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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, 2023
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, 2024, there were 23,279,170 outstanding shares of Class A common stock, $0.0001 par value per share, and 10,093,394 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,
20232023
(unaudited)
Assets
Current assets
Cash and cash equivalents$4,159 $3,112 
Accounts receivable, net68,226 65,110 
Settlement assets3,518 4,873 
Prepaid expenses and other current assets14,218 12,449 
Total current assets90,121 85,544 
Property and equipment, net11,142 12,308 
Restricted cash3,407 4,415 
Capitalized software, net62,153 62,577 
Goodwill410,772 409,563 
Intangible assets, net225,296 226,952 
Deferred tax asset52,332 52,514 
Operating lease right-of-use assets12,717 13,922 
Other assets8,996 13,698 
Total assets$876,936 $881,493 
Liabilities and equity
Liabilities
Current liabilities
Accounts payable$9,711 $11,064 
Current portion of long term debt90,777  
Accrued expenses and other current liabilities33,081 37,740 
Settlement obligations3,518 4,873 
Deferred revenue39,163 35,275 
Current portion of operating lease liabilities4,292 4,509 
Total current liabilities180,542 93,461 
Long-term debt, less current portion and debt issuance costs, net287,751 385,081 
Long-term tax receivable agreement obligations40,079 40,079 
Operating lease liabilities, less current portion9,417 10,433 
Other long-term liabilities21,991 24,143 
Total liabilities539,780 553,197 
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, 2023 and September 30, 2023
  
Class A common stock, par value $0.0001 per share, 150,000,000 shares authorized; 23,279,170 and 23,253,272 shares issued and outstanding as of December 31, 2023 and September 30, 2023, respectively
2 2 
Class B common stock, par value $0.0001 per share, 40,000,000 shares authorized; 10,093,394 and 10,093,394 shares issued and outstanding as of December 31, 2023 and September 30, 2023, respectively
1 1 
Additional paid-in capital254,562 249,688 
Accumulated deficit(11,846)(12,944)
Total stockholders' equity242,719 236,747 
Non-controlling interest94,437 91,549 
Total equity337,156 328,296 
Total liabilities and equity$876,936 $881,493 

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,
2023
2022
Revenue$91,990 $86,029 
Operating expenses
Other costs of services20,424 19,069 
Selling, general and administrative53,532 51,003 
Depreciation and amortization9,739 8,676 
Change in fair value of contingent consideration(237)1,443 
Total operating expenses83,458 80,191 
Income from operations8,532 5,838 
Interest expense, net6,707 5,490 
Other expense (income)107 (203)
Total other expenses6,814 5,287 
Income before income taxes1,718 551 
Provision for income taxes182 382 
Net income1,536 169 
Net income attributable to non-controlling interest438 409 
Net income (loss) attributable to i3 Verticals, Inc.$1,098 $(240)
Net income (loss) per share attributable to Class A common stockholders:
Basic$0.05 $(0.01)
Diluted$0.04 $(0.01)
Weighted average shares of Class A common stock outstanding:
Basic23,267,290 22,998,608 
Diluted33,828,461 22,998,608 

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, 202323,253,272 $2 10,093,394 $1 $249,688 $(12,944)$91,549 $328,296 
Equity-based compensation— — — — 6,508 — — 6,508 
Net income— — — — — 1,098 438 1,536 
Exercise of equity-based awards25,898 — — — (10)— — (10)
Sale of exchangeable note hedges— — — — 1,483 — — 1,483 
Repurchases of warrants— — — — (657)— — (657)
Allocation of equity to non-controlling interests— — — — (2,450)— 2,450  
Balance at December 31, 202323,279,170 2 10,093,394 1 254,562 (11,846)94,437 337,156 

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 STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)


Three months ended December 31,
2023
2022
Cash flows from operating activities:
Net income$1,536 $169 
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization9,739 8,676 
Equity-based compensation6,508 6,846 
Amortization of debt discount and issuance costs414 361 
Provision for income taxes182 355 
Non-cash lease expense1,184 1,063 
Changes in non-cash contingent consideration expense from original estimate(237)1,443 
Other non-cash adjustments to net income513 502 
Changes in operating assets:
Accounts receivable(5,321)8,868 
Prepaid expenses and other current assets(1,773)(3,312)
Other assets6,642 (313)
Changes in operating liabilities:
Accounts payable(1,725)(947)
Accrued expenses and other current liabilities(534)(3,962)
Acquisition escrow obligations(1,009)(3,791)
Settlement obligations(1,355)4,246 
Deferred revenue4,093 2,249 
Operating lease liabilities(1,212)(1,064)
Other long-term liabilities(2,677)2 
Contingent consideration paid in excess of original estimates(1,918)(3,212)
Net cash provided by operating activities13,050 18,179 
Cash flows from investing activities:
Expenditures for property and equipment(699)(1,438)
Proceeds from sale of property and equipment618  
Expenditures for capitalized software(3,100)(2,721)
Purchases of merchant portfolios and residual buyouts(2,883)(275)
Acquisitions of businesses, net of cash and restricted cash acquired(1,100)(89,497)
Payments for other investing activities(11)(802)
Proceeds from other investing activities4 203 
Net cash used in investing activities(7,171)(94,530)

See Notes to the Interim Condensed Consolidated Financial Statements
7

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

Three months ended December 31,
2023
2022
Cash flows from financing activities:
Proceeds from revolving credit facility64,694 157,004 
Payments on revolving credit facility(71,661)(79,025)
Proceeds from sale of exchangeable senior note hedges250  
Payments for repurchases of warrants(119) 
Payments of debt issuance costs (87)
Cash paid for contingent consideration (1,000)
Payments for required distributions to members for tax obligations(155) 
Proceeds from stock option exercises 54 
Payments for employee's tax withholdings from net settled stock option exercises and RSU releases(204)(21)
Net cash (used in) provided by financing activities(7,195)76,925 
Net (decrease) increase in cash, cash equivalents and restricted cash(1,316)574 
Cash, cash equivalents and restricted cash at beginning of period12,400 23,765 
Cash, cash equivalents and restricted cash at end of period$11,084 $24,339 
Supplemental disclosure of cash flow information:
Cash paid for interest$6,189 $4,279 
Cash paid for income taxes$388 $172 
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,
20232022
Beginning balance
Cash and cash equivalents$3,112 $3,490 
Settlement assets4,873 7,540 
Restricted cash4,415 12,735 
Total cash, cash equivalents, and restricted cash$12,400 $23,765 
December 31,
20232022
Ending balance
Cash and cash equivalents$4,159 $3,609 
Settlement assets3,518 11,786 
Restricted cash3,407 8,944 
Total cash, cash equivalents, and restricted cash$11,084 $24,339 
See Notes to the Interim Condensed Consolidated Financial Statements
8


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, 2023 and for the three months ended December 31, 2023 and 2022. The results of operations for the three months ended December 31, 2023 and 2022 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, 2023 and 2022, included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2023 filed with the SEC on November 22, 2023.
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.
9


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 $3,518 as of December 31, 2023 and $4,873 as of September 30, 2023, 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 $4,251 and $4,138 at December 31, 2023 and September 30, 2023, 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.
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 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.
10


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
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's revenue for the three months ended December 31, 2023 and 2022 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.
11


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, for the three months ended December 31, 2023 and 2022.
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 transaction fees, which are charged for accessing our payment and software solutions, and fees for other miscellaneous services. Revenues derived from such fees are recognized at the time the transactions occur and when there are no further performance obligations. Revenue from the sale of equipment, is recognized upon transfer of ownership 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
12


