Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
i3 Verticals, Inc.
Nashville, Tennessee
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of i3 Verticals, Inc. (the “Company”) and subsidiaries as of September 30, 2018 and 2017, the related consolidated statements of operations, changes in equity (deficit), and cash flows for each of the three years in the period ended September 30, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at September 30, 2018 and 2017, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2016.
Nashville, Tennessee
December 7, 2018
i3 Verticals, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except unit, share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2018
|
|
2017
|
Assets
|
|
|
|
Current assets
|
|
|
|
Cash and cash equivalents
|
$
|
572
|
|
$
|
955
|
Accounts receivable, net
|
12,500
|
|
8,412
|
Settlement assets
|
863
|
|
5,196
|
Prepaid expenses and other current assets
|
2,630
|
|
1,141
|
Total current assets
|
16,565
|
|
15,704
|
|
|
|
|
Property and equipment, net
|
2,958
|
|
1,420
|
Restricted cash
|
665
|
|
1,013
|
Capitalized software, net
|
3,372
|
|
3,778
|
Goodwill
|
83,954
|
|
58,517
|
Intangible assets, net
|
66,023
|
|
59,259
|
Other assets
|
1,605
|
|
300
|
Total assets
|
$
|
175,142
|
|
$
|
139,991
|
|
|
|
|
Liabilities, Redeemable Class A Units and equity
|
|
|
|
Liabilities
|
|
|
|
Current liabilities
|
|
|
|
Accounts payable
|
4,114
|
|
1,600
|
Current portion of long-term debt
|
5,000
|
|
4,000
|
Accrued expenses and other current liabilities
|
11,538
|
|
6,706
|
Settlement obligations
|
863
|
|
5,196
|
Deferred revenue
|
4,927
|
|
2,719
|
Total current liabilities
|
26,442
|
|
20,221
|
|
|
|
|
Long-term debt, less current portion and debt issuance costs, net
|
31,776
|
|
106,836
|
Other long-term liabilities
|
4,726
|
|
2,065
|
Total liabilities
|
62,944
|
|
129,122
|
|
|
|
|
Commitments and contingencies (see Note 14)
|
|
|
|
Redeemable Class A units; 0 and 4,900,000 Units authorized, issued and outstanding as of September 30, 2018 and September 30, 2017, respectively
|
—
|
|
7,723
|
Stockholders' / Members' equity
|
|
|
|
Members' equity
|
—
|
|
36,164
|
Preferred stock, par value $0.0001 per share, 10,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2018
|
—
|
|
—
|
Class A common stock, par value $0.0001 per share, 150,000,000 shares authorized; 9,112,042 shares issued and outstanding as of September 30, 2018
|
1
|
|
—
|
Class B common stock, par value $0.0001 per share, 40,000,000 shares authorized; 17,213,806 shares issued and outstanding as of September 30, 2018
|
2
|
|
—
|
Additional paid-in-capital
|
38,562
|
|
—
|
Accumulated earnings (deficit)
|
736
|
|
(33,018)
|
Total Stockholders' / Members' equity
|
39,301
|
|
3,146
|
Non-controlling interest
|
72,897
|
|
—
|
Total equity
|
112,198
|
|
3,146
|
Total liabilities, Redeemable Class A Units and members' / stockholders' equity (deficit)
|
$
|
175,142
|
|
$
|
139,991
|
See Notes to the Consolidated Financial Statements
i3 Verticals, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
|
|
|
Revenue
|
$
|
323,508
|
|
$
|
262,571
|
|
$
|
199,644
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
Interchange and network fees
|
214,543
|
|
189,112
|
|
140,998
|
Other costs of services
|
40,314
|
|
28,798
|
|
21,934
|
Selling general and administrative
|
40,585
|
|
27,194
|
|
20,393
|
Depreciation and amortization
|
11,839
|
|
10,085
|
|
9,898
|
Change in fair value of contingent consideration
|
3,866
|
|
(218)
|
|
2,458
|
Total operating expenses
|
311,147
|
|
254,971
|
|
195,681
|
|
|
|
|
|
|
Income from operations
|
12,361
|
|
7,600
|
|
3,963
|
|
|
|
|
|
|
Other expenses
|
|
|
|
|
|
Interest expense, net
|
8,498
|
|
6,936
|
|
5,900
|
Change in fair value of warrant liability
|
8,487
|
|
(415)
|
|
(28)
|
Other income
|
—
|
|
—
|
|
(59)
|
Total other expenses
|
16,985
|
|
6,521
|
|
5,813
|
|
|
|
|
|
|
(Loss) income before income taxes
|
(4,624)
|
|
1,079
|
|
(1,850)
|
|
|
|
|
|
|
Provision for income taxes
|
337
|
|
177
|
|
243
|
|
|
|
|
|
|
Net (loss) income
|
(4,961)
|
|
902
|
|
(2,093)
|
|
|
|
|
|
|
Net income attributable to non-controlling interest
|
1,937
|
|
—
|
|
—
|
Net (loss) income attributable to i3 Verticals, Inc.
