 30,620 Pro forma taxes at effective tax rate(13) (7,435) (4,159) 4,155 (7,439) (8,444) (3,204) 3,993 (7,655) Pro forma adjusted net income (loss)(14) 22,304 12,477 (12,465) 22,316 25,331 9,614 (11,980) 22,965 Plus: Cash interest (income) expense, net(15) (1) — 5,083 5,082 (3) (8) 5,142 5,131 Pro forma taxes at effective tax rate(13) 7,435 4,159 (4,155) 7,439 8,444 3,204 (3,993) 7,655 Depreciation, non-acquired intangible asset amortization and internally developed software amortization(16) 1,016 2,006 698 3,720 755 1,687 552 2,994 Adjusted EBITDA $ 30,754 $ 18,642 $ (10,839) $ 38,557 $ 34,527 $ 14,497 $ (10,279) $ 38,745 See footnotes continued on the next slide. 8
Reconciliation of Non-GAAP Financial Measures 1. Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation. 2. Financing-related expenses includes expenses directly related to certain transactions as part of financing transactions. 3. Non-cash change in fair value of contingent consideration reflects the changes in management’s estimates of future cash consideration to be paid in connection with prior acquisitions from the amount estimated as of the later of the most recent balance sheet date forming the beginning of the income statement period or the original estimates made at the closing of the applicable acquisition. 4. Equity-based compensation expense consisted of $10,452 and $6,124 related to stock options issued under the Company's 2018 Equity Incentive Plan during the years ended September 30, 2020 and 2019, respectively. 5. Under GAAP, companies must adjust, as necessary, beginning balances of acquired deferred revenue to fair value as part of acquisition accounting as defined by GAAP. Acquisition revenue adjustments remove the effect of these adjustments to acquisition date fair value from acquisitions that have closed as of the date of the earnings release. 6. Acquisition-related expenses are the professional service and related costs directly related to our acquisitions and are not part of our core performance. 7. Acquisition intangible amortization reflects amortization of intangible assets and software acquired through business combinations, acquired customer portfolios, acquired referral agreements and related asset acquisitions. 8. Non-cash interest expense reflects amortization of debt discount and debt issuance costs and any write-offs of debt issuance costs. 9. Other taxes consist of franchise taxes, commercial activity taxes, employer payroll taxes related to stock exercises and other non-income based taxes. Taxes related to salaries are not included. 10. Under our Tax Receivable Agreement we have a liability equal to 85% of certain deferred tax assets resulting from an increase in the tax basis of our investment in i3 Verticals, LLC. Other expenses related to adjustments of liabilities under our Tax Receivable Agreement relate to the remeasurement of the underlying deferred tax asset for changes in estimated income tax rates. 11. Non-cash loss on Exchangeable Note repurchases reflects the loss on retirement of debt the Company recorded during the relevant periods due to the carrying value exceeding the fair value of the repurchased portion of the 1.0% Exchangeable Senior Notes due 2025 (the “Exchangeable Notes”) at the dates of repurchases. 12. COVID-19 related expenses reflects incremental expenses incurred as a result of the COVID-19 pandemic, including employee severance expenses and legal expenses. 13. Pro forma corporate income tax expense is based on Non-GAAP adjusted income before taxes and is calculated using a tax rate of 25.0% for both 2020 and 2019, based on blended federal and state tax rates. 14. Pro forma adjusted net income assumes that all net income during the period is available to the holders of the Company’s Class A common stock. 15. Cash interest expense, net represents all interest expense net of interest income recorded on the Company's statement of operations other than non-cash interest expense, which represents amortization of debt discount and debt issuance costs and any write-offs of debt issuance costs. 16. Depreciation, non-acquired intangible asset amortization and internally developed software amortization reflects depreciation on the Company's property, plant and equipment, net, and amortization expense on its internally developed capitalized software. 9
Reconciliation Between GAAP Debt and Covenant Debt The reconciliation of our GAAP Long-term debt, net of issuance costs and the debt balance used in our Total Leverage Ratio: ($ in millions) As of September 30, 2020 Revolving lines of credit to banks under the Senior Secured Credit Facility $ 0.0 Exchangeable Notes 95.3 Debt issuance costs, net (4.6) Total long-term debt, net of issuance costs $ 90.7 Non-GAAP Adjustments: Discount on Exchangeable Notes(1) $ 21.7 Exchangeable Notes 95.3 Exchangeable Notes Face Value $ 117.0 Revolving lines of credit to banks under the Senior Secured Credit Facility $ 0.0 Exchangeable Notes Face Value 117.0 Less: Cash and Cash Equivalents(2) (10.0) Total long-term debt for use in our Total Leverage Ratio $ 107.0 1. In accordance with Financial Accounting Standards Board Accounting Standards Codification 470-20, Debt with Conversion and Other Options (“ASC 470-20”), convertible debt that may be entirely or partially settled in cash (such as the notes) is required to be separated into a liability and an equity component, such that interest expense reflects the issuer’s non-convertible debt interest cost. On the issue date, the value of the exchange option of the notes, representing the equity component was recorded as additional paid-in capital within shareholders’ equity and as a discount to the notes, which reduces their initial carrying value. The carrying value of the notes, net of the discount recorded, was accrued up to the principal amount of such notes from the issue date until maturity. ASC 470-20 does not affect the actual amount that the Issuer is required to repay. The amount shown in the table above for the discount reflects the debt discount for the value of the exchange option. 2. Although our cash and cash equivalents balance at September 30, 2020 was $15,568, in accordance with our Senior Secured Credit Facility, only up to $10,000 of unrestricted cash and cash equivalents may be subtracted from the calculation of long-term debt for use in our Total Leverage Ratio. 10