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 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, 2023
Software and ServicesMerchant ServicesOtherTotal
Software and related services revenue$40,332 $3,302 $(12)$43,622 
Payments revenue13,982 30,022 (9)43,995 
Other revenue2,275 2,098  4,373 
Total revenue$56,589 $35,422 $(21)$91,990 
For the Three Months Ended December 31, 2022
Software and ServicesMerchant ServicesOtherTotal
Software and related services revenue$38,145 $2,979 $(10)$41,114 
Payments revenue12,753 27,609 (8)40,354 
Other revenue2,315 2,246  4,561 
Total revenue$53,213 $32,834 $(18)$86,029 


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. 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
13


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, 2023
Software and ServicesMerchant ServicesOtherTotal
Revenue earned over time$54,354 $30,081 $(12)$84,423 
Revenue earned at a point in time2,235 5,341 (9)7,567 
Total revenue$56,589 $35,422 $(21)$91,990 
For the Three Months Ended December 31, 2022
Software and ServicesMerchant ServicesOtherTotal
Revenue earned over time$50,441 $27,597 $(10)$78,028 
Revenue earned at a point in time2,772 5,237 (8)8,001 
Total revenue$53,213 $32,834 $(18)$86,029 

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. Additionally, contract assets also include software licenses sold as a right to use license but paid for under a subscription model. Under this structure, the license revenue is recognized upfront while a portion of the revenue is unbilled. 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, 2023 and September 30, 2023, the Company’s contract assets from contracts with customers was $10,139 and $15,131, 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.
14


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, 2023 and 2022, respectively:
Balance at September 30, 2023
$35,444 
Deferral of revenue19,793 
Recognition of unearned revenue(15,664)
Balance at December 31, 2023
$39,573 
Balance at September 30, 2022
$32,089 
Deferral of revenue19,334 
Recognition of unearned revenue(13,925)
Balance at December 31, 2022
$37,498 

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, 2023 and September 30, 2023, the Company had $5,106 and $4,966, 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 $229 for the three months ended December 31, 2023, and $183 for the three months ended December 31, 2022.
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 and software 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
15


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. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.
Recent Accounting Pronouncements
Recently Issued Accounting Pronouncements Not Yet Adopted
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740)—Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 will provide improvements to the income tax disclosures primarily related to the income taxes paid and rate reconciliation, and how legislation changes may affect future capital allocation and cash flow forecasts. The amendment will improve the consistency in which companies provide tax information, and will further increase the transparency of related tax risks and operational opportunities. The amendments in ASU 2023-09 are effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company will not be required to adopt ASU 2023-09 until October 1, 2025. The Company is currently evaluating the impact of the adoption of ASU 2023-09 on the Company’s financial statement disclosures.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280)—Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 improves interim disclosure requirements for segment reporting, including clarifications regarding the measure of profit and loss used to asses segment performance and the allocation of resources. Further, it enhances the disclosures for reporting segment expenses and will require the Company to report significant expenses regularly provided by the chief operating decision maker. The amendment will require companies to disclose a more granular level of information with regards to segment reporting to further enhance the transparency of what specified amounts are included within each segment. The amendments in ASU 2023-07 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company will not be required to adopt ASU 2023-07 until October 1, 2024. The Company is currently evaluating the impact of the adoption of ASU 2023-07 on the Company’s financial statement disclosures.
3. ACQUISITIONS
During the three months ended December 31, 2023 and 2022, 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, 2023 and 2022, the Company purchased residuals for $3,359 and $275 of consideration, respectively. The purchases were funded with 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.
16


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
Business Combinations during the three months ended December 31, 2023
During the three months ended December 31, 2023 the Company completed the acquisition of a business to expand the Company’s software offerings. Total purchase consideration was $1,270, including $1,100 in cash consideration, funded by proceeds from the Company's revolving credit facility, and $170 of contingent consideration.
In connection with this acquisition, the Company allocated approximately $5 to property and equipment, approximately $40 to capitalized software, approximately $220 to customer relationships and the remainder, approximately $1,005, to goodwill, all of which is deductible for tax purposes. Certain of the purchase price allocations assigned for this acquisition is considered preliminary as of December 31, 2023. The acquired customer relationships intangible assets have an estimated amortization periods of ten years. The acquired capitalized software have amortization periods of seven years.
Acquisition-related costs for this acquisition amounted to approximately $8 and were expensed as incurred.
Business Combinations during the year ended September 30, 2023
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 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.
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, 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 $1,782 and were expensed as incurred.
17


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
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$7,660 
Prepaid expenses and other current assets103 
Property and equipment5,233 
Capitalized software12,600 
Customer relationships33,800 
Non-compete agreements200 
Trade name600 
Goodwill43,899 
Total assets acquired104,095 
Accounts payable9 
Accrued expenses and other current liabilities3,182 
Deferred revenue, current2,741 
Other long-term liabilities13,162 
Net assets acquired$85,001 
Other Business Combinations during the year ended September 30, 2023
The Company completed the acquisition of two other businesses to expand the Company's software offerings. The total purchase consideration was $19,757, including $16,997 in cash consideration, funded by proceeds from the Company's revolving credit facility, $2,000 of the Company's Class A Common Stock, and $760 contingent consideration.
In connection with this acquisition, the Company allocated approximately $159 of the consideration to net working capital, approximately $374 to property and equipment, approximately $670 to capitalized software, approximately $8,400 to customer relationships, approximately $100 to trade names, and the remainder, approximately $12,229, to goodwill, of which $2,864 is deductible for tax purposes, and approximately $2,178 to other long-term liabilities. Certain of the purchase price allocations assigned for one of these acquisitions is considered preliminary as of December 31, 2023. The acquired capital software and customer relationships intangible asset have estimated amortization periods of seven to eight years and ten to fifteen years, respectively.
Certain of the purchase price allocations assigned for one of the acquisitions are considered preliminary as of December 31, 2023.
18


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
A summary of the Company's prepaid expenses and other current assets as of December 31, 2023 and September 30, 2023 is as follows:
December 31,September 30,
20232023
Inventory$4,251 $4,138 
Prepaid licenses3,280 3,115 
Prepaid insurance1,436 697 
Notes receivable — current portion 4 
Other current assets5,251 4,495 
Prepaid expenses and other current assets$14,218 $12,449 

5. GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill are as follows:
Software and ServicesMerchant ServicesOtherTotal
Balance at September 30, 2023
$287,613 $121,950 $ $409,563 
Goodwill attributable to preliminary purchase price adjustments and acquisitions during the three months ended December 31, 20231,209   1,209 
Balance at December 31, 2023$288,822 $121,950 $ $410,772 
Intangible assets consisted of the following as of December 31, 2023:
Cost
Accumulated
Amortization
Carrying
Value
Amortization Life and Method
Finite-lived intangible assets:
Merchant relationships$310,721 $(102,550)$208,171 
9 to 25 years – accelerated or straight-line
Non-compete agreements518 (333)185 
3 to 6 years – straight-line
Website and brand development costs224 (196)28 
3 to 4 years – straight-line
Trade names6,131 (3,603)2,528 
3 to 7 years – straight-line
Residual buyouts17,579 (3,574)14,005 
8 years – straight-line
Referral and exclusivity agreements420 (84)336 
5 years – straight-line
Total finite-lived intangible assets335,593 (110,340)225,253 
Indefinite-lived intangible assets:
Trademarks43 — 43 
Total identifiable intangible assets$335,636 $(110,340)$225,296 
Amortization expense for intangible assets amounted to $5,234 and $5,059 during the three months ended December 31, 2023 and 2022 respectively.
19


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
Based on net carrying amounts at December 31, 2023, the Company's estimate of future amortization expense for intangible assets are presented in the table below for fiscal years ending September 30:
2024 (nine months remaining)$15,625 
202520,657 
202620,185 
202719,565 
202818,981 
Thereafter130,240 
$225,253 

