SEC Filing - i3 Verticals

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iiiv-20220630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-38532

i3 Verticals, Inc.

(Exact name of registrant as specified in its charter)


Delaware			82-4052852
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
40 Burton Hills Blvd., Suite 415
Nashville, TN			37215
(Address of principal executive offices)			(Zip Code)
(615) 465-4487
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, $0.0001 Par Value	IIIV	Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☒

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

As of August 8, 2022, there were 22,262,937 outstanding shares of Class A common stock, $0.0001 par value per share, and 10,118,142 outstanding shares of Class B common stock, $0.0001 par value per share.

TABLE OF CONTENTS


			Page
PART I. FINANCIAL INFORMATION			3
Item 1. Financial Statements (Unaudited)			3
Condensed Consolidated Balance Sheets			4
Condensed Consolidated Statements of Operations			5
Condensed Consolidated Statement of Change in Equity			6
Condensed Consolidated Statements of Cash Flows			8
Notes to the Unaudited Condensed Consolidated Financial Statements			10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			44
Item 3. Quantitative and Qualitative Disclosures About Market Risk			57
Item 4. Controls and Procedures			58

PART II. OTHER INFORMATION			58
Item 1. Legal Proceedings			58
Item 1A. Risk Factors			58
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			58
Item 3. Defaults Upon Senior Securities			58
Item 4. Mine Safety Disclosures			58
Item 5. Other Information			59
Item 6. Exhibits			59

SIGNATURES			60

PART I. - FINANCIAL INFORMATION

Item 1. Financial Statements

i3 Verticals, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)


	June 30,		September 30,
	2022		2021
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	9,046	$	3,641
Accounts receivable, net	43,653		38,500
Settlement assets	6,365		4,768
Prepaid expenses and other current assets	14,084		11,214
Total current assets	73,148		58,123
Property and equipment, net	5,418		5,902
Restricted cash	14,705		9,522
Capitalized software, net	51,764		41,371
Goodwill	353,882		292,243
Intangible assets, net	200,454		171,706
Deferred tax asset	51,698		49,992
Operating lease right-of-use assets	18,790		14,479
Other assets	10,565		8,462
Total assets	$	780,424	$	651,800

Liabilities and equity
Liabilities
Current liabilities
Accounts payable	$	8,083	$	7,865
Accrued expenses and other current liabilities	63,883		50,815
Settlement obligations	6,365		4,768
Deferred revenue	22,641		29,862
Current portion of operating lease liabilities	4,624		3,201
Total current liabilities	105,596		96,511
Long-term debt, less current portion and debt issuance costs, net	307,927		200,605
Long-term tax receivable agreement obligations	39,866		39,122
Operating lease liabilities, less current portion	15,021		11,960
Other long-term liabilities	21,522		14,011
Total liabilities	489,932		362,209
Commitments and contingencies (see Note 12)
Stockholders' equity
Preferred stock, par value $0.0001 per share, 10,000,000 shares authorized; 0 shares issued and outstanding as of June 30, 2022 and September 30, 2021	—		—
Class A common stock, par value $0.0001 per share, 150,000,000 shares authorized; 22,252,640 and 22,026,098 shares issued and outstanding as of June 30, 2022 and September 30, 2021, respectively	2		2
Class B common stock, par value $0.0001 per share, 40,000,000 shares authorized; 10,118,142 and 10,229,142 shares issued and outstanding as of June 30, 2022 and September 30, 2021, respectively	1		1
Additional paid-in capital	226,269		211,237
Accumulated deficit	(20,109)		(6,480)
Total stockholders' equity	206,163		204,760
Non-controlling interest	84,329		84,831
Total equity	290,492		289,591
Total liabilities and equity	$	780,424	$	651,800

See Notes to the Interim Condensed Consolidated Financial Statements

i3 Verticals, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except share and per share amounts)


	Three months ended June 30,				Nine months ended June 30,
	2022		2021(1)		2022		2021(1)