|
$
|
(6,898)
|
|
$
|
902
|
|
$
|
(2,093)
|
|
|
|
|
|
|
Net income per share attributable to Class A common stockholders
(1)
:
|
|
|
|
|
|
Basic
|
$
|
0.08
|
|
|
|
|
Diluted
|
$
|
0.08
|
|
|
|
|
Weighted average shares of Class A common stock outstanding
(1)
:
|
|
|
|
|
|
Basic
|
8,812,630
|
|
|
|
|
Diluted
|
26,873,878
|
|
|
|
|
__________________________
1.
Basic and diluted
net income per Class A common stock are presented only for the period after the Company’s Reorganization Transactions. See Note 1 for a description of the Reorganization Transactions. See Note 18 for the calculation of income per common share.
See Notes to the Consolidated Financial Statements
i3 Verticals, Inc.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Units
|
|
Common Units
|
|
Class P Units
|
|
Class A Common Stock
|
|
|
|
Class B Common Stock
|
|
|
|
Additional Paid-In Capital
|
|
Accumulated Members' Deficit
|
|
Retained Earnings
|
|
Non-Controlling Interest
|
|
Total Equity
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2015
|
$
|
7,753
|
|
$
|
300
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(25,664)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(17,611)
|
Preferred returns on Class A Units
|
1,080
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(1,080)
|
|
—
|
|
—
|
|
—
|
Preferred returns on Redeemable Class A Units
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(639)
|
|
—
|
|
—
|
|
(639)
|
Issuance of Class A Units
|
11,000
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
11,000
|
Issuance of Common Units
|
—
|
|
665
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
665
|
Distributions to members
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(764)
|
|
—
|
|
—
|
|
(764)
|
Equity issuance costs
|
(68)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(68)
|
Net loss
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(2,093)
|
|
—
|
|
—
|
|
(2,093)
|
Balance at September 30, 2016
|
$
|
19,765
|
|
$
|
965
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(30,240)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(9,510)
|
Preferred returns on Class A Units
|
2,223
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(2,223)
|
|
—
|
|
—
|
|
—
|
Preferred returns on Redeemable Class A Units
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(701)
|
|
—
|
|
—
|
|
(701)
|
Issuance of Class A Units
|
13,000
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
13,000
|
Issuance of Common Units
|
—
|
|
275
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
275
|
Distributions to members
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(756)
|
|
—
|
|
—
|
|
(756)
|
Equity issuance costs
|
(64)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(64)
|
Net income
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
902
|
|
—
|
|
—
|
|
902
|
Balance at September 30, 2017
|
$
|
34,924
|
|
$
|
1,240
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(33,018)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
3,146
|
See Notes to the Consolidated Financial Statements
i3 Verticals, Inc.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (CONTINUED)
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Units
|
|
Common Units
|
|
Class P Units
|
|
Class A Common Stock
|
|
|
|
Class B Common Stock
|
|
|
|
Additional Paid-In Capital
|
|
Accumulated Members' Deficit
|
|
Retained Earnings
|
|
Non-Controlling Interest
|
|
Total Equity
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2017
|
$
|
34,924
|
|
$
|
1,240
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(33,018)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
3,146
|
Preferred returns on Class A Units