6. ACCRUED EXPENSES AND OTHER LIABILITIES
A summary of the Company's accrued expenses and other current liabilities as of December 31, 2023 and September 30, 2023 is as follows is as follows:
December 31,September 30,
20232023
Accrued wages, bonuses, commissions and vacation$6,995 $8,713 
Accrued interest1,417 1,313 
Accrued contingent consideration — current portion5,905 6,825 
Escrow liabilities2,957 3,965 
Customer deposits1,312 1,258 
Employee health self-insurance liability738 1,014 
Accrued interchange1,913 2,191 
Other current liabilities11,844 12,461 
Accrued expenses and other current liabilities$33,081 $37,740 
A summary of the Company's long-term liabilities as of December 31, 2023 and September 30, 2023 is as follows:
December 31,September 30,
20232023
Accrued contingent consideration — long-term portion$349 $1,414 
Deferred tax liability — long-term19,646 19,646 
Other long-term liabilities1,996 3,083 
Total other long-term liabilities$21,991 $24,143 

20


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
7. LONG-TERM DEBT, NET
A summary of long-term debt, net as of December 31, 2023 and September 30, 2023 is as follows:
December 31,September 30,
Maturity20232023
Revolving lines of credit to banks under the 2023 Senior Secured Credit FacilityMay 8, 2028$265,539 $272,505 
1% Exchangeable Senior Notes due 2025
February 15, 2025117,000 117,000 
Debt issuance costs, net(4,011)(4,424)
Total long-term debt, net of issuance costs378,528 385,081 
Less current portion of long-term debt(90,777) 
Long-term debt, net of current portion$287,751 $385,081 
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 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.
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.
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, 2023.
Non-cash interest expense, including amortization of debt issuance costs, related to the Exchangeable Notes for the three months ended December 31, 2023 was $255 and $227 for the three months ended December 31, 2022. Total unamortized debt issuance costs related to the Exchangeable Notes were $1,246 and $1,501 as of December 31, 2023 and September 30, 2023, respectively.
The estimated fair value of the Exchangeable Notes was $108,635 as of December 31, 2023. 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.
During fiscal year 2020, we repurchased $21,000 in aggregate principal amount of Exchangeable Notes in open market purchases. In addition, on December 21, 2023, i3 Verticals, LLC entered into agreements to repurchase an additional portion of its Exchangeable Notes pursuant to privately negotiated transactions with a limited number of holders of the Exchangeable Notes (the "Exchangeable Note Repurchases"). The repurchase payments were determined by the Company’s average stock price over the 15 trading-day measurement period ending January 16, 2024, and the closing of the Exchangeable Note Purchases occurred on January 18, 2024. The Company reclassified the $90,777 Exchangeable Note Repurchases from long-term to current effective December 21, 2023 to reflect the agreements. The Company will record the impact of the difference in the estimated acquisition price and the net carrying amount of the repurchased portion of the Exchangeable Notes, adjusted for unamortized debt issuance costs and costs and third-party fees related to the transaction, in January
21


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
2024 after giving effect to the settlement. Refer to Note 18 for additional information regarding the settlement of these Exchangeable Notes.
As of December 31, 2023, the aggregate principal amount outstanding of the Exchangeable Notes was $117,000.
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.
In December 2023, i3 Verticals, LLC received $250 from the Counterparties to terminate the portion of the Note Hedge Transactions corresponding to the Exchangeable Notes that were repurchased in fiscal year 2020. Also in December 2023, i3 Verticals, LLC entered into agreements with the Counterparties to terminate the portion of the Note Hedge Transactions corresponding to the Exchangeable Note Repurchases, which settled in January 2024. For additional information regarding the termination of these Note Hedge Transactions, see Note 18.
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, 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.
In December 2023, the Company paid $119 to the Counterparties to terminate the portion of the Warrants corresponding to the Exchangeable Notes that were repurchased in fiscal year 2020. Also in December 2023, i3 Verticals, LLC entered into agreements with the Counterparties to terminate the portion of the Warrants
22


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
corresponding to the Exchangeable Note Repurchases, which settled in January 2024. For additional information regarding the termination of these Warrants, see Note 18.
2023 Senior Secured Revolving Credit Facility
On May 8, 2023, i3 Verticals, LLC (the “Borrower”), entered into that certain Credit Agreement (the “2023 Senior Secured Credit Facility”) with the guarantors and lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (“JPMorgan”). The 2023 Senior Secured Credit Facility replaces the Prior Senior Secured Credit Facility (as defined below). The 2023 Senior Secured Credit Facility provides for aggregate commitments of $450 million in the form of a senior secured revolving credit facility (the “Revolver”).

The 2023 Senior Secured Credit Facility provides that the Borrower has the right to seek additional commitments to provide additional term loan facilities or additional revolving credit commitments in an aggregate principal amount up to, as of any date of determination, the sum of (i) the greater of $100 million and 100% of the Borrower’s consolidated EBITDA (as defined in the 2023 Senior Secured Credit Facility) for the most recently completed four quarter period, plus (ii) the amount of certain prepayments of certain indebtedness, so long as, among other things, after giving pro forma effect to the incurrence of such additional borrowings and any related transactions, the Borrower’s consolidated interest coverage ratio (as defined in the 2023 Senior Secured Credit Facility) would not be less than 3.0 to 1.0 and the Borrower’s consolidated total net leverage ratio (as defined in the 2023 Senior Secured Credit Facility) would not exceed 5.0 to 1.0. As of December 31, 2023, the Borrower's consolidated interest coverage ratio was 4.40 and total leverage ratio was 3.60.

The provision of any such additional amounts under the additional term loan facilities or additional revolving credit commitments are subject to certain additional conditions and the receipt of certain additional commitments by existing or additional lenders. The lenders under the 2023 Senior Secured Credit Facility are not under any obligation to provide any such additional term loan facilities or revolving credit commitments.

The proceeds of the Revolver, together with proceeds from any additional amounts under the additional term loan facilities or additional revolving credit commitments, may only be used by the Borrower to (i) finance working capital, capital expenditures and other lawful corporate purposes, (ii) finance permitted acquisitions (as defined in the 2023 Senior Secured Credit Facility) and (iii) to refinance certain existing indebtedness.

Borrowings under the Revolver will be made, at the Borrower’s option, at the Adjusted Term SOFR rate or the base rate, plus, in each case, an applicable margin.

The Adjusted Term SOFR rate will be the rate of interest per annum equal to the Term SOFR rate (based upon an interest period of one, three or six months), plus 0.10%, plus an applicable margin of 2.00% to 3.00% (3.00% at December 31, 2023). The Adjusted Term SOFR rate shall not be less than 0% in any event.

The base rate is a fluctuating rate of interest per annum equal to the highest of (a) the greater of the federal funds rate or the overnight bank funding rate, plus ½ of 1%, (b) Wall Street Journal prime rate and (c) the Adjusted Term SOFR rate for an interest period of one month, plus 1%, plus an applicable margin of 1.00% to 2.00% (2.00% at December 31, 2023). The base rate shall not be less than 1% in any event.

