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

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 001-38532
i3 Verticals, Inc.
(Exact name of registrant as specified in its charter)
Delaware82-4052852
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
40 Burton Hills Blvd., Suite 415
Nashville, TN
37215
(Address of principal executive offices)(Zip Code)
(615) 465-4487
(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 classTrading Symbol(s)Name of each exchange on which registered
Class A Common Stock, $0.0001 Par ValueIIIVNasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  x  No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
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 February 8, 2023, there were 23,122,665 outstanding shares of Class A common stock, $0.0001 par value per share, and 10,108,218 outstanding shares of Class B common stock, $0.0001 par value per share.



TABLE OF CONTENTS
Page

2


PART I. - FINANCIAL INFORMATION
Item 1.    Financial Statements

3

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

December 31,September 30,
20222022
(unaudited)
Assets
Current assets
Cash and cash equivalents$3,609 $3,490 
Accounts receivable, net52,653 53,334 
Settlement assets11,786 7,540 
Prepaid expenses and other current assets23,133 19,445 
Total current assets91,181 83,809 
Property and equipment, net11,828 5,670 
Restricted cash8,944 12,735 
Capitalized software, net64,831 52,341 
Goodwill398,798 353,639 
Intangible assets, net227,217 195,919 
Deferred tax asset43,788 43,458 
Operating lease right-of-use assets17,272 17,678 
Other assets5,590 5,063 
Total assets$869,449 $770,312 
Liabilities and equity
Liabilities
Current liabilities
Accounts payable$8,414 $9,342 
Accrued expenses and other current liabilities50,967 57,833 
Settlement obligations11,786 7,540 
Deferred revenue37,381 31,975 
Current portion of operating lease liabilities4,724 4,568 
Total current liabilities113,272 111,258 
Long-term debt, less current portion and debt issuance costs, net377,206 287,020 
Long-term tax receivable agreement obligations40,811 40,812 
Operating lease liabilities, less current portion13,413 13,994 
Other long-term liabilities21,289 9,540 
Total liabilities565,991 462,624 
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 December 31, 2022 and September 30, 2022
  
Class A common stock, par value $0.0001 per share, 150,000,000 shares authorized; 23,011,193 and 22,986,448 shares issued and outstanding as of December 31, 2022 and September 30, 2022, respectively
2 2 
Class B common stock, par value $0.0001 per share, 40,000,000 shares authorized; 10,118,142 and 10,118,142 shares issued and outstanding as of December 31, 2022 and September 30, 2022, respectively
1 1 
Additional paid-in capital228,016 241,958 
Accumulated deficit(12,373)(23,582)
Total stockholders' equity215,646 218,379 
Non-controlling interest87,812 89,309 
Total equity303,458 307,688 
Total liabilities and equity$869,449 $770,312 

See Notes to the Interim Condensed Consolidated Financial Statements
4

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

Three months ended December 31,
2022
2021
Revenue$86,029 $73,939 
Operating expenses
Other costs of services19,069 16,510 
Selling, general and administrative51,003 46,387 
Depreciation and amortization8,676 6,870 
Change in fair value of contingent consideration1,443 4,927 
Total operating expenses80,191 74,694 
Income (loss) from operations5,838 (755)
Interest expense, net5,490 3,154 
Other income(203) 
Total other expenses5,287 3,154 
Income (loss) before income taxes551 (3,909)
Provision for (benefit from) income taxes382 (228)
Net income (loss)169 (3,681)
Net income (loss) attributable to non-controlling interest409 (1,153)
Net loss attributable to i3 Verticals, Inc.$(240)$(2,528)
Net loss per share attributable to Class A common stockholders:
Basic$(0.01)$(0.11)
Diluted$(0.01)$(0.11)
Weighted average shares of Class A common stock outstanding:
Basic22,998,608 22,042,801 
Diluted22,998,608 22,042,801 

See Notes to the Interim Condensed Consolidated Financial Statements
5

i3 Verticals, Inc.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)
(In thousands, except share amounts)
Class A Common StockClass B Common StockAdditional Paid-In CapitalRetained Earnings (Deficit)Non-Controlling InterestTotal Equity
SharesAmountSharesAmount
Balance at September 30, 202222,986,448 $2 10,118,142 $1 $241,958 $(23,582)$89,309 $307,688 
Adoption of ASU 2020-06— — — — (23,382)11,449 — (11,933)
Equity-based compensation— — — — 6,846 — — 6,846 
Net (loss) income— — — — — (240)409 169 
Establishment of liabilities under a tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis— — — — 685 — — 685 
Exercise of equity-based awards24,745 — — — 3 — — 3 
Allocation of equity to non-controlling interests— — — — 1,906 — (1,906) 
Balance at December 31, 202223,011,193 $2 10,118,142 $1 $228,016 $(12,373)$87,812 $303,458 

See Notes to the Interim Condensed Consolidated Financial Statements
6

i3 Verticals, Inc.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) (CONTINUED)
(In thousands, except share amounts)
Class A Common StockClass B Common StockAdditional Paid-In CapitalRetained Earnings (Deficit)Non-Controlling Interest
Total Equity
SharesAmountSharesAmount
Balance at September 30, 202122,026,098 $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, LLC15,000 — (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 awards23,219 — — — 174 — — 174 
Allocation of equity to non-controlling interests— — — — (1,899)— 1,899  
Balance at December 31, 202122,064,317 $2 10,214,142 $1 $216,604 $(9,008)$85,454 $293,053 