Payment Volumes Quickly Recovering from COVID-19 Lows Consolidated Average Daily Payments Volume(1) ($ in millions) Average daily payments volume for the week ending February 8th through the week ending October 31st (47%) +79% 39.3 37.3 36.1 36.2 36.8 35.2 34.7 34.2 34.9 34.6 33.8 33.5 33.9 33.2 33.4 33.3 31.7 32.0 31.8 32.2 31.8 31.5 30.9 31.3 30.2 30.7 30.0 26.8 26.3 25.3 25.9 23.3 23.4 20.5 19.7 20.3 18.6 18.9 4-Jul 7-Mar 4-Apr 2-May 9-May 6-Jun 11-Jul 18-Jul 25-Jul 1-Aug 8-Aug 5-Sep 3-Oct 15-Feb 22-Feb 29-Feb 14-Mar 21-Mar 28-Mar 11-Apr 18-Apr 25-Apr 16-May 23-May 30-May 13-Jun 20-Jun 27-Jun 15-Aug 22-Aug 29-Aug 12-Sep 19-Sep 26-Sep 10-Oct 17-Oct 24-Oct 31-Oct 1. This includes volume from i3's largest processing portfolios, for which daily volume figures are readily available. The volume of various minor portfolios and any volume for which we receive a residual but do not control the merchant relationship are not included. Average daily volume above represents approximately 85% of the credit and debit volume we reported, or we expect to report in our consolidated financial statements. 11
Software Revenues Remain Resilient Software and Related and Services Revenue Trends(1) (Monthly Adjusted Net Revenue)(2) ($ in millions) Software and Related Services Monthly Revenue in Q2 through Q4 2020 +50% (16%) $3.9 $3.4 $3.2 $3.0 $3.1 $2.8 $2.9 $2.6 $2.7 April May June July January March August February September 1. Software and related services includes the sale of licenses, subscriptions, installation services, and ongoing support specific to software. 2. Monthly adjusted net revenue is a non-GAAP financial measure. Refer to the following slide for the reconciliation of non-GAAP financial measures. 12
Reconciliation of Non-GAAP Financial Measures The reconciliation of our revenue to adjusted net revenue(1) is as follows: ($ in thousands) Three Months Ended, March 31, 2020 June 30, 2020 September 30, 2020 Other revenue $ 12,792 $ 10,926 $ 13,161 Payments revenue 26,386 20,647 25,111 Revenue 39,178 31,573 38,272 Acquisition revenue adjustments(1) 133 24 154 Adjusted Net Revenue $ 39,311 $ 31,597 $ 38,426 Non-GAAP Adjusted Net Revenue(2): Software and related services $ 9,552 $ 8,122 $ 10,046 Other 3,373 2,828 3,269 Adjusted other revenue(2) 12,925 10,950 13,315 Payments revenue 26,386 20,647 25,111 Adjusted Net Revenue $ 39,311 $ 31,597 $ 38,426 1.) Under GAAP, companies must adjust, as necessary, beginning balances of acquired deferred revenue to fair value as part of acquisition accounting as defined by GAAP. Acquisition revenue adjustments remove the effect of these adjustments to acquisition date fair value from acquisitions that have closed as of the date of the earnings release. 2.) For the three months ended March 31, 2020, June 30, 2020, and September 30, 2020, software and related services includes the sale of licenses, subscriptions, installation services, and ongoing support specific to software. Payments revenue is defined as volume-based payment processing fees (“discount fees”) and other related fixed transactions or service fees, net of interchange and network fees. Remaining revenue is comprised of other POS-related solutions and services the Company provides to its clients directly and through its processing bank relationships. 13
Q3 Fiscal 2020 Supplemental Information
Q3 Fiscal 2020 Segment Performance(1)(3) ($ in thousands) Three months ended June 30, Period over period 2020 2019 growth Adjusted Net Revenue(2) Merchant Services, excluding Purchased Portfolios $ 21,367 $ 24,870 (14)% Purchased Portfolios 855 1,387 (38)% Merchant Services 22,222 26,257 (15)% Proprietary Software and Payments 9,791 9,757 —% Other (416) — nm Total $ 31,597 $ 36,014 (12)% Adjusted EBITDA(2) Merchant Services $ 6,695 $ 8,856 (24)% Proprietary Software and Payments 2,613 3,430 (24)% Other (2,257) (2,592) 13% Total $ 7,051 $ 9,694 (27)% Adjusted EBITDA as a percentage of Net Revenue 22.3 % 26.9 % Volume Merchant Services $ 2,909,731 $ 3,268,141 (11)% Proprietary Software and Payments 70,971 141,081 (50)% Total $ 2,980,702 $ 3,409,222 (13)% 1. i3 Verticals has two segments, “Merchant Services,” which includes Purchased Portfolios (a subset of merchant contracts purchased in 2014 and 2017) and "Proprietary Software and Payments." i3 Verticals also has an “Other” category, which includes corporate overhead. 2. Adjusted Net Revenue and Adjusted EBITDA are non-GAAP financial measures. Refer to the following slides for the reconciliation of non-GAAP financial measures. 15 3. Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation.
Q3 Fiscal 2020 Segment Performance(1)(3) ($ in thousands) Nine months ended June 30, Period over period 2020 2019 growth Adjusted Net Revenue(2) Merchant Services, excluding Purchased Portfolios $ 72,968 $ 69,637 5% Purchased Portfolios 3,222 4,965 (35)% Merchant Services 76,190 74,602 2% Proprietary Software and Payments 37,699 22,430 68% Other (1,357) — nm Total $ 112,532 $ 97,032 16% Adjusted EBITDA(2) Merchant Services $ 23,229 $ 24,717 (6)% Proprietary Software and Payments 13,705 9,652 42% Other (8,059) (7,350) (10)% Total $ 28,875 $ 27,019 7% Adjusted EBITDA as a percentage of Net Revenue 25.7 % 27.8 % Volume Merchant Services $ 9,938,497 $ 8,866,400 12% Proprietary Software and Payments 459,058 429,479 7% Total $ 10,397,555 $ 9,295,879 12% 1. i3 Verticals has two segments, “Merchant Services,” which includes Purchased Portfolios (a subset of merchant contracts purchased in 2014 and 2017) and "Proprietary Software and Payments." i3 Verticals also has an “Other” category, which includes corporate overhead. 2. Adjusted Net Revenue and Adjusted EBITDA are non-GAAP financial measures. Refer to the following slides for the reconciliation of non-GAAP financial measures. 16 3. Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation.