|
2,522
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(2,522)
|
|
—
|
|
—
|
|
—
|
Preferred returns on Redeemable Class A Units
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(552)
|
|
—
|
|
—
|
|
(552)
|
Issuance of Common Units
|
—
|
|
104
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
104
|
Net loss prior to the Reorganization Transactions
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(7,634)
|
|
—
|
|
—
|
|
(7,634)
|
Exercise of Junior Subordinated Notes Warrants and Mezzanine Warrants
|
—
|
|
12,218
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(145)
|
|
—
|
|
—
|
|
—
|
|
12,073
|
Equity based compensation recognized prior to the Reorganization Transactions
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
38
|
|
—
|
|
—
|
|
—
|
|
38
|
Effect of the Reorganization Transactions
|
(37,446)
|
|
(13,562)
|
|
—
|
|
824,861
|
|
—
|
|
17,597,223
|
|
2
|
|
804
|
|
43,726
|
|
—
|
|
15,493
|
|
9,017
|
Issuance of Class A common stock in conversion of Junior Subordinated Notes
|
—
|
|
—
|
|
—
|
|
619,542
|
|
—
|
|
—
|
|
—
|
|
8,054
|
|
—
|
|
—
|
|
—
|
|
8,054
|
Sale of Class A common stock in initial public offering, net
|
—
|
|
—
|
|
—
|
|
7,647,500
|
|
1
|
|
—
|
|
—
|
|
92,446
|
|
—
|
|
—
|
|
—
|
|
92,447
|
Purchase of common units in i3 Verticals, LLC from selling shareholder
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(383,417)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(4,635)
|
|
(4,635)
|
Capitalization of initial public offering costs
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(4,015)
|
|
—
|
|
—
|
|
—
|
|
(4,015)
|
Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
144
|
|
—
|
|
—
|
|
—
|
|
144
|
Non-controlling interests related to purchase of Common Units in i3 Verticals, LLC
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(60,102)
|
|
—
|
|
—
|
|
60,102
|
|
—
|
Issuance of Class A common stock
|
—
|
|
—
|
|
—
|
|
27,840
|
|
—
|
|
—
|
|
—
|
|
550
|
|
—
|
|
—
|
|
—
|
|
550
|
Equity based compensation recognized subsequent to the Reorganization Transactions
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
788
|
|
—
|
|
—
|
|
—
|
|
788
|
Forfeitures of restricted Class A common stock
|
—
|
|
—
|
|
—
|
|
(7,701)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
Net income subsequent to the Reorganization Transactions
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
736
|
|
1,937
|
|
2,673
|
Balance at September 30, 2018
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
9,112,042
|
|
$
|
1
|
|
17,213,806
|
|
$
|
2
|
|
$
|
38,562
|
|
$
|
—
|
|
$
|
736
|
|
$
|
72,897
|
|
$
|
112,198
|
See Notes to the Consolidated Financial Statements
i3 Verticals, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Cash flows from operating activities:
|
|
|
|
|
|
Net (loss) income
|
$
|
(4,961)
|
|
$
|
902
|
|
$
|
(2,093)
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
11,839
|
|
10,085
|
|
9,898
|
Equity-based compensation
|
1,567
|
|
—
|
|
—
|
Provision for doubtful accounts
|
14
|
|
216
|
|
48
|
Amortization of deferred financing costs
|
1,072
|
|
453
|
|
443
|
Loss on disposal of assets
|
5
|
|
44
|
|
4
|
(Benefit from) provision for deferred income taxes
|
(682)
|
|
56
|
|
(3)
|
Non-cash change in fair value of warrant liability
|
8,487
|
|
(415)
|
|
(28)
|
Increase (decrease) in non-cash contingent consideration expense from original estimate
|
3,866
|
|
(218)
|
|
2,458
|
Changes in operating assets:
|
|
|
|
|
|
Accounts receivable
|
(2,321)
|
|
(2,432)
|
|
(1,182)
|
Prepaid expenses and other current assets
|
1,017
|
|
305
|
|
(563)
|
Other assets
|
(3,182)
|
|
9
|
|
(142)
|
Changes in operating liabilities:
|
|
|
|
|
|