See Notes to the Interim Condensed Consolidated Financial Statements
7

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


Three months ended December 31,
2022
2021
Cash flows from operating activities:
Net income (loss)$169 $(3,681)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization8,676 6,870 
Equity-based compensation6,846 6,624 
Amortization of debt discount and issuance costs361 1,416 
Provision for (benefit from) income taxes355 (228)
Non-cash lease expense1,063 1,205 
Increase in non-cash contingent consideration expense from original estimate1,443 4,927 
Other non-cash adjustments to net income502 283 
Changes in operating assets:
Accounts receivable8,868 (628)
Prepaid expenses and other current assets(3,312)(4,541)
Other assets(313)(877)
Changes in operating liabilities:
Accounts payable(947)419 
Accrued expenses and other current liabilities(7,753)6,818 
Settlement obligations4,246 2,581 
Deferred revenue2,249 5,439 
Operating lease liabilities(1,064)(1,180)
Other long-term liabilities2 1 
Contingent consideration paid in excess of original estimates(3,212)(3,538)
Net cash provided by operating activities18,179 21,910 
Cash flows from investing activities:
Expenditures for property and equipment(1,438)(384)
Expenditures for capitalized software(2,721)(1,958)
Purchases of merchant portfolios and residual buyouts(275) 
Acquisitions of businesses, net of cash and restricted cash acquired(89,497)(60,000)
Payments for other investing activities(802)(11)
Proceeds from investments203  
Net cash used in investing activities(94,530)(62,353)

See Notes to the Interim Condensed Consolidated Financial Statements
8

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

Three months ended December 31,
2022
2021
Cash flows from financing activities:
Proceeds from revolving credit facility157,004 105,009 
Payments on revolving credit facility(79,025)(49,900)
Payments of debt issuance costs(87) 
Cash paid for contingent consideration(1,000)(6,217)
Proceeds from stock option exercises54 174 
Payments for employee's tax withholdings from net settled stock option exercises(21)157 
Net cash provided by financing activities76,925 49,223 
Net increase in cash, cash equivalents and restricted cash574 8,780 
Cash, cash equivalents and restricted cash at beginning of period23,765 17,931 
Cash, cash equivalents and restricted cash at end of period$24,339 $26,711 
Supplemental disclosure of cash flow information:
Cash paid for interest$4,279 $1,367 
Cash paid for income taxes$172 $556 
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,
20222021
Beginning balance
Cash and cash equivalents$3,490 $3,641 
Settlement assets7,540 4,768 
Restricted cash12,735 9,522 
Total cash, cash equivalents, and restricted cash$23,765 $17,931 
December 31,
20222021
Ending balance
Cash and cash equivalents$3,609 $3,371 
Settlement assets11,786 8,034 
Restricted cash8,944 15,306 
Total cash, cash equivalents, and restricted cash$24,339 $26,711 
See Notes to the Interim Condensed Consolidated Financial Statements
9


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)

1. ORGANIZATION AND OPERATIONS
i3 Verticals, Inc. (the “Company”) was formed as a Delaware corporation on January 17, 2018. The Company was formed for the purpose of completing an initial public offering (“IPO”) of its Class A common stock and other related transactions in order to carry on the business of i3 Verticals, LLC and its subsidiaries. i3 Verticals, LLC was founded in 2012 and delivers seamlessly integrated 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 owners other than i3 Verticals, Inc. (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 December 31, 2022 and for the three months ended December 31, 2022 and 2021. The results of operations for the three months ended December 31, 2022 and 2021 are not necessarily indicative of the operating results for the full year.
As permitted by the rules and regulations of the SEC, certain information and disclosures otherwise included in the notes to the consolidated financial statements have been condensed or omitted from the summary of significant accounting policies. The Company believes the disclosures are adequate to make the information presented not misleading. 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, 2022 and 2021, included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2022 filed with the SEC on November 18, 2022.
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.
10


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 $11,786 as of December 31, 2022 and $7,540 as of September 30, 2022, 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 $4,960 and $4,121 at December 31, 2022 and September 30, 2022, 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. 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 three months ended December 31, 2022 contributed $3,625 and $971 of revenue and net income, respectively, to the Company's condensed consolidated statements of operations for the three months then ended.
Leases
The Company adopted ASU 2016-02, Leases, 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
11


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
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 three months ended December 31, 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.
12


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
13


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 Companys combined hardware and software element are recognized when each performance obligation has been satisfied which has been determined to be upon the delivery of the product. Revenues derived from service fees are recognized at the time the services are performed and there are no further performance obligations. The Company’s professional services, including training, installation, and repair services are recognized as revenue as these services are performed.
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 December 31, 2022
Merchant ServicesSoftware and ServicesOtherTotal
Software and related services revenue$2,979 $38,145 $(10)$41,114 
Payments revenue27,609 12,753 (8)40,354 
Other revenue2,246 2,315  4,561 
Total revenue$32,834 $53,213 $(18)$86,029 
For the Three Months Ended December 31, 2021
Merchant ServicesSoftware and ServicesOtherTotal
Software and related services revenue$2,962 $33,384 $(8)$36,338 
Payments revenue24,304 9,166 (4)33,466 
Other revenue1,911 2,224  4,135 
Total revenue$29,177 $44,774 $(12)$73,939 