Revenue	$	80,553	$	63,129	$	232,612	$	156,947

Operating expenses
Other costs of services	19,749		16,064		52,890		41,044
Selling, general and administrative	47,775		37,296		142,878		92,769
Depreciation and amortization	7,506		6,995		21,823		17,938
Change in fair value of contingent consideration	8,254		3,609		24,684		5,835
Total operating expenses	83,284		63,964		242,275		157,586

Loss from operations	(2,731)		(835)		(9,663)		(639)

Interest expense, net	3,767		2,704		10,298		7,092
Other income	—		—		—		(2,353)
Total other expenses	3,767		2,704		10,298		4,739

Loss before income taxes	(6,498)		(3,539)		(19,961)		(5,378)

(Benefit from) provision for income taxes	(1,810)		662		(1,154)		516

Net loss	(4,688)		(4,201)		(18,807)		(5,894)

Net loss attributable to non-controlling interest	(960)		(921)		(5,178)		(1,918)
Net loss attributable to i3 Verticals, Inc.	$	(3,728)	$	(3,280)	$	(13,629)	$	(3,976)

Net loss per share attributable to Class A common stockholders:
Basic	$	(0.17)	$	(0.15)	$	(0.62)	$	(0.19)
Diluted	$	(0.17)	$	(0.15)	$	(0.62)	$	(0.19)
Weighted average shares of Class A common stock outstanding:
Basic	22,229,787		21,926,225		22,116,172		20,658,700
Diluted	22,229,787		21,926,225		22,116,172		20,658,700

__________________________

1.Effective October 1, 2020, the Company's financial statements are presented in accordance with ASU 2021-08, Accounting Standards Codification Topic 805, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. See Note 2 to the interim consolidated financial statements for a description of the recently adopted accounting pronouncement and the impacts of adoption on the condensed consolidated statements of operations.

See Notes to the Interim Condensed Consolidated Financial Statements

i3 Verticals, Inc.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

(In thousands, except share amounts)


	Class A Common Stock			Class B Common Stock			Additional Paid-In Capital		Retained Earnings (Deficit)		Non-Controlling Interest		Total Equity
	Shares	Amount		Shares	Amount
Balance at September 30, 2021	22,026,098	$	2	10,229,142	$	1	$	211,237	$	(6,480)	$	84,831	$	289,591
Equity-based compensation	—	—		—	—		6,624		—		—		6,624
Net loss	—	—		—	—		—		(2,528)		(1,153)		(3,681)
Redemption of common units in i3 Verticals, LLC	15,000	—		(15,000)	—		123		—		(123)		—
Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis	—	—		—	—		345		—		—		345
Exercise of equity-based awards	23,219	—		—	—		174		—		—		174
Allocation of equity to non-controlling interests	—	—		—	—		(1,899)		—		1,899		—
Balance at December 31, 2021	22,064,317	2		10,214,142	1		216,604		(9,008)		85,454		293,053
Equity-based compensation	—	—		—	—		6,257		—		—		6,257
Net loss	—	—		—	—		—		(7,373)		(3,065)		(10,438)
Redemption of common units in i3 Verticals, LLC	40,000	—		(40,000)	—		335		—		(335)		—
Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis	—	—		—	—		(1,288)		—		—		(1,288)
Exercise of equity-based awards	29,365	—		—	—		(89)		—		—		(89)
Allocation of equity to non-controlling interests	—	—		—	—		(1,618)		—		1,618		—
Balance at March 31, 2022	22,133,682	2		10,174,142	1		220,201		(16,381)		83,672		287,495
Equity-based compensation	—	—		—	—		6,799		—		—		6,799
Net loss	—	—		—	—		—		(3,728)		(960)		(4,688)
Redemption of common units in i3 Verticals, LLC	56,000	—		(56,000)	—		460		—		(460)		—
Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis	—	—		—	—		748		—		—		748
Exercise of equity-based awards	62,958	—		—	—		138		—		—		138
Allocation of equity to non-controlling interests	—	—		—	—		(2,077)		—		2,077		—
Balance at June 30, 2022	22,252,640	$	2	10,118,142	$	1	$	226,269	$	(20,109)	$	84,329	$	290,492