Accounts payable
|
1,172
|
|
(384)
|
|
509
|
Accrued expenses and other current liabilities
|
2,040
|
|
1,515
|
|
806
|
Deferred revenue
|
(123)
|
|
388
|
|
548
|
Other long-term liabilities
|
362
|
|
40
|
|
(32)
|
Contingent consideration paid in excess of original estimates
|
(2,092)
|
|
(2,234)
|
|
(666)
|
Net cash provided by operating activities
|
18,080
|
|
8,330
|
|
10,005
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Expenditures for property and equipment
|
(2,217)
|
|
(636)
|
|
(862)
|
Expenditures for capitalized software
|
(1,092)
|
|
(1,452)
|
|
(1,992)
|
Purchases of merchant portfolios and residual buyouts
|
(1,207)
|
|
(1,632)
|
|
—
|
Acquisitions of businesses, net of cash acquired
|
(32,362)
|
|
(44,175)
|
|
(32,277)
|
Acquisition of other intangibles
|
(1,177)
|
|
(8)
|
|
(23)
|
Net cash used in investing activities
|
(38,055)
|
|
(47,903)
|
|
(35,154)
|
See Notes to the Consolidated Financial Statements
i3 Verticals, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from revolving credit facility
|
27,250
|
|
56,500
|
|
55,600
|
Payments of revolving credit facility
|
(95,600)
|
|
(23,900)
|
|
(33,600)
|
Proceeds from notes payable to banks
|
24,671
|
|
—
|
|
6,500
|
Payments of notes payable to banks
|
(5,000)
|
|
(5,000)
|
|
(2,800)
|
Payment of notes payable to Mezzanine Lenders
|
(10,486)
|
|
—
|
|
—
|
Payment of unsecured notes payable to related and unrelated creditors
|
(5,489)
|
|
—
|
|
—
|
Payment of debt issuance costs
|
(266)
|
|
(254)
|
|
(876)
|
Proceeds from the exercise of Mezzanine Warrants and Junior Subordinated Notes Warrants
|
270
|
|
—
|
|
—
|
Proceeds from issuance of Class A common stock sold in initial public offering, net of underwriting discounts and offering costs
|
89,506
|
|
—
|
|
—
|
Payments for Common Units in i3 Verticals, LLC from selling shareholder
|
(4,635)
|
|
—
|
|
—
|
Proceeds from the issuance of Class A Units
|
—
|
|
12,500
|
|
9,000
|
Payment of equity issuance costs for Class A unit issuances
|
—
|
|
(64)
|
|
(68)
|
Cash paid for contingent consideration
|
(977)
|
|
(966)
|
|
(4,776)
|
Required distributions to members for tax obligations
|
—
|
|
(1,464)
|
|
(56)
|
Net cash provided by financing activities
|
19,244
|
|
37,352
|
|
28,924
|
|
|
|
|
|
|
Net (decrease) increase in cash, cash equivalents, and restricted cash
|
(731)
|
|
(2,221)
|
|
3,775
|
Cash, cash equivalents, and restricted cash at beginning of period
|
1,968
|
|
4,189
|
|
414
|
Cash, cash equivalents, and restricted cash at end of period
|
$
|
1,237
|
|
$
|
1,968
|
|
$
|
4,189
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
Cash paid for interest
|
$
|
7,881
|
|
$
|
6,288
|
|
$
|
5,386
|
Cash paid for income taxes
|
$
|
483
|
|
$
|
837
|
|
$
|
21
|
See Notes to the Consolidated Financial Statements
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
1. ORGANIZATION AND OPERATIONS
i3 Verticals, Inc. (the “Company”) was formed as a Delaware corporation on January 17, 2018. The Company was formed for the purpose of completing an initial public offering (“IPO”) of its Class A common stock and other related transactions in order to carry on the business of i3 Verticals, LLC and its subsidiaries. i3 Verticals, LLC was founded in 2012 and delivers seamlessly integrated payment and software solutions to small- and medium-sized businesses (“SMBs”) and organizations in strategic vertical markets. The Company’s headquarters are in Nashville, Tennessee, with operations throughout the United States. Unless the context otherwise requires, references to “we,” “us,” “our,” “i3 Verticals” and the “Company” refer to i3 Verticals, Inc. and its subsidiaries, including i3 Verticals, LLC.