The tables below present a disaggregation of the Company's revenue from contracts with customers by timing of transfer of goods or services by segment. For the three months ended December 31, 2021, $10,213 was included in revenue earned at a point in time related to professional services or other stand ready contract revenue for fixed service fee arrangements. These types of revenue are included in revenue earned over time for the three months ended December 31, 2022.The Company's revenue included in each category are defined as follows:
Revenue earned over time Includes discount fees, gateway fees, sales of SaaS, ongoing support or other stand-ready obligations and professional services.
Revenue earned at a point in time — Includes point in time service fees that are not stand-ready obligations, software licenses sold as functional intellectual property and other equipment.
14


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
For the Three Months Ended December 31, 2022
Merchant ServicesSoftware and ServicesOtherTotal
Revenue earned over time$27,597 $50,441 $(10)$78,028 
Revenue earned at a point in time5,237 2,772 (8)8,001 
Total revenue$32,834 $53,213 $(18)$86,029 
For the Three Months Ended December 31, 2021
Merchant ServicesSoftware and ServicesOtherTotal
Revenue earned over time$22,734 $31,288 $(8)$54,014 
Revenue earned at a point in time6,443 13,486 (4)19,925 
Total revenue$29,177 $44,774 $(12)$73,939 

Contract Assets
The Company bills for certain software and related services sales and fixed fee professional services upon pre-determined milestones in the contracts. Therefore, the Company may have contract assets other than trade accounts receivable for performance obligations that are partially completed, which would typically represent consulting services provided before a milestone is completed in a contract. Unbilled amounts associated with these services are presented as accounts receivable as the Company has an unconditional right to payment for services performed.
As of December 31, 2022 and September 30, 2022, the Company’s contract assets from contracts with customers was $11,676 and $9,716, respectively.
Contract Liabilities
Deferred revenue represents amounts billed to customers by the Company for services contracts. Payment is typically collected at the start of the contract term. The initial prepaid contract agreement balance is deferred. The balance is then recognized as the services are provided over the contract term. Deferred revenue that is expected to be recognized as revenue within one year is recorded as short-term deferred revenue and the remaining portion is recorded as other long-term liabilities in the condensed consolidated balance sheets. The terms for most of the Company's contracts with a deferred revenue component are one year. Substantially all of the Company's deferred revenue is anticipated to be recognized within the next year.
15


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
The following tables present the changes in deferred revenue as of and for the three months ended December 31, 2022 and 2021, respectively:
Balance at September 30, 2022
$32,089 
Deferral of revenue19,334 
Recognition of unearned revenue(13,925)
Balance at December 31, 2022
$37,498 
Balance at September 30, 2021
$30,024 
Deferral of revenue21,032 
Recognition of unearned revenue(15,735)
Balance at December 31, 2021
$35,321 

Costs to Obtain and Fulfill a Contract
The Company capitalizes incremental costs to obtain new contracts and contract renewals and amortizes these costs on a straight-line basis as an expense over the benefit period, which is generally the contract term, unless a commensurate payment is not expected at renewal. As of December 31, 2022 and September 30, 2022 the Company had $4,339 and $4,185, respectively, of capitalized contract costs, which relates to commissions paid to employees and agents as well as other incentives given to customers to obtain new sales, included within “Other assets" on the condensed consolidated balance sheets. The Company recorded expense related to these costs of $183 for the three months ended December 31, 2022 and $167 for the three months ended December 31, 2021.
The Company expenses sales commissions as incurred for the Company's sales commission plans that are paid on recurring monthly revenues, portfolios of existing customers, or have a substantive stay requirement prior to payment.
Other Cost of Services
Other costs of services include third-party processing costs directly attributable to processing and bank sponsorship costs, which may not be based on a percentage of volume. These costs also include related costs such as residual payments to sales groups, which are based on a percentage of the net revenues generated from merchant referrals. In certain merchant processing bank relationships the Company is liable for chargebacks against a merchant equal to the volume of the transaction. Losses resulting from chargebacks against a merchant are included in other cost of services on the accompanying condensed consolidated statement of operations. The Company evaluates its risk for such transactions and estimates its potential loss from chargebacks based primarily on historical experience and other relevant factors. The reserve for merchant losses is included within accrued expenses and other current liabilities on the accompanying condensed consolidated balance sheets. The cost of equipment sold is also included in other cost of services. Other costs of services are recognized at the time the associated revenue is earned.
The Company accounts for all governmental taxes associated with revenue transactions on a net basis.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include, but are not limited to, the value of purchase consideration paid and identifiable assets acquired and assumed in acquisitions, goodwill and intangible asset impairment review, determination of performance obligations for revenue
16


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
recognition, loss reserves, assumptions used in the calculation of equity-based compensation and in the calculation of income taxes, and certain tax assets and liabilities as well as the related valuation allowances. Actual results could differ from those estimates.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40)—Accounting For Convertible Instruments and Contracts in an Entity's Own Equity (“ASU 2020-06”). ASU 2020-06 simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. ASU 2020-06 also simplifies the diluted net income per share calculation in certain areas. The amendments in ASU 2020-06 are effective for public business entities for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company adopted this ASU on October 1, 2022. The adoption of ASU 2020-06 resulted in an increase in long-term debt, less current portion and debt issuance costs, net of $11,933, a decrease in additional paid-in-capital of $23,382 and a decrease in accumulated deficit of $11,449. The adoption of ASU 2020-06 had no impact on net income.