See Notes to the Interim Condensed Consolidated Financial Statements

i3 Verticals, Inc.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) (CONTINUED)

(In thousands, except share amounts)


	Class A Common Stock			Class B Common Stock			Additional Paid-In Capital		Retained Earnings (Deficit)		Non-Controlling Interest		Total Equity(1)
	Shares	Amount		Shares	Amount
Balance at September 30, 2020	18,864,143	$	2	11,900,621	$	1	$	157,598	$	(2,023)	$	84,590	$	240,168
Equity-based compensation	—	—		—	—		3,441		—		—		3,441
Net loss	—	—		—	—		—		(1,998)		(1,024)		(3,022)
Redemption of common units in i3 Verticals, LLC	1,019,609	—		(1,019,609)	—		7,185		—		(7,185)		—
Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis	—	—		—	—		1,162		—		—		1,162
Exercise of equity-based awards	121,019	—		—	—		688		—		—		688
Allocation of equity to non-controlling interests	—	—		—	—		(1,008)		—		1,008		—
Balance at December 31, 2020	20,004,771	2		10,881,012	1		169,066		$	(4,021)	77,389		242,437
Equity-based compensation	—	—		—	—		4,142		—		—		4,142
Net income	—	—		—	—		—		1,303		27		1,330
Redemption of common units in i3 Verticals, LLC	651,870	—		(651,870)	—		4,529		—		(4,529)		—
Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis	—	—		—	—		617		—		—		617
Exercise of equity-based awards	59,745	—		—	—		(199)		—		—		(199)
Allocation of equity to non-controlling interests	—	—		—	—		(9,769)		—		9,769		—
Issuance of Class A common stock under the 2020 Inducement Plan	1,202,914	—		—	—		35,245		—		—		35,245
Balance at March 31, 2021	21,919,300	2		10,229,142	1		203,631		(2,718)		82,656		283,572
Equity-based compensation	—	—		—	—		5,111		—		—		5,111
Net loss	—	—		—	—		—		(3,280)		(921)		(4,201)
Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis	—	—		—	—		28		—		—		28
Exercise of equity-based awards	40,759	—		—	—		287		—		—		287
Allocation of equity to non-controlling interests	—	—		—	—		(1,597)		—		1,597		—
Balance at June 30, 2021	21,960,059	$	2	10,229,142	$	1	$	207,460	$	(5,998)	$	83,332	$	284,797

__________________________

See Notes to the Interim Condensed Consolidated Financial Statements

i3 Verticals, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)


	Nine months ended June 30,
	2022		2021(1)(2)
Cash flows from operating activities:
Net loss	$	(18,807)	$	(5,894)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	21,823		17,938
Equity-based compensation	19,680		12,694
Provision for doubtful accounts	515		129
Amortization of debt discount and issuance costs	4,312		4,057
Amortization of capitalized customer acquisition costs	532		386
Unrealized gain on investment	—		(2,353)
(Benefit from) provision for income taxes	(1,154)		517
Non-cash lease expense	3,684		2,328
Increase in non-cash contingent consideration expense from original estimate	24,684		5,835
Changes in operating assets:
Accounts receivable	(4,800)		(2,862)
Prepaid expenses and other current assets	(2,735)		1,049
Other assets	(1,837)		(915)
Changes in operating liabilities:
Accounts payable	242		1,190
Accrued expenses and other current liabilities	11,063		12,395
Settlement obligations	912		(2,046)
Deferred revenue	(7,325)		(3,768)
Operating lease liabilities	(3,544)		(2,311)
Other long-term liabilities	—		(698)
Contingent consideration paid in excess of original estimates	(11,405)		(3,636)
Net cash provided by operating activities	35,840		34,035

Cash flows from investing activities:
Expenditures for property and equipment	(1,395)		(1,364)
Expenditures for capitalized software	(7,199)		(4,483)
Purchases of merchant portfolios and residual buyouts	—		(1,500)
Acquisitions of businesses, net of cash and restricted cash acquired	(100,715)		(142,486)
Acquisition of other intangibles	(11)		(104)
Loans to third parties	(30)		—
Net cash used in investing activities	(109,350)		(149,937)