Reconciliation of Non-GAAP Financial Measures The reconciliation of our revenue to non-GAAP adjusted net revenue is as follows: ($ in thousands) Three months ended June 30, 2020 Proprietary Software Merchant Services(2) and Payments Other Total Revenue $ 22,222 $ 9,767 $ (416) $ 31,573 Acquisition revenue adjustments(1) — 24 — 24 Adjusted Net Revenue $ 22,222 $ 9,791 $ (416) $ 31,597 ($ in thousands) Three months ended June 30, 2019(4) Proprietary Software Merchant Services(3) and Payments Other Total Revenue $ 87,870 $ 9,613 $ — $ 97,483 Acquisition revenue adjustments(1) 131 1,663 — 1,794 Interchange and nework fees (61,744) (1,519) — (63,263) Adjusted Net Revenue $ 26,257 $ 9,757 $ — $ 36,014 1. Under GAAP, companies must adjust, as necessary, beginning balances of acquired deferred revenue to fair value as part of acquisition accounting as defined by GAAP. Acquisition revenue adjustments remove the effect of these adjustments to acquisition date fair value from acquisitions that have closed as of the date of the earnings release. 2. Merchant Services includes purchased portfolios which had revenue of $855 and acquisition revenue adjustments of $0 for the three months ended June 30, 2020. 3. Merchant Services includes purchased portfolios which had revenue of $2,884, acquisition revenue adjustments of $0 and interchange and network fees of $1,497 for the three months ended June 30, 2019. 17 4. Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation.
Reconciliation of Non-GAAP Financial Measures The reconciliation of our revenue to non-GAAP adjusted net revenue is as follows: ($ in thousands) Nine months ended June 30, 2020(4) Proprietary Software Merchant Services(2) and Payments Other Total Revenue $ 76,190 $ 37,029 $ (1,357) $ 111,862 Acquisition revenue adjustments(1) — 670 — 670 Adjusted Net Revenue $ 76,190 $ 37,699 $ (1,357) $ 112,532 ($ in thousands) Nine months ended June 30, 2019(4) Proprietary Software Merchant Services(3) and Payments Other Total Revenue $ 243,384 $ 24,361 $ — $ 267,745 Acquisition revenue adjustments(1) 448 2,616 — 3,064 Interchange and nework fees (169,230) (4,547) — (173,777) Adjusted Net Revenue $ 74,602 $ 22,430 $ — $ 97,032 1. Under GAAP, companies must adjust, as necessary, beginning balances of acquired deferred revenue to fair value as part of acquisition accounting as defined by GAAP. Acquisition revenue adjustments remove the effect of these adjustments to acquisition date fair value from acquisitions that have closed as of the date of the earnings release. 2. Merchant Services includes purchased portfolios which had revenue of $3,222 and acquisition revenue adjustments of $0 for the nine months ended June 30, 2020. 3. Merchant Services includes purchased portfolios which had revenue of $9,761, acquisition revenue adjustments of $0 and interchange and network fees of $4,796 for the nine months ended June 30, 2019. 18 4. Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation.
Reconciliation of Non-GAAP Financial Measures The reconciliation of our income (loss) from operations to non-GAAP pro forma adjusted net income and non-GAAP adjusted EBITDA is as follows: ($ in thousands) Three months ended June 30, 2020(1) Three months ended June 30, 2019(1) Proprietary Proprietary Merchant Software and Merchant Software and Services Payments Other Total Services Payments Other Total Income (loss) from operations $ 4,975 $ 1,265 $ (5,803) $ 437 $ 6,296 $ 320 $ (5,422) $ 1,194 Interest (income) expense, net (1) — 2,424 2,423 (1) (8) 1,927 1,918 Other expense — — 829 829 — — — — Benefit from income taxes — — (5) (5) — — (131) (131) Net income (loss) 4,976 1,265 (9,051) (2,810) 6,297 328 (7,218) (593) Non-GAAP Adjustments: Benefit from income taxes — — (5) (5) — — (131) (131) Financing-related expenses(2) — — 22 22 — — — — Non-cash change in fair value of contingent consideration(3) (1,345) (128) — (1,473) (673) 256 — (417) Equity-based compensation(4) — — 2,816 2,816 — — 1,808 1,808 Acquisition revenue adjustments(5) — 24 — 24 131 1,663 — 1,794 Acquisition-related expenses(6) — — 458 458 — — 826 826 Acquisition intangible amortization(7) 2,674 878 — 3,552 2,886 755 — 3,641 Non-cash interest expense(8) — — 1,436 1,436 — — 306 306 Other taxes(9) 4 — 50 54 13 — 51 64 Non-cash loss on Exchangeable Note repurchases(10) — — 828 828 — — — — COVID-19 related expenses(11) 107 109 23 239 — — — — Non-GAAP adjusted income (loss) before taxes 6,416 2,148 (3,423) 5,141 8,654 3,002 (4,358) 7,298 Pro forma taxes at effective tax rate(12) (1,605) (537) 856 (1,286) (2,164) (750) 1,089 (1,825) Pro forma adjusted net income (loss)(13) 4,811 1,611 (2,567) 3,855 6,490 2,252 (3,269) 5,473 Plus: Cash interest (income) expense, net(14) (1) — 988 987 (1) (8) 1,621 1,612 Pro forma taxes at effective tax rate(12) 1,605 537 (856) 1,286 2,164 750 (1,089) 1,825 Depreciation, non-acquired intangible asset amortization and internally developed software amortization(15) 280 465 178 923 203 436 145 784 Adjusted EBITDA $ 6,695 $ 2,613 $ (2,257) $ 7,051 $ 8,856 $ 3,430 $ (2,592) $ 9,694 See footnotes continued on the next slide. 19