3. ACQUISITIONS
During the three months ended December 31, 2022 and 2021, the Company acquired the following intangible assets and businesses:
Residual Buyouts
From time to time, the Company acquires future commission streams (or "residuals") from sales agents in exchange for an upfront cash payment. This results in an increase in overall gross processing volume to the Company. The residual buyouts are treated as asset acquisitions, resulting in recording a residual buyout intangible asset at cost on the date of acquisition. These assets are amortized using a method of amortization that reflects the pattern in which the economic benefits of the intangible asset are expected to be utilized over their estimated useful lives.
During the three months ended December 31, 2022, the Company purchased $275 in residuals using a combination of cash on hand and borrowings on the Company's revolving credit facility. The acquired residual buyout intangible asset has an estimated amortization period of eight years. The Company did not acquire any residuals during the three months ended December 31, 2021.
Purchase of Celtic Cross Holdings, Inc. and Celtic Systems Pvt. Ltd.
During the three months ended December 31, 2022, the Company completed the acquisition of substantially all of the assets of Celtic Cross Holdings, Inc., in Scottsdale, Arizona and Celtic Systems Pvt. Ltd. in Vadodara, India (collectively "Celtic") to expand the Company’s software offerings in the Public Sector vertical. Celtic is within the Software and Services segment. Total purchase consideration consisted of $85,000 in cash consideration, funded by proceeds from the Company's revolving credit facility. Certain of the purchase price allocations assigned for this acquisition is considered preliminary as of December 31, 2022.
The goodwill associated with the Celtic acquisition is deductible for tax purposes. The acquired customer relationships intangible assets has an estimated amortization period of eighteen years. The trade name and non-compete agreements associated with the acquisition have amortization periods of five years and three years,
17


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
respectively. The weighted-average amortization period for all intangibles acquired is eighteen years. The acquired capitalized software has a weighted-average amortization period of ten years.
Acquisition-related costs for this acquisition amounted to approximately $1,567 and were expensed as incurred.
Summary of Celtic Cross Holdings, Inc. and Celtic Systems Pvt. Ltd.
The fair values assigned to certain assets and liabilities assumed, as of the acquisition date, were as follows:

Accounts receivable$8,217 
Inventories 
Prepaid expenses and other current assets110 
Property and equipment5,437 
Capitalized software12,600 
Customer relationships33,800 
Non-compete agreements200 
Trade name600 
Goodwill42,315 
Total assets acquired103,279 
Accounts payable9 
Accrued expenses and other current liabilities3,134 
Deferred revenue, current3,160 
Other long-term liabilities11,976 
Net assets acquired$85,000 
Other Business Combinations during the three months ended December 31, 2022
Effective October 1, 2022, the Company completed the acquisition of another business to expand the Company's software offerings. The total purchase consideration consisted of $4,497 in cash consideration, funded by proceeds from the Company's revolving credit facility. In connection with this acquisition, the Company allocated approximately $104 of the consideration to net working capital, approximately $39 of the consideration to purchase price to property and equipment, approximately $30 of the consideration to capitalized software, approximately $1,480 of the consideration to customer relationships, and the remainder, approximately $2,844, to goodwill, which is deductible for tax purposes. Certain of the purchase price allocations assigned for this acquisition is considered preliminary as of December 31, 2022. The acquired capital software and customer relationships intangible asset have estimated amortization periods of eight years and ten years, respectively.
18


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
Pro Forma Results of Operations for Business Combinations during the three months ended December 31, 2022
The following unaudited supplemental pro forma results of operations have been prepared as though each of the acquired businesses in the three months ended December 31, 2022 had occurred on October 1, 2021. Pro forma adjustments were made to reflect the impact of depreciation and amortization, changes to executive compensation and the increased debt, all in accordance with ASC 805. This supplemental pro forma information does not purport to be indicative of the results of operations that would have been attained had the acquisitions been made on these dates, or of results of operations that may occur in the future.
Three months ended December 31,
20222021
Revenue$86,029 $79,109 
Net income (loss)$169 $(5,267)
Business Combinations during the year ended September 30, 2022
During the year ended September 30, 2022, the Company completed the acquisitions of three businesses to expand the Company’s software offerings in the Public Sector and Healthcare vertical markets. Certain of the purchase price allocations assigned for these acquisitions are considered preliminary as of December 31, 2022.
Total purchase consideration was $107,681, including $101,400 in cash consideration, funded by proceeds from the Company's revolving credit facility, and $6,281 of contingent consideration.
The goodwill associated with two of the three acquisitions is deductible for tax purposes. The acquired customer relationships intangible assets have estimated amortization periods of between ten and nineteen years. The trade names have estimated weighted-average amortization periods of four years. The weighted-average amortization period for all intangibles acquired is fifteen years. The acquired capitalized software have amortization periods of seven years.
Acquisition-related costs for these businesses amounted to approximately $773 and were expensed as incurred.
Certain provisions in the purchase agreements provide for additional consideration of up to $23,000, in the aggregate, to be paid based upon the achievement of specified financial performance targets, as defined in the purchase agreements, through no later than September 2024. The Company determined the acquisition date fair values of the liabilities for the contingent consideration based on probability forecasts and discounted cash flow analyses. In each subsequent reporting period, the Company will reassess its current estimates of performance relative to the targets and adjust the contingent liabilities to their fair values through earnings See additional disclosures in Note 10.
19