23


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
The applicable margin is based upon the Borrower’s consolidated total net leverage ratio (as defined in the 2023 Senior Secured Credit Facility), as reflected in the schedule below:
Consolidated Total Net Leverage RatioCommitment FeeLetter of Credit FeeTerm Benchmark LoansBase Rate Loans
> 3.0 to 1.0
0.30 %3.00 %3.00 %2.00 %
> 2.5 to 1.0 but < 3.00 to 1.0
0.25 %2.50 %2.50 %1.50 %
> 2.0 to 1.0 but < 2.50 to 1.0
0.20 %2.25 %2.25 %1.25 %
< 2.0 to 1.0
0.15 %2.00 %2.00 %1.00 %

In addition to paying interest on outstanding principal under the Revolver, the Borrower will be required to pay a commitment fee equal to the product of between 0.15% and 0.30% (the applicable percentage depending on the Borrower’s consolidated total net leverage ratio as reflected in the schedule above, 0.30% at December 31, 2023) times the actual daily amount by which $450 million exceeds the total amount outstanding under the Revolver and available to be drawn under all outstanding letters of credit.

The Borrower will be permitted to voluntarily reduce the unutilized portion of the commitment amount and repay outstanding loans under the 2023 Senior Secured Credit Facility, whether such amounts are issued under the Revolver or under the additional term loan facilities or additional revolving credit facilities, at any time without premium or penalty.

In addition, if the total amount borrowed under the Revolver exceeds $450 million at any time, the 2023 Senior Secured Credit Facility requires the Borrower to prepay such excess outstanding amounts.

All obligations under the 2023 Senior Secured Credit Facility are unconditionally guaranteed by the Company, and each of the Company’s existing and future direct and indirect material, wholly owned domestic subsidiaries, subject to certain exceptions. The obligations are secured by first-priority security interests in substantially all tangible and intangible assets of the Borrower, the Company and each subsidiary guarantor, in each case whether owned on the date of the initial borrowings or thereafter acquired.

The 2023 Senior Secured Credit Facility places certain restrictions on the ability of the Borrower, the Company and their subsidiaries to, among other things, incur debt and liens; merge, consolidate or liquidate; dispose of assets; enter into hedging arrangements; make certain restricted payments; undertake transactions with affiliates; enter into sale-leaseback transactions; make certain investments; prepay or modify the terms of certain indebtedness; and modify the terms of certain organizational agreements.

The 2023 Senior Secured Credit Facility contains customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, certain events of bankruptcy and insolvency, material judgments, certain events with respect to employee benefit plans, invalidity of loan documents and certain changes in control.
Prior Senior Secured Credit Facility
On May 9, 2019, the Company replaced its then existing credit facility with a new credit agreement (the "Prior Senior Secured Credit Facility") (as noted above, the Prior Senior Secured Credit Facility was replaced by the 2023 Senior Secured Credit Facility in May 2023). Effective October 3, 2022, the Prior 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).
24


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
The Prior Senior Secured Credit Facility accrued 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%, 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%, in each case depending upon the consolidated total leverage ratio, as defined in the agreement. Interest was payable at the end of the selected interest period, but no less frequently than quarterly. Additionally, the Prior Senior Secured Credit Facility required the Company to pay unused commitment fees of 0.15% to 0.30% 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.
Debt issuance costs
The Company did not incur any debt issuance costs during the three months ended December 31, 2023, and incurred $265 in debt issuance costs during the three months ended December 31, 2022. 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 $414 during the three months ended December 31, 2023, and $361 during the three months ended December 31, 2022.

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 $182 for the three months ended December 31, 2023, and a provision of $382 during the three months ended December 31, 2022.
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
25


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
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.
During the three months ended December 31, 2023, the Company acquired no Common Units in i3 Verticals, LLC in connection with the redemption of Common Units from the Continuing Equity Owners.
The deferred tax asset and corresponding Tax Receivable Agreement liability balances were $37,723 and $40,079, respectively, as of December 31, 2023.
Payments to the Continuing Equity Owners related to exchanges through December 31, 2023 will range from $0 to $3,235 per year and are expected to be paid over the next 23 years. The amounts recorded as of December 31, 2023, 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, 2023. 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, 2023 and 2022 was two and four years, respectively. The Company had no significant short-term leases during the three months ended December 31, 2023 and 2022.
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 7.5% and 6.1% as of December 31, 2023 and 2022, respectively.
Operating lease cost is recognized on a straight-line basis over the lease term. Operating lease costs were $1,333 for the three months ended December 31, 2023 and $1,504 for the three months ended December 31, 2022, 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, 2023 include variable lease costs of approximately $10 and $11 and for the three months ended December 31, 2022, 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, 2023 were $45 and were $35 for the three months ended December 31, 2022, 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, 2023, maturities of lease liabilities are as follows:
Fiscal Years ending September 30:
2024 (nine months remaining)$3,833 
20254,707 
20263,730 
20271,666 
2028755 
Thereafter1,262 
Total future minimum lease payments (undiscounted)(1)
15,953 
Less: present value discount(2,244)
Present value of lease liability$13,709 
__________________________
1.Total future minimum lease payments excludes payments of $62 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, 2023 and 2022, because of the relatively short maturity dates on these instruments. The carrying amount of debt approximates fair value as of December 31, 2023 and 2022, 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, 2023$8,239 
Contingent consideration accrued at time of business combination170 
Change in fair value of contingent consideration included in Operating expenses(237)
Contingent consideration paid(1,918)
Balance at December 31, 2023$6,254 
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 
The fair value of contingent consideration obligations includes inputs not observable in the market and thus represents a Level 3 measurement. The amount to be paid under these obligations is contingent upon the achievement of certain growth metrics related to the financial performance of the entities subsequent to acquisition. The fair value of material contingent consideration included in an acquisition is calculated using a Monte Carlo simulation. The contingent consideration is revalued each period until it is settled. Management reviews the historical and projected performance of each acquisition with contingent consideration and uses an income probability method to revalue the contingent consideration. The revaluation requires management to make certain assumptions and represent management's best estimate at the valuation date. The probabilities are determined based on a management review of the expected likelihood of triggering events that would cause a change in the contingent consideration paid. The Company develops the projected future financial results based on an analysis of historical results, market conditions, and the expected impact of anticipated changes in the Company's overall business and/or product strategies.
Approximately $5,905 and $6,825 of contingent consideration was recorded in accrued expenses and other current liabilities as of December 31, 2023 and September 30, 2023, respectively. Approximately $349 and $1,414 of contingent consideration was recorded in other long-term liabilities as of December 31, 2023 and September 30, 2023, respectively.
Disclosure of Fair Values
The Company's financial instruments that are not remeasured at fair value include the Exchangeable Notes (see Note 7). The Company estimates the fair value of the Exchangeable Notes through consideration of quoted market prices of similar instruments, classified as Level 2 as described above. The estimated fair value of the Exchangeable Notes was $108,635 as of December 31, 2023.