Reconciliation of Non-GAAP Financial Measures 1. Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation. 2. Financing-related expenses includes expenses directly related to certain transactions as part of financing transactions. 3. Non-cash change in fair value of contingent consideration reflects the changes in management’s estimates of future cash consideration to be paid in connection with prior acquisitions from the amount estimated as of the later of the most recent balance sheet date forming the beginning of the income statement period or the original estimates made at the closing of the applicable acquisition. 4. Equity-based compensation expense consisted of $2,816 and $1,808 related to stock options issued under the Company's 2018 Equity Incentive Plan during the three months ended June 30, 2020 and 2019, respectively. 5. Under GAAP, companies must adjust, as necessary, beginning balances of acquired deferred revenue to fair value as part of acquisition accounting as defined by GAAP. Acquisition revenue adjustments remove the effect of these adjustments to acquisition date fair value from acquisitions that have closed as of the date of the earnings release. 6. Acquisition-related expenses are the professional service and related costs directly related to our acquisitions and are not part of our core performance. 7. Acquisition intangible amortization reflects amortization of intangible assets and software acquired through business combinations, acquired customer portfolios, acquired referral agreements and related asset acquisitions. 8. Non-cash interest expense reflects amortization of debt discount and debt issuance costs and any write-offs of debt issuance costs. 9. Other taxes consist of franchise taxes, commercial activity taxes, employer payroll taxes related to stock exercises and other non-income based taxes. Taxes related to salaries are not included. 10. Non-cash loss on Exchangeable Note repurchases reflects the loss on retirement of debt the Company recorded during the relevant periods due to the carrying value exceeding the fair value of the repurchased portion of the 1.0% Exchangeable Senior Notes due 2025 (the “Exchangeable Notes”) at the dates of repurchases. 11. COVID-19 related expenses reflects incremental expenses incurred as a result of the COVID-19 pandemic, including employee severance expenses and legal expenses. 12. Pro forma corporate income tax expense is based on Non-GAAP adjusted income before taxes and is calculated using a tax rate of 25.0% for both 2020 and 2019, based on blended federal and state tax rates, considering the Tax Reform Act for 2018. 13. Pro forma adjusted net income assumes that all net income during the period is available to the holders of the Company’s Class A common stock. 14. Cash interest expense, net represents all interest expense net of interest income recorded on the Company's statement of operations other than non-cash interest expense, which represents amortization of debt discount and debt issuance costs and any write-offs of debt issuance costs. 15. Depreciation, non-acquired intangible asset amortization and internally developed software amortization reflects depreciation on the Company's property, plant and equipment, net, and amortization expense on its internally developed capitalized software. 20
Reconciliation of Non-GAAP Financial Measures The reconciliation of our income (loss) from operations to non-GAAP pro forma adjusted net income and non-GAAP adjusted EBITDA is as follows: ($ in thousands) Nine months ended June 30, 2020(1) Nine months ended June 30, 2019(1) Proprietary Proprietary Merchant Software and Merchant Software and Services Payments Other Total Services Payments Other Total Income (loss) from operations $ 18,381 $ 5,975 $ (17,781) $ 6,575 $ 16,608 $ 1,439 $ (13,526) $ 4,521 Interest (income) expense, net (1) — 6,622 6,621 (2) (8) 3,997 3,987 Other expense — — 829 829 — — — — Benefit from income taxes — — (1,918) (1,918) — — (2) (2) Net income (loss) 18,382 5,975 (23,314) 1,043 16,610 1,447 (17,521) 536 Non-GAAP Adjustments: Benefit from income taxes — — (1,918) (1,918) — — (2) (2) Financing-related expenses(2) — — 243 243 — — — — Non-cash change in fair value of contingent consideration(3) (4,291) 2,830 — (1,461) (1,372) 3,108 — 1,736 Equity-based compensation(4) — — 7,450 7,450 — — 4,122 4,122 Acquisition revenue adjustments(4) — 670 — 670 448 2,616 — 3,064 Acquisition-related expenses(6) — — 1,303 1,303 — — 1,447 1,447 Acquisition intangible amortization(7) 8,241 2,632 — 10,873 8,449 1,301 1 9,751 Non-cash interest expense(8) — — 2,415 2,415 — — 771 771 Other taxes(9) 11 — 178 189 36 4 214 254 Non-cash loss on Exchangeable Note repurchases(10) — — 828 828 — — — — COVID-19 related expenses(11) 107 109 23 239 — — — — Non-GAAP adjusted income (loss) before taxes 22,450 12,216 (12,792) 21,874 24,171 8,476 (10,968) 21,679 Pro forma taxes at effective tax rate(12) (5,613) (3,054) 3,198 (5,469) (6,043) (2,119) 2,742 (5,420) Pro forma adjusted net income (loss)(13) 16,837 9,162 (9,594) 16,405 18,128 6,357 (8,226) 16,259 Plus: Cash interest (income) expense, net(14) (1) — 4,207 4,206 (2) (8) 3,226 3,216 Pro forma taxes at effective tax rate(12) 5,613 3,054 (3,198) 5,469 6,043 2,119 (2,742) 5,420 Depreciation, non-acquired intangible asset amortization and internally developed software amortization(15) 780 1,489 526 2,795 548 1,184 392 2,124 Adjusted EBITDA $ 23,229 $ 13,705 $ (8,059) $ 28,875 $ 24,717 $ 9,652 $ (7,350) $ 27,019 See footnotes continued on the next slide. 21
Reconciliation of Non-GAAP Financial Measures 1. Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation. 2. Financing-related expenses includes expenses directly related to certain transactions as part of financing transactions. 3. Non-cash change in fair value of contingent consideration reflects the changes in management’s estimates of future cash consideration to be paid in connection with prior acquisitions from the amount estimated as of the later of the most recent balance sheet date forming the beginning of the income statement period or the original estimates made at the closing of the applicable acquisition. 4. Equity-based compensation expense consisted of $7,450 and $4,122 related to stock options issued under the Company's 2018 Equity Incentive Plan during the nine months ended June 30, 2020 and 2019, respectively. 5. Under GAAP, companies must adjust, as necessary, beginning balances of acquired deferred revenue to fair value as part of acquisition accounting as defined by GAAP. Acquisition revenue adjustments remove the effect of these adjustments to acquisition date fair value from acquisitions that have closed as of the date of the earnings release. 6. Acquisition-related expenses are the professional service and related costs directly related to our acquisitions and are not part of our core performance. 