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
Summary of Business Combinations during the year ended September 30, 2022
The fair values assigned to certain assets and liabilities assumed, as of the acquisition dates, during the year ended September 30, 2022 were as follows:
Accounts receivable$651 
Settlement assets685 
Inventories 
Prepaid expenses and other current assets83 
Property and equipment190 
Capitalized software9,790 
Acquired merchant relationships41,090 
Non-compete agreements 
Trade name1,550 
Goodwill61,347 
Operating lease right-of-use assets263 
Other assets22 
Total assets acquired115,671 
Accrued expenses and other current liabilities287 
Settlement obligations685 
Deferred revenue, current30 
Current portion of operating lease liabilities82 
Operating lease liabilities, less current portion181 
Other long-term liabilities6,725 
Net assets acquired$107,681 

4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
A summary of the Company's prepaid expenses and other current assets as of December 31, 2022 and September 30, 2022 is as follows:
December 31,September 30,
20222022
Inventory$4,960 $4,121 
Prepaid licenses7,287 5,743 
Prepaid insurance1,487 736 
Notes receivable — current portion5,117 4,930 
Other current assets4,282 3,915 
Prepaid expenses and other current assets$23,133 $19,445 

20


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
5. GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill are as follows:
Merchant ServicesSoftware and ServicesOtherTotal
Balance at September 30, 2022
$119,086 $234,553 $ $353,639 
Goodwill attributable to preliminary purchase price adjustments and acquisitions during the three months ended December 31, 20222,844 42,315  45,159 
Balance at December 31, 2022$121,930 $276,868 $ $398,798 
Intangible assets consisted of the following as of December 31, 2022:
Cost
Accumulated
Amortization
Carrying
Value
Amortization Life and Method
Finite-lived intangible assets:
Merchant relationships$303,581 $(85,003)$218,578 
9 to 25 years – accelerated or straight-line
Non-compete agreements1,390 (816)574 
3 to 6 years – straight-line
Website and brand development costs267 (177)90 
3 to 4 years – straight-line
Trade names8,371 (4,578)3,793 
3 to 7 years – straight-line
Residual buyouts6,445 (2,334)4,111 
8 years – straight-line
Referral and exclusivity agreements800 (773)27 
5 years – straight-line
Total finite-lived intangible assets320,854 (93,681)227,173 
Indefinite-lived intangible assets:
Trademarks44 — 44 
Total identifiable intangible assets$320,898 $(93,681)$227,217 
Amortization expense for intangible assets amounted to $5,059 and $4,178 during the three months ended December 31, 2022, and 2021 respectively.
Based on net carrying amounts at December 31, 2022, the Company's estimate of future amortization expense for intangible assets are presented in the table below for fiscal years ending September 30:
2023 (nine months remaining)$14,884 
202418,969 
202518,677 
202618,205 
202717,585 
Thereafter138,853 
$227,173 

21


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
6. ACCRUED EXPENSES AND OTHER LIABILITIES
A summary of the Company's accrued expenses and other current liabilities as of December 31, 2022 and September 30, 2022 is as follows is as follows:
December 31,September 30,
20222022
Accrued wages, bonuses, commissions and vacation$7,143 $8,117 
Accrued interest1,492 642 
Accrued contingent consideration — current portion18,847 21,385 
Escrow liabilities8,494 12,285 
Tax receivable agreement liability — current portion21 20 
Customer deposits1,583 1,575 
Employee health self-insurance liability581 732 
Accrued interchange1,877 2,096 
Other current liabilities10,929 10,981 
Accrued expenses and other current liabilities$50,967 $57,833 
A summary of the Company's long-term liabilities as of December 31, 2022 and September 30, 2022 is as follows:
December 31,September 30,
20222022
Accrued contingent consideration — long-term portion$1,217 $1,448 
Deferred tax liability — long-term19,872 7,896 
Other long-term liabilities200 196 
Total other long-term liabilities$21,289 $9,540 