Initial Public Offering
On June 25, 2018, the Company completed the IPO of 7,647,500 shares of its Class A common stock at a public offering price of $13.00 per share. The Company received approximately $92.5 million of net proceeds, after deducting underwriting discounts and commissions, which the Company used to purchase newly issued common units from i3 Verticals, LLC (the “Common Units”), and Common Units from a selling Common Unit holder, in each case at a price per Common Unit equal to the price per share paid by the underwriters for shares of the Company's Class A common stock in the IPO.
Reorganization Transactions
In connection with the IPO, the Company completed the following transactions (the “Reorganization Transactions”):
•
i3 Verticals, LLC amended and restated its existing limited liability company agreement to, among other things,
(1) convert all existing Class A units, common units (including common units issued upon the exercise of existing warrants) and Class P units of ownership interest in i3 Verticals, LLC into either Class A voting common units of i3 Verticals, LLC (such holders of Class A voting common units referred to herein as the “Continuing Equity Owners”) or Class B non-voting common units of i3 Verticals, LLC (such holders of Class B non-voting common units referred to herein as the “Former Equity Owners”), and (2) appoint i3 Verticals, Inc. as the sole managing member of i3 Verticals, LLC upon its acquisition of Common Units in connection with the IPO;
•
the Company amended and restated its certificate of incorporation to provide for, among other things, Class A common stock and Class B common stock;
•
i3 Verticals, LLC and the Company consummated a merger among i3 Verticals, LLC, i3 Verticals, Inc. and a newly formed wholly-owned subsidiary of i3 Verticals, Inc. (“MergerSub”) whereby: (1) MergerSub merged with and into i3 Verticals, LLC, with i3 Verticals, LLC as the surviving entity; (2) Class A voting common units converted into newly issued Common Units in i3 Verticals, LLC together with an equal number of shares of Class B common stock of i3 Verticals, Inc., and (3) Class B non-voting common units converted into Class A common stock of i3 Verticals, Inc. based on a conversion ratio that provided an equitable adjustment to reflect the full value of the Class B non-voting common units; and
•
the Company issued shares of its Class A common stock pursuant to a voluntary private conversion of certain subordinated notes (the “Junior Subordinated Notes”) by certain related and unrelated creditors of i3 Verticals, LLC.
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Following the completion of the IPO and Reorganization Transactions, the Company became a holding company and its principal asset is the Common Units in i3 Verticals, LLC that it owns. i3 Verticals, Inc. operates and controls all of i3 Verticals, LLC's operations and, through i3 Verticals, LLC and its subsidiaries, conducts i3 Verticals, LLC's business. i3 Verticals, Inc. has a minority economic interest in i3 Verticals, LLC.
•
As of
September 30, 2018, i3 Verticals, Inc. owned 34.6% of the economic interest in i3 Verticals, LLC.
•
As of
September 30, 2018, the Continuing Equity Owners owned Common Units in i3 Verticals, LLC representing approximately 65.4% of the economic interest in i3 Verticals, LLC, shares of Class A common stock in the Company representing approximately 0.9% of the economic interest and voting power in the Company, and shares of Class B common stock in i3 Verticals, Inc., representing approximately 65.4% of the voting power in the Company.
•
The Continuing Equity Owners who own Common Units in i3 Verticals, LLC may redeem at each of their options (subject in certain circumstances to time-based vesting requirements) their Common Units for, at the election of i3 Verticals, LLC, cash or newly-issued shares of the Company's Class A common stock.
•
Combining the Class A common stock and Class B common stock, the Continuing Equity Holders hold approximately
66.3% of the economic interest and voting power in i3 Verticals, Inc.
i3 Verticals, Inc. is the sole managing member of i3 Verticals, LLC and as a result, consolidates the financial results of i3 Verticals, LLC and reports a non-controlling interest representing the Common Units of i3 Verticals, LLC held by the Continuing Equity Owners.
As the Reorganization Transactions are considered transactions between entities under common control, the financial statements retroactively reflect the accounts of i3 Verticals, LLC for periods prior to the IPO and Reorganization Transactions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the reporting and disclosure rules and regulations of the Securities and Exchange Commission (“SEC”).