7. Acquisition intangible amortization reflects amortization of intangible assets and software acquired through business combinations, acquired customer portfolios, acquired referral agreements and related asset acquisitions. 8. Non-cash interest expense reflects amortization of debt discount and debt issuance costs and any write-offs of debt issuance costs. 9. Other taxes consist of franchise taxes, commercial activity taxes, employer payroll taxes related to stock exercises and other non-income based taxes. Taxes related to salaries are not included. 10. Non-cash loss on Exchangeable Note repurchases reflects the loss on retirement of debt the Company recorded during the relevant periods due to the carrying value exceeding the fair value of the repurchased portion of the 1.0% Exchangeable Senior Notes due 2025 (the “Exchangeable Notes”) at the dates of repurchases. 11. COVID-19 related expenses reflects incremental expenses incurred as a result of the COVID-19 pandemic, including employee severance expenses and legal expenses. 12. Pro forma corporate income tax expense is based on Non-GAAP adjusted income before taxes and is calculated using a tax rate of 25.0% for both 2020 and 2019, based on blended federal and state tax rates. 13. Pro forma adjusted net income assumes that all net income during the period is available to the holders of the Company’s Class A common stock. 14. Cash interest expense, net represents all interest expense net of interest income recorded on the Company's statement of operations other than non-cash interest expense, which represents amortization of debt discount and debt issuance costs and any write-offs of debt issuance costs. 15. Depreciation, non-acquired intangible asset amortization and internally developed software amortization reflects depreciation on the Company's property, plant and equipment, net, and amortization expense on its internally developed capitalized software. 22
Q2 Fiscal 2020 Supplemental Information
Q2 Fiscal 2020 Segment Performance(1)(3) ($ in thousands) Three months ended March 31, Period over period 2020 2019 growth Adjusted Net Revenue(2) Merchant Services, excluding Purchased Portfolios $ 24,695 $ 22,943 8% Purchased Portfolios 1,034 1,541 (33)% Merchant Services 25,729 24,484 5% Proprietary Software and Payments 14,113 6,964 103% Other (531) — nm Total $ 39,311 $ 31,448 25% Adjusted EBITDA(2) Merchant Services $ 7,328 $ 7,889 (7)% Proprietary Software and Payments 5,846 3,491 67% Other (3,209) (2,633) (22)% Total $ 9,965 $ 8,747 14% Adjusted EBITDA as a percentage of Net Revenue 25.3 % 27.8 % Volume Merchant Services $ 3,393,710 $ 2,794,120 21% Proprietary Software and Payments 184,025 148,688 24% Total $ 3,577,735 $ 2,942,808 22% 1. i3 Verticals has two segments, “Merchant Services,” which includes Purchased Portfolios (a subset of merchant contracts purchased in 2014 and 2017) and "Proprietary Software and Payments." i3 Verticals also has an “Other” category, which includes corporate overhead. 2. Adjusted Net Revenue and Adjusted EBITDA are non-GAAP financial measures. Refer to the following slides for the reconciliation of non-GAAP financial measures. 24 3. Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation.
Q2 Fiscal 2020 Segment Performance(1)(3) ($ in thousands) Six months ended March 31, Period over period 2020 2019 growth Adjusted Net Revenue(2) Merchant Services, excluding Purchased Portfolios $ 51,601 $ 44,767 15% Purchased Portfolios 2,367 3,578 (34)% Merchant Services 53,968 48,345 12% Proprietary Software and Payments 27,908 12,673 120% Other (941) — nm Total $ 80,935 $ 61,018 33% Adjusted EBITDA(2) Merchant Services $ 16,534 $ 15,861 4% Proprietary Software and Payments 11,092 6,222 78% Other (5,802) (4,758) (22)% Total $ 21,824 $ 17,325 26% Adjusted EBITDA as a percentage of Net Revenue 27.0 % 28.4 % Volume Merchant Services $ 7,028,766 $ 5,598,259 26% Proprietary Software and Payments 388,087 288,398 35% Total $ 7,416,853 $ 5,886,657 26% 1. i3 Verticals has two segments, “Merchant Services,” which includes Purchased Portfolios (a subset of merchant contracts purchased in 2014 and 2017) and "Proprietary Software and Payments." i3 Verticals also has an “Other” category, which includes corporate overhead. 2. Adjusted Net Revenue and Adjusted EBITDA are non-GAAP financial measures. Refer to the following slides for the reconciliation of non-GAAP financial measures. 25 3. Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation.
Reconciliation of Non-GAAP Financial Measures The reconciliation of our revenue to non-GAAP adjusted net revenue is as follows: ($ in thousands) Three months ended March 31, 2020 Proprietary Software Merchant Services(2) and Payments Other Total Revenue $ 25,729 $ 13,980 $ (531) $ 39,178 Acquisition revenue adjustments(1) — 133 — 133 Adjusted Net Revenue $ 25,729 $ 14,113 $ (531) $ 39,311 ($ in thousands) Three months ended March 31, 2019(4) Proprietary Software Merchant Services(3) and Payments Other Total Revenue $ 77,441 $ 7,953 $ — $ 85,394 Acquisition revenue adjustments(1) 164 575 — 739 Interchange and nework fees (53,121) (1,564) — (54,685) Adjusted Net Revenue $ 24,484 $ 6,964 $ — $ 31,448 1. Under GAAP, companies must adjust, as necessary, beginning balances of acquired deferred revenue to fair value as part of acquisition accounting as defined by GAAP. Acquisition revenue adjustments remove the effect of these adjustments to acquisition date fair value from acquisitions that have closed as of the date of the earnings release. 2. Merchant Services includes purchased portfolios which had revenue of $1,034 and acquisition revenue adjustments of $0 for the three months ended March 31, 2020. 3. Merchant Services includes purchased portfolios which had revenue of $3,031, acquisition revenue adjustments of $0 and interchange and network fees of $1,490 for the three months ended March 31, 2019. 26 4. Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation.