7. LONG-TERM DEBT, NET
A summary of long-term debt, net as of December 31, 2022 and September 30, 2022 is as follows:
December 31,September 30,
Maturity20222022
Revolving lines of credit to banks under the Senior Secured Credit FacilityMay 9, 2024$263,174 $185,017 
1% Exchangeable Senior Notes due 2025
February 15, 2025117,000 104,557 
Debt issuance costs, net(2,968)(2,554)
Total long-term debt, net of issuance costs$377,206 $287,020 
2020 Exchangeable Notes Offering
On February 18, 2020, i3 Verticals, LLC issued $138,000 aggregate principal amount of 1.0% Exchangeable Senior Notes due 2025 (the “Exchangeable Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The Company
22


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
received approximately $132,762 in net proceeds from the sale of the Exchangeable Notes, as determined by deducting estimated offering expenses paid to third-parties from the aggregate principal amount.
On October 1, 2022, the Company adopted ASU 2020-06 using the modified retrospective method, which resulted in the Exchangeable Notes being presented as a single liability instrument with no separate accounting for embedded conversion features. Refer to Note 2 for further discussion.
The Exchangeable Notes bear interest at a fixed rate of 1.00% per year, payable semiannually in arrears on February 15 and August 15 of each year, beginning on August 15, 2020. The Exchangeable Notes will mature on February 15, 2025, unless converted or repurchased at an earlier date.
i3 Verticals, LLC issued the Exchangeable Notes pursuant to an Indenture, dated as of February 18, 2020, among i3 Verticals, LLC, the Company and U.S. Bank National Association, as trustee.
As of December 31, 2022, the aggregate principal amount outstanding of the Exchangeable Notes was $117,000.
For a discussion of the terms of the Exchangeable Notes, refer to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022.
Non-cash interest expense, including amortization of debt issuance costs, related to the Exchangeable Notes for the three months ended December 31, 2022 was $227, and $159 for the three months ended December 31, 2021. Total unamortized debt issuance costs related to the Exchangeable Notes were $2,223 as of December 31, 2022.
The estimated fair value of the Exchangeable Notes was $103,990 as of December 31, 2022. The estimated fair value of the Exchangeable Notes was determined through consideration of quoted market prices for similar instruments. The fair value is classified as Level 2, as defined in Note 10.
Exchangeable Note Hedge Transactions
On February 12, 2020, concurrently with the pricing of the Exchangeable Notes, and on February 13, 2020, concurrently with the exercise by the initial purchasers of their right to purchase additional Exchangeable Notes, i3 Verticals, LLC entered into exchangeable note hedge transactions with respect to Class A common stock (the “Note Hedge Transactions”) with certain financial institutions (collectively, the “Counterparties”). The Note Hedge Transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Exchangeable Notes, the same number of shares of Class A common stock that initially underlie the Exchangeable Notes in the aggregate and are exercisable upon exchange of the Exchangeable Notes. The Note Hedge Transactions are intended to reduce potential dilution to the Class A common stock upon any exchange of the Exchangeable Notes. The Note Hedge Transactions will expire upon the maturity of the Exchangeable Notes, if not earlier exercised. The Note Hedge Transactions are separate transactions, entered into by i3 Verticals, LLC with the Counterparties, and are not part of the terms of the Exchangeable Notes. Holders of the Exchangeable Notes will not have any rights with respect to the Note Hedge Transactions. i3 Verticals, LLC used approximately $28,676 of the net proceeds from the offering of the Exchangeable Notes (net of the premiums received for the warrant transactions described below) to pay the cost of the Note Hedge Transactions.
The Note Hedge Transactions do not require separate accounting as a derivative as they meet a scope exception for certain contracts involving an entity's own equity. The premiums paid for the Note Hedge Transactions have been included as a net reduction to additional paid-in capital within stockholders' equity.
Warrant Transactions
On February 12, 2020, concurrently with the pricing of the Exchangeable Notes, and on February 13, 2020, concurrently with the exercise by the initial purchasers of their right to purchase additional Exchangeable Notes,
23