Principles of Consolidation
These consolidated financial statements include the accounts of the Company and its subsidiary companies. All significant intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers cash on hand, checking accounts, and savings accounts to be cash and cash equivalents. At times, the balance in these accounts may exceed federal insured limits. Cash equivalents are defined as financial instruments readily transferrable into cash with an original maturity less than 90 days.
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Restricted Cash
Restricted cash represents funds held-on-deposit with processing banks pursuant to agreements to cover potential merchant losses. It is presented as long-term assets on the accompanying consolidated balance sheets since the related agreements extend beyond the next twelve months. Following the adoption of 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. The reconciliation between the consolidated balance sheet and the consolidated statement of cash flows is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
September 30, 2017
|
Cash and cash equivalents on consolidated balance sheet
|
$
|
572
|
|
$
|
955
|
Restricted cash
|
665
|
|
1,013
|
Total cash, cash equivalents and restricted cash on consolidated statement of cash flows
|
$
|
1,237
|
|
$
|
1,968
|
Accounts Receivable and Credit Policies
Accounts receivable consist primarily of uncollateralized credit card processing residual payments due from processing banks requiring payment within thirty days following the end of each month. Accounts receivable also include amounts due from the sales of the Company’s technology solutions to its customers. The carrying amount of accounts receivable is reduced by an allowance for doubtful accounts, if necessary, which reflects management’s best estimate of the amounts that will not be collected. The allowance is estimated based on management’s knowledge of its customers, historical loss experience and existing economic conditions. Accounts receivable and the allowance are written-off when, in management’s opinion, all collection efforts have been exhausted. The Company’s allowance for doubtful accounts was $205 and $211 as of September 30, 2018 and 2017, respectively; however, actual write-offs may exceed estimated amounts.
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 expense, 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. As of September 30, 2018 and 2017, settlement assets and settlement obligations were both $863 and $5,196, 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 basis, or net realizable value. Inventories were $930 and $454 at September 30, 2018 and 2017, respectively, and are included within prepaid expenses and other current assets on the accompanying consolidated balance sheets.
Property and Equipment
Property and equipment are stated at cost or, if acquired through a business combination or an asset acquisition, fair value at the date of acquisition. Depreciation and amortization are provided over the assets’ estimated useful lives (or, if obtained in connection with a business acquisition, over their estimated remaining useful lives) using the straight-line method, except for leasehold improvements, which are depreciated over the shorter of the estimated useful lives of the assets or the lease term.
Expenditures for maintenance and repairs are expensed when incurred. Expenditures for renewals or betterments are capitalized. Management reviews long-lived assets for impairment when events or changes in
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
circumstances indicate the carrying amount of an asset may not be recoverable. The Company recognizes impairment when the sum of undiscounted estimated future cash flows expected to result from the use of the asset is less than the carrying value of the asset. There were no impairment charges during the years ended September 30, 2018, 2017 and 2016.
Capitalized Software
Development costs for software to be sold or leased to customers are capitalized once technological feasibility of the software product has been established. Costs incurred prior to establishing technological feasibility are expensed as incurred. Technological feasibility is established when the Company has completed a detailed program design and has determined that a product can be produced to meet its design specifications, including functions, features and technical performance requirements. Capitalization of costs ceases when the product is generally available to clients. Software development costs are amortized using the greater of the straight-line method or the usage method over its estimated useful life, which is generally estimated to be three years.
Software development costs may become impaired in situations where development efforts are abandoned due to the viability of a planned project becoming doubtful or due to technological obsolescence of a planned software product. Management evaluates the remaining useful lives and carrying values of capitalized software at least annually or when events and circumstances warrant such a review, to determine whether significant events or changes in circumstances indicate that impairment in value may have occurred. To the extent estimated net realizable values, which are estimated to equal future undiscounted cash flows, exceed the carrying value, no impairment is necessary. If estimated net realizable values are less than the carrying values, an impairment charge is recorded. Impairment charges during the years ended September 30, 2018, 2017 and 2016 were nominal.