28


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
11. EQUITY-BASED COMPENSATION
A summary of equity-based compensation expense recognized during the three months ended December 31, 2023 and 2022 is as follows:
Three Months Ended December 31,
20232022
Stock options$4,969 $6,288 
Restricted stock units1,539 558 
Equity-based compensation expense$6,508 $6,846 
Amounts are included in general and administrative expense on the condensed consolidated statements of operations. Current and deferred income tax benefits of $1,078 and $1,189 were recognized during the three months ended December 31, 2023 and 2022, respectively.
In May 2018, the Company adopted the 2018 Equity Incentive Plan (the “2018 Plan”) under which the Company may grant up to 3,500,000 stock options and other equity-based awards to employees, directors and officers. The number of shares of Class A common stock available for issuance under the 2018 Plan includes an annual increase on the first day of each calendar year equal to 4.0% of the outstanding shares of all classes of the Company's common stock as of the last day of the immediately preceding calendar year, unless the Company’s board of directors determines prior to the last trading day of December of the immediately preceding calendar year that the increase shall be less than 4.0%. As of December 31, 2023, equity awards with respect to 2,433,717 shares of the Company's Class A common stock were available for grant under the 2018 Plan.
In September 2020, the Company adopted the 2020 Acquisition Equity Incentive Plan (the “2020 Inducement Plan”) under which the Company may grant up to 1,500,000 stock options and other equity-based awards to individuals that were not previously employees of the Company or its subsidiaries in connection with acquisitions, as a material inducement to the individual's entry into employment with the Company or its subsidiaries within the meaning of Rule 5635(c)(4) of the Nasdaq Listing Rules. In May 2021, the Company amended the 2020 Inducement Plan to increase the number of shares of the Company's Class A common stock available for issuance from 1,500,000 to 3,000,000 shares. As of December 31, 2023, equity awards with respect to 1,230,668 shares of the Company's Class A common stock were available for grant under the 2020 Inducement Plan.
Share-based compensation expense includes the estimated effects of forfeitures, which will be adjusted over the requisite service period to the extent actual forfeitures differ or are expected to differ from such estimates.
Stock Options
The Company has issued stock option awards under the 2018 Plan and the 2020 Inducement Plan. The fair value of the stock option awards during the three months ended December 31, 2023 and during the year ended September 30, 2023 was determined on the grant date using the Black-Scholes valuation model based on the following weighted-average assumptions:
December 31, 2023September 30, 2023
Expected volatility(1)
52.7 %54.9 %
Expected dividend yield(2)
 % %
Expected term(3)
6 years6 years
Risk-free interest rate(4)
4.4 %3.9 %
_________________
1.Expected volatility is based on the Company's own share price.
2.The Company has assumed a dividend yield of zero as management has no plans to declare dividends in the foreseeable future.
3.Expected term represents the estimated period of time until an award is exercised and was determined using the simplified method as details of employee exercise behavior are limited due to limited historical data.
4.The risk-free rate is an interpolation of yields on U.S. Treasury securities with maturities equivalent to the expected term.

29


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
A summary of stock option activity for the three months ended December 31, 2023 is as follows:
Stock OptionsWeighted Average Exercise Price
Outstanding at September 30, 20238,576,670 $25.16 
Granted10,000 19.76 
Exercised(10,000)13 
Forfeited(113,595)28.19 
Outstanding at December 31, 20238,463,075 $25.13 
Exercisable at December 31, 20236,030,296 $24.65 
The weighted-average grant date fair value of stock options granted during the three months ended December 31, 2023 was $11.04.
As of December 31, 2023, total unrecognized compensation expense related to unvested stock options, including an estimate for pre-vesting forfeitures, was $18,211, which is expected to be recognized over a weighted-average period of 2.14 years. The Company's policy is to account for forfeitures of stock-based compensation awards as they occur.
The total fair value of stock options that vested during the three months ended December 31, 2023 was $6,395.
Restricted Stock Units
The Company has issued Class A common stock in the form of restricted stock units ("RSUs") under the 2018 Plan.
A summary of activity related to restricted stock units for the three months ended December 31, 2023 is as follows:
Restricted Stock UnitsWeighted Average Grant Date Fair Value
Outstanding at September 30, 2023874,024 $24.95 
Granted19,350 19.76 
Vested(31,246)22.33 
Forfeited(9,792)25.54 
Outstanding at December 31, 2023852,336 $24.93 
As of December 31, 2023, total unrecognized compensation expense related to unvested RSUs, including an estimate for pre-vesting forfeitures, was $12,240, which is expected to be recognized over a weighted average period of 2.97 years.
$698 of RSUs vested during the three months ended December 31, 2023.
12. COMMITMENTS AND CONTINGENCIES
Leases
The Company utilizes office space and equipment under operating leases. Rent expense under these leases amounted to $1,378 and $1,539 during the three months ended December 31, 2023 and 2022, respectively. Refer to Note 9 for further discussion and a table of the future minimum payments under these leases.
30


i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
Minimum Processing Commitments
The Company has non-exclusive agreements with several processors to provide the Company services related to transaction processing and transmittal, transaction authorization and data capture, and access to various reporting tools. Certain of these agreements require the Company to submit a minimum monthly number of transactions for processing. If the Company submits a number of transactions that is lower than the minimum, it is required to pay to the processor the fees the processor would have received if the Company had submitted the required minimum number of transactions. As of December 31, 2023, such minimum fee commitments were as follows:
Fiscal Years ending September 30:
2024 (nine months remaining)$3,425 
2025727 
2026240 
202760 
2028 
Thereafter 
Total$4,452 
Litigation
With respect to all legal, regulatory and governmental proceedings, and in accordance with ASC 450-20, Contingencies—Loss Contingencies, the Company considers the likelihood of a negative outcome. If the Company determines the likelihood of a negative outcome with respect to any such matter is probable and the amount of the loss can be reasonably estimated, the Company records an accrual for the estimated amount of loss for the expected outcome of the matter. If the likelihood of a negative outcome with respect to material matters is reasonably possible and the Company is able to determine an estimate of the amount of possible loss or a range of loss, whether in excess of a related accrued liability or where there is no accrued liability, the Company discloses the estimate of the amount of possible loss or range of loss. However, the Company in some instances may be unable to estimate an amount of possible loss or range of loss based on the significant uncertainties involved in, or the preliminary nature of, any such material matter, and in these instances the Company will disclose the nature of the contingency and describe why the Company is unable to determine an estimate of possible loss or range of loss.
The Company is involved in ordinary course legal proceedings, which include all claims, lawsuits, investigations and proceedings, including unasserted claims, which are probable of being asserted, arising in the ordinary course of business. The Company has considered all such ordinary course legal proceedings in formulating its disclosures and assessments. After taking into consideration the evaluation of such legal matters by the Company's legal counsel, the Company's management believes at this time such matters will not have a material impact on the Company's consolidated balance sheet, results of operations or cash flows.
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i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
S&S Litigation
On June 2, 2021, the State of Louisiana, Division of Administration (the “State”) and a putative class of Louisiana sheriffs and law enforcement districts (collectively "Plaintiffs") filed a Petition (as amended on October 4, 2021, the “Petition”), in the 19th Judicial District Court for the Parish of East Baton Rouge against i3-Software & Services, LLC (“S&S”), a subsidiary of the Company located in Shreveport, Louisiana, the Company, i3 Verticals, LLC, the current leader of the S&S business, the former leader of the S&S business, and 1120 South Pointe Properties, LLC (“South Pointe”), the former owner of the assets of the S&S business (collectively "Defendants"). See State of Louisiana, by and through its Division of Administration, East Baton Rouge Parish Law Enforcement District, by and through the duly elected East Baton Rouge Parish Sheriff, Sid J. Gautreaux, III, et. al., individually and as class representatives vs. i3-Software & Services, LLC; 1120 South Pointe Properties, LLC, formerly known as Software and Services of Louisiana, L.L.C.; i3 Verticals, Inc.; i3 Verticals, LLC; Gregory R. Teeters; and Scott Carrington.
The Petition was amended on October 4, 2021 to amend and expand the putative class and subsequently removed to the United States District Court for the Middle District of Louisiana. The Petition seeks monetary damages for the cost of network remediation of $15,000 purportedly spent by the State and $7,000 purportedly spent by the Plaintiffs, return of purchase prices, potential additional expenses related to remediation and any obligation to notify parties of an alleged data breach as and if required by applicable law, and reasonable attorneys’ fees. The claimed damages relate to a third-party remote access software product used in connection with services provided by S&S to certain Louisiana law enforcement districts and alleged inadequacies in the Company’s cybersecurity practices. Plaintiffs moved to remand the action to state court on November 5, 2021, and the motion was referred to a magistrate to make a report and recommendation to the district court judge. On July 5, 2022, the magistrate recommended that the matter be remanded to state court. On July 19, 2022, the Company and all other defendants filed objections to the recommendation. On August 3, 2022, the Plaintiffs filed a response to those objections. On August 16, 2022, the district court granted the Plaintiffs’ motion to remand, and all Defendants appealed. Oral argument on this motion in front of the United States Fifth Circuit Court of Appeals took place on April 4, 2023, and on September 1, 2023, the Fifth Circuit panel affirmed the District Court order to remand the case back to state court. On September 29, 2023, all Defendants-Appellants filed a Petition for Rehearing En Banc, which the Plaintiffs-Appellees opposed on October 12, 2023. The parties await a decision on that motion.
The assets of the S&S business were acquired from South Pointe by the Company in 2018 for $17,000, including upfront cash consideration and contingent consideration, and provides software and payments services within the Company’s Public Sector vertical to local government agencies almost exclusively in Louisiana.
The Company is unable to predict the outcome of this litigation. While we do not believe that this matter will have a material adverse effect on our business or financial condition, we cannot give assurance that this matter will not have a material effect on our results of operations or cash flows for the period in which it is resolved.
Other
The Company's subsidiary CP-PS, LLC has certain indemnification obligations in favor of FDS Holdings, Inc. related to the acquisition of certain assets of Merchant Processing Solutions, LLC in February 2014. The Company has incurred expenses related to these indemnification obligations in prior periods and may have additional expenses in the future. However, after taking into consideration the evaluation of such matters by the Company’s legal counsel, the Company’s management believes at this time that the anticipated outcome of any existing or potential indemnification liabilities related to this matter will not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