Reconciliation of Non-GAAP Financial Measures The reconciliation of our revenue to non-GAAP adjusted net revenue is as follows: ($ in thousands) Six months ended March 31, 2020(4) Proprietary Software Merchant Services(2) and Payments Other Total Revenue $ 53,968 $ 27,262 $ (941) $ 80,289 Acquisition revenue adjustments(1) — 646 — 646 Adjusted Net Revenue $ 53,968 $ 27,908 $ (941) $ 80,935 ($ in thousands) Six months ended March 31, 2019(4) Proprietary Software Merchant Services(3) and Payments Other Total Revenue $ 155,514 $ 14,748 $ — $ 170,262 Acquisition revenue adjustments(1) 317 953 — 1,270 Interchange and nework fees (107,486) (3,028) — (110,514) Adjusted Net Revenue $ 48,345 $ 12,673 $ — $ 61,018 1. Under GAAP, companies must adjust, as necessary, beginning balances of acquired deferred revenue to fair value as part of acquisition accounting as defined by GAAP. Acquisition revenue adjustments remove the effect of these adjustments to acquisition date fair value from acquisitions that have closed as of the date of the earnings release. 2. Merchant Services includes purchased portfolios which had revenue of $2,367 and acquisition revenue adjustments of $0 for the six months ended March 31, 2020. 3. Merchant Services includes purchased portfolios which had revenue of $6,877, acquisition revenue adjustments of $0 and interchange and network fees of $3,299 for the six months ended March 31, 2019. 27 4. Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation.
Reconciliation of Non-GAAP Financial Measures The reconciliation of our income (loss) from operations to non-GAAP pro forma adjusted net income and non-GAAP adjusted EBITDA is as follows: ($ in thousands) Three months ended March 31, 2020(1) Three months ended March 31, 2019(1) Proprietary Proprietary Merchant Software and Merchant Software and Services Payments Other Total Services Payments Other Total Income (loss) from operations $ 4,979 $ 3,842 $ (6,780) $ 2,041 $ 5,037 $ (683) $ (4,557) $ (203) Interest expense, net — — 2,184 2,184 — — 1,155 1,155 Benefit from income taxes — — (2,062) (2,062) — — (136) (136) Net income (loss) 4,979 3,842 (6,902) 1,919 5,037 (683) (5,576) (1,222) Non-GAAP Adjustments: Benefit from income taxes — — (2,062) (2,062) — — (136) (136) Financing-related expenses(2) — — 221 221 — — — — Non-cash change in fair value of contingent consideration(3) (649) 507 — (142) (376) 2,878 — 2,502 Equity-based compensation(4) — — 2,510 2,510 — — 1,363 1,363 Acquisition revenue adjustments(5) — 133 — 133 164 575 — 739 Acquisition-related expenses(6) — — 583 583 — — 261 261 Acquisition intangible amortization(7) 2,728 872 — 3,600 2,867 337 1 3,205 Non-cash interest expense(8) — — 879 879 — — 232 232 Other taxes(9) 3 — 78 81 23 4 160 187 Non-GAAP adjusted income (loss) before taxes 7,061 5,354 (4,693) 7,722 7,715 3,111 (3,695) 7,131 Pro forma taxes at effective tax rate(10) (1,765) (1,338) 1,173 (1,930) (1,929) (778) 924 (1,783) Pro forma adjusted net income (loss)(11) 5,296 4,016 (3,520) 5,792 5,786 2,333 (2,771) 5,348 Plus: Cash interest expense (income), net(12) — — 1,305 1,305 (1) — 924 923 Pro forma taxes at effective tax rate(10) 1,765 1,338 (1,173) 1,930 1,929 778 (924) 1,783 Depreciation, non-acquired intangible asset amortization and internally developed software amortization(13) 267 492 179 938 175 380 138 693 Adjusted EBITDA $ 7,328 $ 5,846 $ (3,209) $ 9,965 $ 7,889 $ 3,491 $ (2,633) $ 8,747 See footnotes continued on the next slide. 28
Reconciliation of Non-GAAP Financial Measures 1. Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation. 2. Financing-related expenses includes expenses directly related to certain transactions as part of financing transactions. 3. Non-cash change in fair value of contingent consideration reflects the changes in management’s estimates of future cash consideration to be paid in connection with prior acquisitions from the amount estimated as of the later of the most recent balance sheet date forming the beginning of the income statement period or the original estimates made at the closing of the applicable acquisition. 4. Equity-based compensation expense consisted of $2,510 and $1,363 related to stock options issued under the Company's 2018 Equity Incentive Plan during the three months ended March 31, 2020 and 2019, respectively. 5. Under GAAP, companies must adjust, as necessary, beginning balances of acquired deferred revenue to fair value as part of acquisition accounting as defined by GAAP. Acquisition revenue adjustments remove the effect of these adjustments to acquisition date fair value from acquisitions that have closed as of the date of the earnings release. 6. Acquisition-related expenses are the professional service and related costs directly related to our acquisitions and are not part of our core performance. 7. Acquisition intangible amortization reflects amortization of intangible assets and software acquired through business combinations, acquired customer portfolios, acquired referral agreements and related asset acquisitions. 8. Non-cash interest expense reflects amortization of debt discount and debt issuance costs and any write-offs of debt issuance costs. 9. Other taxes consist of franchise taxes, commercial activity taxes, employer payroll taxes related to stock exercises and other non-income based taxes. Taxes related to salaries are not included. 10. Pro forma corporate income tax expense is based on Non-GAAP adjusted income before taxes and is calculated using a tax rate of 25.0% for both 2020 and 2019, based on blended federal and state tax rates, considering the Tax Reform Act for 2018. 11. Pro forma adjusted net income assumes that all net income during the period is available to the holders of the Company’s Class A common stock. 12. Cash interest expense, net represents all interest expense net of interest income recorded on the Company's statement of operations other than non-cash interest expense, which represents amortization of debt discount and debt issuance costs and any write-offs of debt issuance costs. 13. Depreciation, non-acquired intangible asset amortization and internally developed software amortization reflects depreciation on the Company's property, plant and equipment, net, and amortization expense on its internally developed capitalized software. 29