See Notes to the Interim Condensed Consolidated Financial Statements

i3 Verticals, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)

(In thousands)


	Nine months ended June 30,
	2022		2021(1)(2)
Cash flows from financing activities:
Proceeds from revolving credit facility	258,665		262,264
Payments on revolving credit facility	(155,655)		(144,435)
Cash paid for contingent consideration	(17,378)		(2,886)
Proceeds from stock option exercises	617		1,286
Payments for employee's tax withholdings from net settled stock option exercises	(554)		(710)
Net cash provided by financing activities	85,695		115,519

Net increase in cash, cash equivalents and restricted cash	12,185		(383)
Cash, cash equivalents and restricted cash at beginning of period	17,931		20,601
Cash, cash equivalents and restricted cash at end of period	$	30,116	$	20,218

Supplemental disclosure of cash flow information:
Cash paid for interest	$	5,428	$	2,800
Cash paid for income taxes	$	835	$	280

__________________________

1.The prior period amounts included in the statement of cash flows have been updated to correct settlement assets as restricted cash, which were previously reported as cash flows used in operating and investing activities. These adjustments reflect a decrease in prior year cash flows provided by operating activities of $2,046 and a decrease of $7,009 in cash outflows for acquisitions of businesses, net of cash and restricted cash acquired within cash flows used in investing activities, resulting in a combined increase of $4,963 in cash, cash equivalents, and restricted cash at the end of the period.

2.Effective October 1, 2020, the Company's financial statements are presented in accordance with ASU 2021-08, Accounting Standards Codification Topic 805, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. See Note 2 to the interim consolidated financial statements for a description of the recently adopted accounting pronouncement and the impacts of adoption on the condensed consolidated statements of cash flows.

The following tables provide reconciliations of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to that shown in the condensed consolidated statements of cash flows:


	September 30,
	2021		2020
Beginning balance
Cash and cash equivalents	$	3,641	$	15,568
Settlement assets	4,768		—
Restricted cash	9,522		5,033
Total cash, cash equivalents, and restricted cash	$	17,931	$	20,601

	June 30,
	2022		2021
Ending balance
Cash and cash equivalents	$	9,046	$	4,653
Settlement assets	6,365		4,963
Restricted cash	14,705		10,602
Total cash, cash equivalents, and restricted cash	$	30,116	$	20,218

See Notes to the Interim Condensed Consolidated Financial Statements

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except unit, share and per share amounts)

1. ORGANIZATION AND OPERATIONS

i3 Verticals, Inc. (the “Company”) was formed as a Delaware corporation on January 17, 2018. The Company was formed for the purpose of completing an initial public offering (“IPO”) of its Class A common stock and other related transactions in order to carry on the business of i3 Verticals, LLC and its subsidiaries. i3 Verticals, LLC was founded in 2012 and delivers seamlessly integrated software and payment solutions to customers in strategic vertical markets. The Company’s headquarters are located in Nashville, Tennessee, with operations throughout the United States. Unless the context otherwise requires, references to “we,” “us,” “our,” “i3 Verticals” and the “Company” refer to i3 Verticals, Inc. and its subsidiaries, including i3 Verticals, LLC.

In connection with the IPO, the Company completed certain reorganization transactions, which, among other things, resulted in i3 Verticals, Inc. being the sole managing member of i3 Verticals, LLC (the “Reorganization Transactions”). Following the completion of the IPO and Reorganization Transactions, the Company is a holding company and the principal asset that it owns are the common units of i3 Verticals, LLC. i3 Verticals, Inc. operates and controls all of i3 Verticals, LLC's operations and, through i3 Verticals, LLC and its subsidiaries, conducts i3 Verticals, LLC's business. i3 Verticals, Inc. has a majority economic interest in i3 Verticals, LLC. As the sole managing member of i3 Verticals, LLC, i3 Verticals, Inc. consolidates the financial results of i3 Verticals, LLC and reports a non-controlling interest representing the Common Units of i3 Verticals, LLC held by other owners other (the “Continuing Equity Owners”).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the reporting and disclosure rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for fair presentation of the unaudited condensed consolidated financial statements of the Company and its subsidiaries as of June 30, 2022 and for the three and nine months ended June 30, 2022 and 2021. The results of operations for the three and nine months ended June 30, 2022 and 2021 are not necessarily indicative of the operating results for the full year. It is recommended that these interim condensed consolidated financial statements be read in conjunction with the Company's consolidated financial statements and related footnotes for the years ended September 30, 2021 and 2020, included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2021.