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i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
13. RELATED PARTY TRANSACTIONS
In connection with the Company’s IPO, the Company and i3 Verticals, LLC entered into a Tax Receivable Agreement with the Continuing Equity Owners 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. See Note 8 for further information. As of December 31, 2023, the total amount due under the Tax Receivable Agreement was $40,079.
14. SEGMENTS
The Company determines its operating segments based on ASC 280, Segment Reporting, in alignment with how the chief operating decision-making group monitors and manages the performance of the business as well as the level at which financial information is reviewed. The Company’s operating segments are strategic business units that offer different products and services.
The Company's core business is delivering seamlessly integrated software and payment solutions customers in strategic vertical markets. This is accomplished through the Merchant Services and Software and Services segments.
The Software and Services segment delivers vertical market software solutions to customers across all of the Company's strategic vertical markets. These solutions often include embedded payments or other recurring services.
The Merchant Services segment provides comprehensive payment solutions to businesses and organizations. The Merchant Services segment includes third-party integrated payment solutions as well as traditional merchant processing services across the Company's strategic vertical markets.
The Other category includes corporate overhead expenses when presenting reportable segment information.
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i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
The Company primarily uses processing margin to measure operating performance. Processing margin is equal to revenue less other cost of services plus residuals expense, which are a component of other cost of services. The following is a summary of reportable segment operating performance for the three months ended December 31, 2023 and 2022.
As of and for the Three Months Ended December 31, 2023
Software and ServicesMerchant ServicesOtherTotal
Revenue$56,589 $35,422 $(21)$91,990 
Other costs of services(4,309)(16,134)19 (20,424)
Residuals618 10,400 (9)11,009 
Processing margin$52,898 $29,688 $(11)$82,575 
Residuals(11,009)
Selling, general and administrative(53,532)
Depreciation and amortization(9,739)
Change in fair value of contingent consideration237 
Income from operations$8,532 
Total assets$604,751 $211,843 $60,342 $876,936 
Goodwill$288,822 $121,950 $ $410,772 
As of and for the Three Months Ended December 31, 2022
Software and ServicesMerchant ServicesOtherTotal
Revenue$53,213 $32,834 $(18)$86,029 
Other costs of services(3,523)(15,567)21 (19,069)
Residuals523 9,809 (11)10,321 
Processing Margin$50,213 $27,076 $(8)$77,281 
Residuals(10,321)
Selling, general and administrative(51,003)
Depreciation and amortization(8,676)
Change in fair value of contingent consideration(1,443)
Income from operations$5,838 
Total assets$607,010 $206,782 $55,657 $869,449 
Goodwill$276,868 $121,930 $ $398,798 

The Company has not disclosed expenditures on long-lived assets as such expenditures are not reviewed by or provided to the chief operating decision maker.

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i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
15. NON-CONTROLLING INTEREST
i3 Verticals, Inc. is the sole managing member of i3 Verticals, LLC, and as a result, consolidates the financial results of i3 Verticals, LLC and reports a non-controlling interest representing the Common Units of i3 Verticals, LLC held by the Continuing Equity Owners. Changes in i3 Verticals, Inc.’s ownership interest in i3 Verticals, LLC while i3 Verticals, Inc. retains its controlling interest in i3 Verticals, LLC will be accounted for as equity transactions. As such, future redemptions or direct exchanges of Common Units of i3 Verticals, LLC by the Continuing Equity Owners will result in a change in ownership and reduce or increase the amount recorded as non-controlling interest and increase or decrease additional paid-in capital when i3 Verticals, LLC has positive or negative net assets, respectively.
As of December 31, 2023 and 2022, respectively, i3 Verticals, Inc. owned 23,279,170 and 23,011,193 of i3 Verticals, LLC's Common Units, representing a 69.8% and 69.5% economic ownership interest in i3 Verticals, LLC.
The following table summarizes the impact on equity due to changes in the Company's ownership interest in i3 Verticals, LLC:
Three Months Ended December 31,
20232022
Net income attributable to non-controlling interest
$438 $409 
Transfers to (from) non-controlling interests:
Allocation of equity to (from) non-controlling interests2,450 (1,906)
Net transfers to (from) non-controlling interests2,450 (1,906)
Change from net income (loss) attributable to non-controlling interests and transfers to non-controlling interests$2,888 $(1,497)

16. EARNINGS PER SHARE
Basic earnings per share of Class A common stock is computed by dividing net income available to i3 Verticals, Inc. by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted earnings per share of Class A common stock is computed by dividing net income available to i3 Verticals, Inc. by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities.
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i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per share of Class A common stock for the three months ended December 31, 2023 and 2022:
Three Months Ended December 31,
20232022
Basic net income (loss) per share:
Numerator
Net income
$1,536 $169 
Less: Net income attributable to non-controlling interest
438 409 
Net income (loss) attributable to Class A common stockholders
$1,098 $(240)
Denominator
Weighted average shares of Class A common stock outstanding
23,267,290 22,998,608 
Basic net income (loss) per share(1)
$0.05 $(0.01)
Diluted net income per share:
Numerator
Net income attributable to Class A common stockholders$1,098 
Reallocation of net income assuming conversion of common units331 
Net income attributable to Class A common stockholders - diluted1,429 
Denominator
Weighted average shares of Class A common stock outstanding
23,267,290 
Weighted average effect of dilutive securities(2)
10,561,171 
Weighted average shares of Class A common stock outstanding - diluted
33,828,461 
Diluted net income per share$0.04 
__________________________
1.For the three months ended December 31, 2022, all potentially dilutive securities were anti-dilutive, so diluted net loss per share was equivalent to basic net loss per share. The following securities were excluded from the weighted average effect of dilutive securities in the computation of diluted net loss per share of Class A common stock:
a.10,118,142 weighted average shares of Class B common stock for the three months ended December 31, 2022, along with the reallocation of net income assuming conversion of these shares, were excluded because the effect would have been anti-dilutive.
b.5,652,711 stock options for the three months ended December 31, 2022, were excluded because the exercise price of these stock options exceeded the average market price of our Class A common stock during the period (“out-of-the-money”) and the effect of including them would have been anti-dilutive, and
c.696,427 shares for the three months ended December 31, 2022, resulting from estimated stock option exercises and restricted stock units vesting as calculated by the treasury stock method were excluded because of the effect of including them would have been anti-dilutive.
2.For the three months ended December 31, 2023, the following securities were excluded from the weighted average effect of dilutive securities in the computation of diluted net loss per share of Class A common stock:
a.7,496,394 stock options for the three months ended December 31, 2023, were excluded because the exercise price of these stock options exceeded the average market price of our Class A common stock during the period (“out-of-the-money”) and the effect of including them would have been anti-dilutive.
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i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)