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
the Company entered into warrant transactions to sell to the Counterparties warrants (the “Warrants”) to acquire, subject to customary adjustments, up to initially 3,376,391 shares of Class A common stock in the aggregate at an initial exercise price of $62.88 per share. The Company offered and sold the Warrants in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act. The Warrants will expire over a period beginning on May 15, 2025.
The Warrants are separate transactions, entered into by the Company with the Counterparties, and are not part of the terms of the Exchangeable Notes. Holders of the Exchangeable Notes will not have any rights with respect to the Warrants. The Company received approximately $14,669 from the offering and sale of the Warrants. The Warrants do not require separate accounting as a derivative as they meet a scope exception for certain contracts involving an entity's own equity. The premiums paid for the Warrants have been included as a net increase to additional paid-in capital within stockholders' equity.
Senior Secured Credit Facility
On May 9, 2019, the Company replaced its then existing credit facility with a new credit agreement (the "Senior Secured Credit Facility"). Effective October 3, 2022, the Senior Secured Credit Facility, as amended, consisted of a $375,000 revolving credit facility, together with an option to increase the revolving credit facility and/or obtain incremental term loans in an additional principal amount of up to $50,000 in the aggregate (subject to the receipt of additional commitments for any such incremental loan amounts).
The Senior Secured Credit Facility accrues interest at Term SOFR (based upon an interest period of one, three or six months), plus an adjustment of 0.10%, plus an applicable margin of 2.25% to 3.25% (3.25% as of December 31, 2022), or the base rate (defined as the highest of (x) the Bank of America prime rate, (y) the federal funds rate plus 0.50% and (z) Term SOFR, plus an adjustment of 0.10%, plus 1.00%), plus an applicable margin of 0.25% to 1.25% (1.25% as of December 31, 2022), in each case depending upon the consolidated total leverage ratio, as defined in the agreement. Interest is payable at the end of the selected interest period, but no less frequently than quarterly. Additionally, the Senior Secured Credit Facility requires the Company to pay unused commitment fees of 0.15% to 0.30% (0.30% as of December 31, 2022) on any undrawn amounts under the revolving credit facility and letter of credit fees of up to 3.25% on the maximum amount available to be drawn under each letter of credit issued under the agreement. The Senior Credit Facility requires maintenance of certain financial ratios on a quarterly basis as follows: (i) a minimum consolidated interest coverage ratio of 3.00 to 1.00 (ii) a maximum total leverage ratio of 5.00 to 1.00, provided, that for each of the four fiscal quarters immediately following a qualified acquisition (each a “Leverage Increase Period”), the required ratio set forth above may be increased by up to 0.25, subject to certain limitations and (iii) a maximum consolidated senior secured leverage ratio of 3.25 to 1.00, provided, that for each Leverage Increase Period, the consolidated senior leverage ratio may be increased by up to 0.25, subject to certain limitations. The maturity date of the Senior Secured Credit Facility is May 9, 2024. As of December 31, 2022, the Company was in compliance with these covenants, and there was $111,826 available for borrowing under the revolving credit facility, subject to the financial covenants.

The Senior Secured Credit Facility is secured by substantially all assets of the Company. The lenders under the Senior Secured Credit Facility hold senior rights to collateral and principal repayment over all other creditors.

The provisions of the Senior Secured Credit Facility place certain restrictions and limitations upon the Company. These include, among others, restrictions on liens, investments, indebtedness, fundamental changes and dispositions; maintenance of certain financial ratios; and certain non-financial covenants pertaining to the activities of the Company during the period covered. The Company was in compliance with such covenants as of December 31, 2022. In addition, the Senior Secured Credit Facility restricts the Company's ability to make dividends or other distributions to the holders of the Company's equity. The Company is permitted to (i) make cash distributions to the holders of the Company's equity in order to pay taxes incurred by owners of equity in i3 Verticals, LLC, by reason of such ownership, (ii) move intercompany cash between subsidiaries that are joined to the Senior Secured Credit Facility, (iii) repurchase equity from employees, directors, officers or consultants in an aggregate amount not to exceed $3,000 per year, (iv) make certain payments in connection with the Tax Receivable Agreement (discussed in Note 8 below), and (v) make other dividends or distributions in an aggregate
24


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
amount not to exceed 5% of the net cash proceeds received from any additional common equity issuance. The Company is also permitted to make non-cash dividends in the form of additional equity issuances. Each subsidiary may make ratable distributions to persons that own equity interests in such subsidiary. All other forms of dividends or distributions are prohibited under the Senior Secured Credit Facility.
Debt issuance costs
The Company incurred $265 in debt issuance costs during the three months ended December 31, 2022 and did not incur any debt issuance costs during the three months ended December 31, 2021. The Company's debt issuance costs are being amortized over the related term of the debt using the straight-line method, which is not materially different than the effective interest rate method, and are presented net against long-term debt in the condensed consolidated balance sheets. The amortization of deferred debt issuance costs is included in interest expense and amounted to approximately $361 during the three months ended December 31, 2022 and $254 during the three months ended December 31, 2021.

8. INCOME TAXES
i3 Verticals, Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from i3 Verticals, LLC based on i3 Verticals, Inc.’s economic interest in i3 Verticals, LLC. i3 Verticals, LLC's members, including the Company, are liable for federal, state and local income taxes based on their share of i3 Verticals, LLC's pass-through taxable income. i3 Verticals, LLC is not a taxable entity for federal income tax purposes but is subject to and reports entity level tax in both Tennessee and Texas. In addition, certain subsidiaries of i3 Verticals, LLC are corporations that are subject to state and federal income taxes.
The Company’s tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. When the estimate of the annual effective tax rate is unreliable, the Company records its income tax expense or benefit based up on a period to date effective tax rate. Each quarter, the Company updates its estimate of the annual effective tax rate, and if the Company’s estimated tax rate changes, it makes a cumulative adjustment in that period. The Company’s provision for income taxes was a provision of $382 for the three months ended December 31, 2022, and a benefit of $228 during the three months ended December 31, 2021.
Tax Receivable Agreement
On June 25, 2018, the Company entered into a Tax Receivable Agreement with i3 Verticals, LLC and each of the Continuing Equity Owners (the “Tax Receivable Agreement”) that provides for the payment by the Company to the Continuing Equity Owners of 85% of the amount of certain tax benefits, if any, that it actually realizes, or in some circumstances, is deemed to realize in its tax reporting, as a result of (i) future redemptions funded by the Company or exchanges, or deemed exchanges in certain circumstances, of Common Units of i3 Verticals, LLC for Class A common stock of i3 Verticals, Inc. or cash, and (ii) certain additional tax benefits attributable to payments made under the Tax Receivable Agreement. These tax benefit payments are not conditioned upon one or more of the Continuing Equity Owners maintaining a continued ownership interest in i3 Verticals, LLC. If a Continuing Equity Owner transfers Common Units but does not assign to the transferee of such units its rights under the Tax Receivable Agreement, such Continuing Equity Owner generally will continue to be entitled to receive payments under the Tax Receivable Agreement arising in respect of a subsequent exchange of such Common Units. In general, the Continuing Equity Owners’ rights under the Tax Receivable Agreement may not be assigned, sold, pledged or otherwise alienated to any person, other than certain permitted transferees, without (a) the Company's prior written consent, which should not be unreasonably withheld, conditioned or delayed, and (b) such persons becoming a party to the Tax Receivable Agreement and agreeing to succeed to the applicable Continuing Equity Owner’s interest therein. The Company expects to benefit from the remaining 15% of the tax benefits, if any, that the Company may realize.
25