Principles of Consolidation

These interim condensed consolidated financial statements include the accounts of the Company and its subsidiary companies. All significant intercompany accounts and transactions have been eliminated in consolidation.

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except unit, share and per share amounts)

Restricted Cash

Restricted cash represents funds held in escrow related to acquisitions or held-on-deposit with processing banks pursuant to agreements to cover potential merchant losses. It is presented as long-term assets on the accompanying condensed consolidated balance sheets since the related agreements extend beyond the next twelve months. Following the adoption of Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows: Restricted Cash (Topic 230), the Company includes restricted cash along with the cash and cash equivalents balance for presentation in the consolidated statements of cash flows.

Settlement Assets and Obligations

Settlement assets and obligations result when funds are temporarily held or owed by the Company on behalf of merchants, consumers, schools, and other institutions. Timing differences, interchange expenses, merchant reserves and exceptional items cause differences between the amount received from the card networks and the amount funded to counterparties. These balances arising in the settlement process are reflected as settlement assets and obligations on the accompanying consolidated balance sheets. With the exception of merchant reserves, settlement assets or settlement obligations are generally collected and paid within one to four days. Settlement assets and settlement obligations were both $6,365 as of June 30, 2022 and $4,768 as of September 30, 2021, respectively.

Inventories

Inventories consist of point-of-sale equipment to be sold to customers and are stated at the lower of cost, determined on a weighted average or specific basis, or net realizable value. Inventories were $4,087 and $2,220 at June 30, 2022 and September 30, 2021, respectively, and are included within prepaid expenses and other current assets on the accompanying condensed consolidated balance sheets.

Acquisitions

Business acquisitions have been recorded using the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”), and, accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair value as of the date of acquisition. Where relevant, the fair value of contingent consideration included in an acquisition is calculated using a Monte Carlo simulation. The fair value of merchant relationships and non-compete assets acquired is identified using the Income Approach. The fair values of trade names and internally-developed software acquired are identified using the Relief from Royalty Method. The fair value of deferred revenue is identified using the Adjusted Fulfillment Cost Method. After the purchase price has been allocated, goodwill is recorded to the extent the total consideration paid for the acquisition, including the acquisition date fair value of contingent consideration, if any, exceeds the sum of the fair values of the separately identifiable acquired assets and assumed liabilities. Acquisition costs for business combinations are expensed when incurred and recorded in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.

Acquisitions not meeting the accounting criteria to be accounted for as a business combination are accounted for as an asset acquisition. An asset acquisition is recorded at its purchase price, inclusive of acquisition costs, which is allocated among the acquired assets and assumed liabilities based upon their relative fair values at the date of acquisition.

The operating results of an acquisition are included in the Company’s condensed consolidated statements of operations from the date of such acquisition. Acquisitions completed during the nine months ended June 30, 2022 contributed $26,049 and $3,567 of revenue and net income, respectively, to the Company's condensed consolidated statements of operations for the nine months then ended.

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except unit, share and per share amounts)

Leases

The Company adopted ASU 2016-02, Leases, (“ASC 842”) on October 1, 2020, using the optional modified retrospective method under which the prior period financial statements were not restated for the new guidance. The Company elected the accounting policy practical expedients for all classes of underlying assets to (i) combine associated lease and non-lease components in a lease arrangement as a combined lease component and (ii) exclude recording short-term leases as right-of-use assets on the condensed consolidated balance sheets.