In September 2022 the Company made the irrevocable election to settle the principal portion of its Exchangeable Notes only in cash, the Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will have a dilutive impact on diluted net income per share of common stock when the average market price of the Company's Class A common stock for a given period exceeds the exchange price of $40.87 per share for the Exchangeable Notes.
The Warrants sold in connection with the issuance of the Exchangeable Notes are considered to be dilutive when the average price of the Company's Class A common stock during the period exceeds the Warrants' stock price of $62.88 per share. The effect of the additional shares that may be issued upon exercise of the Warrants will be included in the weighted average shares of Class A common stock outstanding—diluted using the treasury stock method. The Note Hedge Transactions purchased in connection with the issuance of the Exchangeable Notes are considered to be anti-dilutive and therefore do not impact our calculation of diluted net income per share. Refer to Note 7 for further discussion regarding the Exchangeable Notes.
Shares of the Company's Class B common stock do not participate in the earnings or losses of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented.

17. SIGNIFICANT NON-CASH TRANSACTIONS
The Company engaged in the following significant non-cash investing and financing activities during the three months ended December 31, 2023 and 2022:
Three months ended December 31,
20232022
Acquisition date fair value of contingent consideration in connection with business combinations$170 $ 
Debt issuance costs financed with proceeds from the 2023 Senior Secured Credit Facility$ $178 
Consideration accrued for December 2023 residual buyout$476 $ 
Right-of-use assets obtained in exchange for operating lease obligations$18 $838 

18. SUBSEQUENT EVENTS
Exchangeable Note Repurchases
On January 18, 2024, the Company paid $87,391 to repurchase $90,777 in aggregate principal amount of its Exchangeable Notes and to repay approximately $386 in accrued interest on the repurchased portion of the Exchangeable Notes pursuant to agreements entered into with certain holders of the Exchangeable Notes as described in Note 7. The Company wrote off $926 of debt issuance costs in connection with the repurchase transactions. These repurchases resulted in a decrease in the Company's total leverage ratio, and following the completion of the repurchases of these Exchangeable Notes, approximately $26,223 in aggregate principal amount of the Exchangeable Notes remained outstanding, with terms unchanged. The Company recorded a gain on retirement of debt of $2,397 due to the estimated acquisition price exceeding the net carrying amount of the repurchased portion of the Exchangeable Notes, adjusted for unamortized debt issuance costs and costs and third-party fees related to the transaction.
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i3 VERTICALS, Inc.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except unit, share and per share amounts)
Note Hedge and Warrant Unwind Transactions
Also on January 18, 2024, in connection with the Exchangeable Note Repurchases, the Company and i3 Verticals, LLC terminated the corresponding portions of the Note Hedge Transactions ("Note Hedge Unwinds") and Warrants ("Warrant Unwinds"). i3 Verticals, LLC received $987 for the sale of the Note Hedge Unwinds and the Company paid $433 for the repurchase of the Warrant Unwinds.
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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our Annual Report on Form 10-K for the year ended September 30, 2023 (“Form 10-K”), filed with the SEC on November 22, 2023. The terms “i3 Verticals,” “we,” “us” and “our” and similar references refer (1) before the completion of our IPO or the reorganization transactions entered into in connection therewith (the “Reorganization Transactions”), which are described in the notes to the condensed consolidated financial statements, to i3 Verticals, LLC and, where appropriate, its subsidiaries, and (2) after the Reorganization Transactions to i3 Verticals, Inc. and, where appropriate, its subsidiaries.
Note Regarding Forward-looking Statements
This Quarterly Report on Form 10-Q includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, “forward-looking statements” within the meaning of the federal securities laws. All statements other than statements of historical facts contained in this report may be forward-looking statements. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “pro forma,” “continues,” “anticipates,” “expects,” “seeks,” “projects,” “intends,” “plans,” “may,” “will,” “would” or “should” or, in each case, their negative or other variations or comparable terminology.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. These factors include, but are not limited to, the following:
our indebtedness and our ability to maintain compliance with the financial covenants in our 2023 Senior Secured Credit Facility (as defined below);
our ability to meet our liquidity needs;
our ability to raise additional funds on terms acceptable to us, if at all, whether through debt, equity or a combination thereof;
our ability to protect our systems and data from continually evolving cybersecurity risks or other technological risks, including the impact of any cybersecurity incidents or security breaches;
liability and reputation damage from unauthorized disclosure, destruction or modification of data or disruption of our services;
technical, operational and regulatory risks related to our information technology systems and third-party providers’ systems;
our ability to successfully manage our intellectual property;
the triggering of impairment testing of our fair-valued assets, including goodwill and intangible assets, in the event of a decline in the price of our Class A common stock or otherwise;
our ability to generate revenues sufficient to maintain profitability and positive cash flow;
competition in our industry and our ability to compete effectively;
consolidation in the banking and financial services industry;
risk of shortages, price increases, changes, delays or discontinuations of hardware due to supply chain disruptions with respect to our limited number of suppliers;
impact of inflation and fluctuations in interest rates (including current elevated interest rate levels) and the potential effect of such fluctuations on revenues, expenses and resulting margins;
our dependence on non-exclusive distribution partners to market our products and services;
our ability to keep pace with rapid developments and changes in our industry and provide new products and services;
reliance on third parties for significant services;
exposure to economic conditions and political risks affecting consumer and commercial spending, including the use of credit cards;
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our ability to increase our existing vertical markets, expand into new vertical markets and execute our growth strategy;
our ability to successfully identify acquisition targets, complete those acquisitions and effectively integrate those acquisitions into our services;
potential degradation of the quality of our products, services and support;
our ability to retain customers;
our ability to attract, recruit, retain and develop key personnel and qualified employees;
risk of significant chargeback liability if our customers refuse or cannot reimburse chargebacks resolved in favor of their customers;
risks related to laws, regulations and industry standards, including our ability to comply with complex laws and regulations applicable to the healthcare industry or to adjust our operations in response to changing laws and regulations;
the impact of government investigations, claims, and litigation;
the effects of health reform initiatives;
risks related to our international operations;
operating and financial restrictions imposed by our 2023 Senior Secured Credit Facility;
risks related to the accounting method for i3 Verticals, LLC's 1.0% Exchangeable Notes due February 15, 2025 (the "Exchangeable Notes");
our ability to raise the funds necessary to settle exchanges of the Exchangeable Notes or to repurchase the Exchangeable Notes upon a fundamental change;
risks related to the conditional exchange feature of the Exchangeable Notes;
risks related to the potential sale of certain assets related to our Merchant Services business;
the "Risk Factors" included in our Form 10-K and included in Part II, Item 1A of this Quarterly Report on Form 10-Q, if any.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.
Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and industry developments may differ materially from statements made in or suggested by the forward-looking statements contained in this Quarterly Report on Form 10-Q. The matters summarized in “Risk Factors” in our Form 10-K, and in subsequent filings could cause our actual results to differ significantly from those contained in our forward-looking statements. In addition, even if our results of operations, financial condition and liquidity, and industry developments are consistent with the forward-looking statements contained in this filing, those results or developments may not be indicative of results or developments in subsequent periods.
In light of these risks and uncertainties, we caution you not to place undue reliance on these forward-looking statements. Any forward-looking statement that we make in this filing speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statement or to publicly announce the results of any revision to any of those statements to reflect future events or developments, except as required by applicable law. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data.
Executive Overview
The Company delivers seamless integrated software and services to customers in strategic vertical markets. Building on its broad suite of software and services solutions, the Company creates and acquires software products to serve the specific needs of its customers. The Company's primary strategic verticals are Public Sector (including Education) and Healthcare.
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On February 8, 2024, we announced that our Board of Directors had initiated a process to explore a potential sale of certain assets related to our Merchant Services business. There is no assurance that the process to explore a sale of the Merchant Services business will result in any transaction, or if the transaction is completed, the timing or terms of any such transaction. Our Board of Directors may determine to suspend or terminate the exploration of a potential sale of our Merchant Services business at any time due to various factors. Any potential transaction is also dependent upon a number of factors that may be beyond our control, including, among other factors, market conditions, industry trends, regulatory limitations and the interest of third parties in our business. We do not intend to make any further disclosure concerning these matters unless and until any definitive transaction agreement is reached or we otherwise deem further disclosure is appropriate.
Economic Trends
Inflationary pressures, elevated interest rate levels, monetary policy, and the current geopolitical situation (including the military conflicts in Ukraine and in the Middle East), are causing broad economic uncertainty and could potentially cause new, or exacerbate existing, economic challenges that may impact us. These conditions could worsen as a result of adverse economic developments impacting the U.S. and/or global economies, including as a result of monetary policy designed to curb inflation. As the future magnitude, duration and effects of these conditions are difficult to predict at this time, we are unable to predict the extent of the potential effect on our financial results.
Liquidity
At December 31, 2023, we had $4.2 million of cash and cash equivalents and $184.5 million of available capacity under our 2023 Senior Secured Credit Facility subject to our financial covenants. As of December 31, 2023, we were in compliance with these covenants with a consolidated interest coverage ratio and total leverage ratio 4.40x, and 3.60x, respectively. For additional information about our Exchangeable Notes and 2023 Senior Secured Credit Facility, see the section entitled “Liquidity and Capital Resources” below.
Acquisitions
Acquisitions during the three months ended December 31, 2023
During the three months ended December 31, 2023, we completed the acquisition of one business to expand our software offerings. Total purchase consideration was $1.3 million, including $1.1 million in cash funded by the proceeds from our revolving credit facility and $0.2 million in contingent consideration.
Acquisitions during the three months ended December 31, 2022
During the three months ended December 31, 2023, we completed the acquisition of two businesses to expand our software offerings in the Public Sector vertical. Total purchase consideration was $89.5 million in cash consideration, funded by the proceeds from our revolving credit facility.
Our Revenue and Expenses
Revenues
We generate revenue from software and related services revenue, including the sale of subscriptions, recurring services, ongoing support, licenses, and installation and implementation services specific to software. We also generate revenue from volume-based payment processing fees (“discount fees”) and POS-related solutions that we provide to our customers directly and through our distribution partners. Volume-based fees represent a percentage of the dollar amount of each credit or debit transaction processed. Revenues are also derived from a variety of fixed transaction or service fees, including authorization fees, convenience fees, statement fees, annual fees and fees for other miscellaneous services, such as handling chargebacks.
Interchange and network fees. Interchange and network fees consist primarily of pass-through fees that make up a portion of discount fee revenue. These include assessment fees payable to card associations, which are a percentage of the processing volume we generate from Visa and Mastercard. These fees are presented net of revenue.
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Expenses
Other costs of services. Other costs of services include costs directly attributable to processing and bank sponsorship costs. These also include related costs such as residual payments to our distribution partners, which are based on a percentage of the net revenues (revenue less interchange and network fees) generated from customer referrals. Losses resulting from excessive chargebacks against a customer are included in other cost of services. The cost of equipment sold is also included in cost of services. Other costs of services are recognized at the time the customer’s transactions are processed.
Selling, general and administrative. Selling, general and administrative expenses include salaries and other employment costs, professional services, rent and utilities and other operating costs.
Depreciation and amortization. Depreciation expense consists of depreciation on our investments in property, equipment and computer hardware and software. Depreciation expense is recognized on a straight-line basis over the estimated useful life of the asset. Amortization expense for acquired intangible assets and internally developed software is recognized using a proportional cash flow method. Amortization expense for internally developed software is recognized over the estimated useful life of the asset. The useful lives of contract-based intangible assets are equal to the terms of the agreement.
Interest expense, net. Our interest expense consists of interest on our outstanding indebtedness under our 2023 Senior Secured Credit Facility, our Prior Senior Secured Credit Facility and Exchangeable Notes, and amortization of debt discount and issuance costs.
How We Assess Our Business
Software and Services
Our Software and Services segment delivers vertical market software solutions to customers across all of our strategic vertical markets. These solutions often include embedded payments or other recurring services.
Merchant Services
Our Merchant Services segment provides comprehensive payment solutions to businesses and organizations. Our Merchant Services segment includes third-party integrated payment solutions as well as traditional merchant processing services across our strategic vertical markets.
Other
Our Other category includes corporate overhead expenses, when presenting reportable segment information.
For additional information on our segments, see Note 14 to our condensed consolidated financial statements.
Key Performance Indicators
We evaluate our performance through key performance indicators, including:
annualized recurring revenue ("ARR");
software and related services as a percentage of total revenue;
the dollar volume of payments our customers process through us (“payment volume”); and
processing margin.