Reconciliation of Non-GAAP Financial Measures The reconciliation of our income (loss) from operations to non-GAAP pro forma adjusted net income and non-GAAP adjusted EBITDA is as follows: ($ in thousands) Six months ended March 31, 2020(1) Six months ended March 31, 2019(1) Proprietary Proprietary Merchant Software and Merchant Software and Services Payments Other Total Services Payments Other Total Income (loss) from operations $ 13,406 $ 4,710 $ (11,978) $ 6,138 $ 10,312 $ 1,119 $ (8,104) $ 3,327 Interest expense, net — — 4,198 4,198 (1) — 2,070 2,069 (Benefit from) provision for income taxes — — (1,913) (1,913) — — 129 129 Net income (loss) 13,406 4,710 (14,263) 3,853 10,313 1,119 (10,303) 1,129 Non-GAAP Adjustments: (Benefit from) provision for income taxes — — (1,913) (1,913) — — 129 129 Financing-related expenses(2) — — 221 221 — — — — Non-cash change in fair value of contingent consideration(3) (2,946) 2,958 — 12 (699) 2,852 — 2,153 Equity-based compensation(4) — — 4,634 4,634 — — 2,314 2,314 Acquisition revenue adjustments(4) — 646 — 646 317 953 — 1,270 Acquisition-related expenses(6) — — 845 845 — — 621 621 Acquisition intangible amortization(7) 5,567 1,754 — 7,321 5,563 546 1 6,110 Non-cash interest expense(8) — — 979 979 — — 465 465 Other taxes(9) 7 — 128 135 23 4 163 190 Non-GAAP adjusted income (loss) before taxes 16,034 10,068 (9,369) 16,733 15,517 5,474 (6,610) 14,381 Pro forma taxes at effective tax rate(10) (4,008) (2,517) 2,342 (4,183) (3,879) (1,369) 1,653 (3,595) Pro forma adjusted net income (loss)(11) 12,026 7,551 (7,027) 12,550 11,638 4,105 (4,957) 10,786 Plus: Cash interest expense (income), net(12) — — 3,219 3,219 (1) — 1,605 1,604 Pro forma taxes at effective tax rate(10) 4,008 2,517 (2,342) 4,183 3,879 1,369 (1,653) 3,595 Depreciation, non-acquired intangible asset amortization and internally developed software amortization(13) 500 1,024 348 1,872 345 748 247 1,340 Adjusted EBITDA $ 16,534 $ 11,092 $ (5,802) $ 21,824 $ 15,861 $ 6,222 $ (4,758) $ 17,325 See footnotes continued on the next slide. 30
Reconciliation of Non-GAAP Financial Measures 1. Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation. 2. Financing-related expenses includes expenses directly related to certain transactions as part of financing transactions. 3. Non-cash change in fair value of contingent consideration reflects the changes in management’s estimates of future cash consideration to be paid in connection with prior acquisitions from the amount estimated as of the later of the most recent balance sheet date forming the beginning of the income statement period or the original estimates made at the closing of the applicable acquisition. 4. Equity-based compensation expense consisted of $4,634 and $2,314 related to stock options issued under the Company's 2018 Equity Incentive Plan during the six months ended March 31, 2020 and 2019, respectively. 5. Under GAAP, companies must adjust, as necessary, beginning balances of acquired deferred revenue to fair value as part of acquisition accounting as defined by GAAP. Acquisition revenue adjustments remove the effect of these adjustments to acquisition date fair value from acquisitions that have closed as of the date of the earnings release. 6. Acquisition-related expenses are the professional service and related costs directly related to our acquisitions and are not part of our core performance. 7. Acquisition intangible amortization reflects amortization of intangible assets and software acquired through business combinations, acquired customer portfolios, acquired referral agreements and related asset acquisitions. 8. Non-cash interest expense reflects amortization of debt discount and debt issuance costs and any write-offs of debt issuance costs. 9. Other taxes consist of franchise taxes, commercial activity taxes, employer payroll taxes related to stock exercises and other non-income based taxes. Taxes related to salaries are not included. 10. Pro forma corporate income tax expense is based on Non-GAAP adjusted income before taxes and is calculated using a tax rate of 25.0% for both 2020 and 2019, based on blended federal and state tax rates. 11. Pro forma adjusted net income assumes that all net income during the period is available to the holders of the Company’s Class A common stock. 12. Cash interest expense, net represents all interest expense net of interest income recorded on the Company's statement of operations other than non-cash interest expense, which represents amortization of debt discount and debt issuance costs and any write-offs of debt issuance costs. 13. Depreciation, non-acquired intangible asset amortization and internally developed software amortization reflects depreciation on the Company's property, plant and equipment, net, and amortization expense on its internally developed capitalized software. 31
Q1 Fiscal 2020 Supplemental Information
Q1 Fiscal 2020 Segment Performance(1)(3) ($ in thousands) Three months ended December 31, Period over period 2019 2018 growth Adjusted Net Revenue(2) Merchant Services, excluding Purchased Portfolios $ 26,906 $ 21,824 23% Purchased Portfolios 1,333 2,037 (35)% Merchant Services 28,239 23,861 18% Proprietary Software and Payments 13,795 5,709 142% Other (410) — nm Total $ 41,624 $ 29,570 41% Adjusted EBITDA(2) Merchant Services $ 9,206 $ 7,972 15% Proprietary Software and Payments 5,246 2,731 92% Other (2,593) (2,125) (22)% Total $ 11,859 $ 8,578 38% Adjusted EBITDA as a percentage of Net Revenue 28.5 % 29.0 % Volume Merchant Services $ 3,635,056 $ 2,804,139 30% Proprietary Software and Payments 204,062 139,710 46% Total $ 3,839,118 $ 2,943,849 30% 1. i3 Verticals has two segments, “Merchant Services,” which includes Purchased Portfolios (a subset of merchant contracts purchased in 2014 and 2017) and "Proprietary Software and Payments." i3 Verticals also has an “Other” category, which includes corporate overhead. 2. Adjusted Net Revenue and Adjusted EBITDA are non-GAAP financial measures. Refer to the following slides for the reconciliation of non-GAAP financial measures. 33 3. Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation.