At contract inception the Company determines whether an arrangement is, or contains a lease, and for each identified lease, evaluates the classification as operating or financing. Leased assets and obligations are recognized at the lease commencement date based on the present value of fixed lease payments to be made over the term of the lease. Renewal and termination options are factored into determination of the lease term only if the option is reasonably certain to be exercised. The Company’s leases do not provide a readily determinable implicit interest rate and the Company uses its incremental borrowing rate to measure the lease liability and corresponding right-of-use asset. The incremental borrowing rate is a fully collateralized rate that considers the Company’s credit rating, market conditions and the term of the lease. The Company accounts for all components in a lease arrangement as a single combined lease component.

Operating lease cost is recognized on a straight-line basis over the lease term. Total lease costs include variable lease costs, which are primarily comprised of the consumer price index adjustments and other changes based on rates, such as costs of insurance and property taxes. Variable payments are expensed in the period incurred and not included in the measurement of lease assets and obligations.

Revenue Recognition and Deferred Revenue

Revenue is recognized as each performance obligation is satisfied, in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). The Company accrues for rights of refund, processing errors or penalties, or other related allowances based on historical experience. The Company utilized the portfolio approach practical expedient within ASC 606-10-10-4 Revenue from Contracts with Customers—Objectives and the significant financing component practical expedient within ASC 606-10-32-18 Revenue from Contracts with Customers—The Existence of a Significant Financing Component in the Contract in performing the analysis. The Company adopted ASC 606 on October 1, 2019, using the modified retrospective method and applying the standard to all contracts not completed on the date of adoption.

The Company's revenue for the nine months ended June 30, 2022 and 2021 is derived from the following sources:

•Software and related services — Includes sales of software as a service, transaction-based fees, ongoing software maintenance and support, software licenses and other professional services related to our software offerings

•Payments — Includes volume-based payment processing fees (“discount fees”), gateway fees and other related fixed transaction or service fees

•Other — Includes sales of equipment, non-software related professional services and other revenues

Revenues from sales of the Company’s software are recognized when the related performance obligations are satisfied. Sales of software licenses are categorized into one of two categories of intellectual property in accordance with ASC 606, functional or symbolic. The key distinction is whether the license represents a right to use (functional) or a right to access (symbolic) intellectual property. The Company generates sales of one-time software licenses, which is functional intellectual property. Revenue from functional intellectual property is recognized at a point in time, when delivered to the customer. The Company also offers access to its software under software-as-a-service (“SaaS”) arrangements, which represent services arrangements. Revenue from SaaS arrangements is recognized over time, over the term of the agreement.

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except unit, share and per share amounts)

Discount fees represent a percentage of the dollar amount of each credit or debit transaction processed or a specified per transaction amount, depending on the card type. The Company frequently enters into agreements with customers under which the customer engages the Company to provide both payment authorization services and transaction settlement services for all of the cardholder transactions of the customer, regardless of which issuing bank and card network to which the transaction relates. The Company’s core performance obligations are to stand ready to provide continuous access to the Company’s payment authorization services and transaction settlement services in order to be able to process as many transactions as its customers require on a daily basis over the contract term. These services are stand ready obligations, as the timing and quantity of transactions to be processed is not determinable. Under a stand-ready obligation, the Company’s performance obligation is defined by each time increment rather than by the underlying activities satisfied over time based on days elapsed. Because the service of standing ready is substantially the same each day and has the same pattern of transfer to the customer, the Company has determined that its stand-ready performance obligation comprises a series of distinct days of service. Discount fees are recognized each day based on the volume or transaction count at the time the merchants’ transactions are processed.

The Company follows the requirements of ASC 606-10-55 Revenue from Contracts with Customers—Principal versus Agent Considerations, which states that the determination of whether a company should recognize revenue based on the gross amount billed to a customer or the net amount retained is a matter of judgment that depends on the facts and circumstances of the arrangement. The determination of gross versus net recognition of revenue requires judgment that depends on whether the Company controls the good or service before it is transferred to the merchant or whether the Company is acting as an agent of a third party. The assessment is provided separately for each performance obligation identified. Under its agreements, the Company incurs interchange and network pass-through charges from the third-party card issuers and card networks, respectively, related to the provision of payment authorization services. The Company has determined that it is acting as an agent with respect to these payment authorization services, based on the following factors: (1) the Company has no discretion over which card issuing bank will be used to process a transaction and is unable to direct the activity of the merchant to another card issuing bank, and (2) interchange and card network rates are pre-established by the card issuers or card networks, and the Company has no latitude in determining these fees. Therefore, revenue allocated to the payment authorization performance obligation is presented net of interchange and card network fees paid to the card issuing banks and card networks, respectively.