ARR is the annualized revenue derived from software-as-a-service (“SaaS”) arrangements, transaction-based software-revenue, software maintenance, recurring software-based services, payments revenue and other recurring revenue sources within the quarter. This excludes contracts that are not recurring or are one-time in nature. We focus on ARR because it helps us to assess the health and trajectory of our business. ARR does not have a standardized definition and is therefore unlikely to be comparable to similarly titled measures presented by other companies. It should be reviewed independently of revenue and it is not a forecast. Additionally, ARR does not take into account seasonality. The active contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our customers. ARR for the three months ended December 31, 2023 and 2022 was $316.9 million and $290.2 million, respectively, representing a period-to-period growth rate of 9.2%.
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Software and related services revenue includes the sale of subscriptions, recurring services, ongoing support, licenses, and installation and implementation services specific to software. We focus on software and related services revenue as a percentage of total revenue because it is a strategic goal to expand the software services we provide our customers. Software and related services typically result in long-term partnerships with strong recurring revenues. Software and related services revenue as a percentage of total revenue for the three months ended December 31, 2023 and 2022 was 47.4% and 47.8%.
Our payment volume for the three months ended December 31, 2023 and 2022 was $6.2 billion and $5.9 billion, respectively, representing a period-to-period growth rate of 5.4%. We focus on payment volume because it is a reflection of the scale and economic activity of our customer base and because a significant part of our revenue is derived as a percentage of our customers’ dollar volume receipts. Payment volume reflects the addition of new customers and same store payment volume growth of existing customers, partially offset by customer attrition during the period.
Processing margin is equal to revenue less other cost of services plus residuals expense, which is a component of other cost of services. We focus on processing margin because it represents the profitability of the operating segments, exclusive of sales efforts and overhead. Processing margin is a measure reported to our management for purposes of assessing the operating performance of our business segments, and is presented in our financial statement footnotes in accordance with ASC 280. For additional information regarding processing margin, including the amount of our processing margin for our business segments for the three months ended December 31, 2023 and 2022, see Note 15 to our condensed consolidated financial statements.
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Results of Operations
Three Months Ended December 31, 2023 Compared to Three Months Ended December 31, 2022
The following table presents our historical results of operations for the periods indicated:
Three months ended December 31,