Reconciliation of Non-GAAP Financial Measures The reconciliation of our revenue to non-GAAP adjusted net revenue is as follows: ($ in thousands) Three months ended December 31, 2019(4) Proprietary Software Merchant Services(2) and Payments Other Total Revenue $ 28,239 $ 13,282 $ (410) $ 41,111 Acquisition revenue adjustments(1) — 513 — 513 Adjusted Net Revenue $ 28,239 $ 13,795 $ (410) $ 41,624 ($ in thousands) Three months ended December 31, 2018(4) Proprietary Software Merchant Services(3) and Payments Other Total Revenue $ 78,073 $ 6,795 $ — $ 84,868 Acquisition revenue adjustments(1) 153 378 — 531 Interchange and nework fees (54,365) (1,464) — (55,829) Adjusted Net Revenue $ 23,861 $ 5,709 $ — $ 29,570 1. Under GAAP, companies must adjust, as necessary, beginning balances of acquired deferred revenue to fair value as part of acquisition accounting as defined by GAAP. Acquisition revenue adjustments remove the effect of these adjustments to acquisition date fair value from acquisitions that have closed as of the date of the earnings release. 2. Merchant Services includes purchased portfolios which had revenue of $1,333 and acquisition revenue adjustments of $0 for the three months ended December 31, 2019. 3. Merchant Services includes purchased portfolios which had revenue of $3,846, acquisition revenue adjustments of $0 and interchange and network fees of $1,809 for the three months ended December 31, 2018. 34 4. Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation.
Reconciliation of Non-GAAP Financial Measures The reconciliation of our income (loss) from operations to non-GAAP pro forma adjusted net income and non-GAAP adjusted EBITDA is as follows: ($ in thousands) Three months ended December 31, 2019(1) Three months ended December 31, 2018(1) Proprietary Proprietary Merchant Software and Merchant Software and Services Payments Other Total Services Payments Other Total Income (loss) from operations $ 8,427 $ 868 $ (5,198) $ 4,097 $ 5,275 $ 1,802 $ (3,547) $ 3,530 Interest expense, net — — 2,014 2,014 (1) — 915 914 Provision for income taxes — — 149 149 — — 265 265 Net income (loss) 8,427 868 (7,361) 1,934 5,276 1,802 (4,727) 2,351 Non-GAAP Adjustments: Provision for income taxes — — 149 149 — — 265 265 Non-cash change in fair value of contingent consideration(2) (2,297) 2,451 — 154 (323) (26) — (349) Equity-based compensation(3) — — 2,124 2,124 — — 951 951 Acquisition revenue adjustments(4) — 513 — 513 153 378 — 531 Acquisition-related expenses(5) — — 262 262 — — 360 360 Acquisition intangible amortization(6) 2,839 882 — 3,721 2,696 209 — 2,905 Non-cash interest expense(7) — — 100 100 — — 233 233 Other taxes(8) 4 — 50 54 — — 3 3 Non-GAAP adjusted income (loss) before taxes 8,973 4,714 (4,676) 9,011 7,802 2,363 (2,915) 7,250 Pro forma taxes at effective tax rate(9) (2,243) (1,179) 1,169 (2,253) (1,950) (591) 729 (1,812) Pro forma adjusted net income (loss)(10) 6,730 3,535 (3,507) 6,758 5,852 1,772 (2,186) 5,438 Plus: Cash interest expense, net(11) — — 1,914 1,914 — — 681 681 Pro forma taxes at effective tax rate(9) 2,243 1,179 (1,169) 2,253 1,950 591 (729) 1,812 Depreciation, non-acquired intangible asset amortization and internally developed software amortization(12) 233 532 169 934 170 368 109 647 Adjusted EBITDA $ 9,206 $ 5,246 $ (2,593) $ 11,859 $ 7,972 $ 2,731 $ (2,125) $ 8,578 See footnotes continued on the next slide. 35
Reconciliation of Non-GAAP Financial Measures 1. Effective July 1, 2020, the Company reassigned a component from the Proprietary Software and Payments segment to the Merchant Services segment to better align the Company's business within its segments. The prior period comparatives have been retroactively adjusted to reflect the Company's current segment presentation. 2. Non-cash change in fair value of contingent consideration reflects the changes in management’s estimates of future cash consideration to be paid in connection with prior acquisitions from the amount estimated as of the later of the most recent balance sheet date forming the beginning of the income statement period or the original estimates made at the closing of the applicable acquisition. 3. Equity-based compensation expense consisted of $2,124 and $951 related to stock options issued under the Company's 2018 Equity Incentive Plan during the three months ended December 31, 2019 and 2018, respectively. 4. Under GAAP, companies must adjust, as necessary, beginning balances of acquired deferred revenue to fair value as part of acquisition accounting as defined by GAAP. Acquisition revenue adjustments remove the effect of these adjustments to acquisition date fair value from acquisitions that have closed as of the date of the earnings release. 5. Acquisition-related expenses are the professional service and related costs directly related to our acquisitions and are not part of our core performance. 6. Acquisition intangible amortization reflects amortization of intangible assets and software acquired through business combinations, acquired customer portfolios, acquired referral agreements and related asset acquisitions. 7. Non-cash interest expense reflects amortization of debt discount and debt issuance costs and any write-offs of debt issuance costs. 8. Other taxes consist of franchise taxes, commercial activity taxes, employer payroll taxes related to stock exercises and other non-income based taxes. Taxes related to salaries are not included. 9. Pro forma corporate income tax expense is based on Non-GAAP adjusted income before taxes and is calculated using a tax rate of 25.0% for both 2019 and 2018, based on blended federal and state tax rates, considering the Tax Reform Act for 2018. 10. Pro forma adjusted net income assumes that all net income during the period is available to the holders of the Company’s Class A common stock. 11. Cash interest expense, net represents all interest expense net of interest income recorded on the Company's statement of operations other than non-cash interest expense, which represents amortization of debt discount and debt issuance costs and any write-offs of debt issuance costs. 12. Depreciation, non-acquired intangible asset amortization and internally developed software amortization reflects depreciation on the Company's property, plant and equipment, net, and amortization expense on its internally developed capitalized software. 36