With regards to the Company's discount fees, generally, where the Company has control over merchant pricing, merchant portability, credit risk and ultimate responsibility for the merchant relationship, revenues are reported at the time of sale equal to the full amount of the discount charged to the merchant, less interchange and network fees. Revenues generated from merchant portfolios where the Company does not have control over merchant pricing, liability for merchant losses or credit risk or rights of portability are reported net of interchange and network fees as well as third-party processing costs directly attributable to processing and bank sponsorship costs.

Revenues are also derived from a variety of fixed transaction or service fees, including authorization fees, convenience fees, statement fees, annual fees, gateway fees, which are charged for accessing our payment and software solutions, and fees for other miscellaneous services, such as handling chargebacks. Revenues derived from service fees are recognized at the time the services are performed and there are no further performance obligations. Revenue from fixed transactions, which principally relate to the sale of equipment, is recognized upon transfer of ownership and delivery to the customer, after which there are no further performance obligations.

Arrangements may contain multiple performance obligations, such as payment authorization services, transaction settlement services, hardware, software products, maintenance, and professional installation and training services. Revenues are allocated to each performance obligation based on the standalone selling price of each good or service. The selling price for a deliverable is based on standalone selling price, if available, the adjusted market assessment approach, estimated cost plus margin approach, or residual approach. The Company establishes estimated selling price, based on the judgment of the Company's management, considering internal factors such as margin objectives, pricing practices and controls, customer segment pricing strategies and

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except unit, share and per share amounts)

the product life cycle. In arrangements with multiple performance obligations, the Company determines allocation of the transaction price at inception of the arrangement and uses the standalone selling prices for the majority of the Company's revenue recognition.

Revenues from sales of the Company’s combined hardware and software element are recognized when each performance obligation has been satisfied which has been determined to be upon the delivery of the product. Revenues derived from service fees are recognized at the time the services are performed and there are no further performance obligations. The Company’s professional services, including training, installation, and repair services are recognized as revenue as these services are performed.

The tables below present a disaggregation of the Company's revenue from contracts with customers by product by segment. Refer to Note 14 for discussion of the Company's segments. The Company's products are defined as follows:

•Software and related services — Includes sales of SaaS, transaction-based fees, ongoing software maintenance and support, software licenses and other professional services related to our software offerings.

•Payments — Includes discount fees, gateway fees and other related fixed transaction or service fees.

•Other — Includes sales of equipment, non-software related professional services and other revenues.


	For the Three Months Ended June 30, 2022
	Merchant Services		Proprietary Software and Payments		Other		Total
Software and related services revenue	$	3,349	$	35,667	$	(10)	$	39,006
Payments revenue	27,135		9,559		(11)		36,683
Other revenue	2,230		2,613		21		4,864
Total revenue	$	32,714	$	47,839	$	—	$	80,553


	For the Three Months Ended June 30, 2021(1)
	Merchant Services		Proprietary Software and Payments		Other		Total
Software and related services revenue	$	2,975	$	23,852	$	(8)	$	26,819
Payments revenue	24,995		7,770		(542)		32,223
Other revenue	1,993		2,107		(13)		4,087
Total revenue	$	29,963	$	33,729	$	(563)	$	63,129

__________________________

i3 VERTICALS, Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except unit, share and per share amounts)


	For the Nine Months Ended June 30, 2022
	Merchant Services		Proprietary Software and Payments		Other		Total
Software and related services revenue	$	9,319	$	105,023	$	(26)	$	114,316
Payments revenue	75,365		29,341		(29)		104,677
Other revenue	6,387		7,211		21		13,619
Total revenue	$	91,071