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
During the three months ended December 31, 2022, the Company did not acquire any Common Units in i3 Verticals, LLC in connection with the redemption of Common Units from the Continuing Equity Owners. As a result, the Company did not recognize any activity related to exchanges during the three months ended December 31, 2022 in its net deferred tax assets and corresponding Tax Receivable Agreement liabilities.
The deferred tax asset and corresponding Tax Receivable Agreement liability balances were $40,346 and $40,832, respectively, as of December 31, 2022.
Payments to the Continuing Equity Owners related to exchanges through December 31, 2022 will range from $0 to $3,315 per year and are expected to be paid over the next 24 years. The amounts recorded as of December 31, 2022, approximate the current estimate of expected tax savings and are subject to change after the filing of the Company’s U.S. federal and state income tax returns. Future payments under the Tax Receivable Agreement with respect to subsequent exchanges would be in addition to these amounts.

9. LEASES
The Company’s leases consist primarily of real estate leases throughout the markets in which the Company operates. 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. The Company had no finance leases as of December 31, 2022. 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 weighted-average remaining lease term at December 31, 2022 and 2021 was four and five years, respectively. The Company had no significant short-term leases during the three months ended December 31, 2022 and 2021.
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 rates were determined based on a portfolio approach considering the Company’s current secured borrowing rate adjusted for market conditions and the length of the lease term. The weighted-average discount rate used in the measurement of our lease liabilities was 6.1% and 6.7% as of December 31, 2022 and 2021, respectively.
Operating lease cost is recognized on a straight-line basis over the lease term. Operating lease costs for the three months ended December 31, 2022 and 2021 were $1,504 and $1,491, respectively, which are included in selling, general and administrative expenses in the condensed consolidated statements of operations.
Total operating lease costs for the three months ended December 31, 2022 and 2021 include variable lease costs of approximately $11 and $38, respectively, which are primarily comprised of costs of maintenance and utilities and changes in rates, and are determined based on the actual costs incurred during the period. Variable payments are expensed in the period incurred and not included in the measurement of lease assets and liabilities.
Short-term rent expense for the three months ended December 31, 2022 and 2021 were $35 and $47, respectively, and are included in selling, general and administrative expenses in the condensed consolidated statements of operations.
26


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
As of December 31, 2022, maturities of lease liabilities are as follows:
Years ending September 30:
2023 (nine months remaining)$4,195 
20244,870 
20254,256 
20263,423 
20271,597 
Thereafter2,017 
Total future minimum lease payments (undiscounted)(1)
20,358 
Less: present value discount(2,221)
Present value of lease liability$18,137 
__________________________
1.Total future minimum lease payments excludes payments of $14 for leases designated as short-term leases, which are excluded from the Company's right-of-use assets. These payments will be made within the next twelve months.

10. FAIR VALUE MEASUREMENTS
The Company applies the provisions of ASC 820, Fair Value Measurement, which defines fair value, establishes a framework for its measurement and expands disclosures about fair value measurements. Fair value is the price that would be received to sell an asset or the price paid to transfer a liability as of the measurement date. A three-tier, fair-value reporting hierarchy exists for disclosure of fair value measurements based on the observability of the inputs to the valuation of financial assets and liabilities. The three levels are:
Level 1 — Quoted prices for identical instruments in active markets.
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable in active exchange markets.
The carrying value of the Company’s financial instruments, including cash and cash equivalents, restricted cash, settlement assets and obligations, accounts receivable, other assets, accounts payable, and accrued expenses, approximated their fair values as of December 31, 2022 and 2021, because of the relatively short maturity dates on these instruments. The carrying amount of debt approximates fair value as of December 31, 2022 and 2021, because interest rates on these instruments approximate market interest rates.
27


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
The Company has no Level 1 or Level 2 financial instruments measured at fair value on a recurring basis. The following tables present the changes in the Company's Level 3 financial instruments that are measured at fair value on a recurring basis.
Accrued Contingent Consideration
Balance at September 30, 2022$22,833 
Contingent consideration accrued at time of business combination 
Change in fair value of contingent consideration included in Operating expenses1,443 
Contingent consideration paid(4,212)
Balance at December 31, 2022$20,064