Identifiable software technology intangible assets resulting from acquisitions are amortized using the straight-line method over periods not exceeding their remaining estimated useful lives. GAAP requires that intangible assets with estimated useful lives be amortized over their respective estimated useful lives to their residual values, and reviewed for impairment. Acquisition technology intangibles’ net book values are included in capitalized software, net in the accompanying 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 value of trade names acquired is identified using the Relief from Royalty Method. The fair value of deferred revenue is identified using the Adjusted Fulfillment Cost Method. After the purchase price has been allocated, goodwill is recorded to the extent the total consideration paid for the acquisition, including the acquisition date fair value of contingent consideration, if any, exceeds the sum of the fair values of the separately identifiable acquired assets and assumed liabilities. Acquisition costs for business combinations are expensed when incurred and recorded in selling general and administrative expenses in the accompanying 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.
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
The operating results of an acquisition are included in the consolidated statements of operations from the date of such acquisition. Acquisitions completed during the year ended September 30, 2018 contributed $24,568 and $1,782 of revenue and net income, respectively, to the results in the Company's consolidated statements of operations for the year then ended.
Goodwill
In accordance with ASC 350,
Intangibles—Goodwill and Other
, the Company tests goodwill for impairment for each reporting unit on an annual basis, or when events or circumstances indicate the fair value of a reporting unit is below its carrying value.
The Company’s goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in business combinations. The goodwill generated from the business combinations is primarily related to the value placed on the employee workforce and expected synergies. Goodwill is tested for impairment at least annually in the fourth quarter and between annual tests if there are indicators of impairment that suggest a decline in the fair value of a reporting unit. Judgment is involved in determining if an indicator or change in circumstances relating to impairment has occurred. Such changes may include, among others, a significant decline in expected future cash flows, a significant adverse change in the business climate, and unforeseen competition. No goodwill impairment charges were recognized during the years ended September 30, 2018, 2017 and 2016.
The Company has the option of performing a qualitative assessment of impairment to determine whether any further quantitative testing for impairment is necessary. The option of whether or not to perform a qualitative assessment is made annually and may vary by reporting unit. Factors the Company considers in the qualitative assessment include general macroeconomic conditions, industry and market conditions, cost factors, overall financial performance of the Company’s reporting units, events or changes affecting the composition or carrying amount of the net assets of its reporting units, sustained decrease in its share price, and other relevant entity specific events. If the Company determines not to perform the qualitative assessment or if it determines, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying value, then the Company performs a quantitative test for that reporting unit. The fair value of each reporting unit is compared to the reporting unit’s carrying value, including goodwill. Subsequent to the adoption on January 1, 2017 of Accounting Standards Update (“ASU”) No. 2017-04, Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment, if the fair value of a reporting unit is less than its carrying value, the Company recognizes an impairment equal to the excess carrying value, not to exceed the total amount of goodwill allocated to that reporting unit.
For a discussion of the estimate methodology and the significance of various inputs, please see the subheading below titled “Use of Estimates.”
The Company has determined that it has nine reporting units. For each of the years ended September 30, 2018, 2017 and 2016 the Company performed a quantitative assessment for each of its reporting units. The Company determined that none of the reporting units were impaired.
Intangible Assets
Intangible assets include acquired merchant relationships, residual buyouts, referral agreements, trademarks, tradenames, website development costs and non-compete agreements. Merchant relationships represent the fair value of customer relationships purchased by the Company. Residual buyouts represent the right to not have to pay a residual to an independent sales agent related to certain future transactions with the agent’s referred merchants. Referral agreements represent the right to exclusively obtain referrals from a partner for their customers' credit card processing services.
The Company amortizes definite lived identifiable intangible assets using a method that reflects the pattern in which the economic benefits of the intangible asset are expected to be consumed or otherwise utilized. The
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
estimated useful lives of the Company’s customer-related intangible assets approximate the expected distribution of cash flows, whether straight-line or accelerated, generated from each asset. The useful lives of contract-based intangible assets are equal to the terms of the agreement.
Management evaluates the remaining useful lives and carrying values of long-lived assets, including definite lived intangible assets, at least annually, or when events and circumstances warrant such a review, to determine whether significant events or changes in circumstances indicate that a change in the useful life or impairment in value may have occurred. There were no impairment charges during the years ended September 30, 2018, 2017 and 2016.
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 amount provided for state income taxes is based upon the amounts of current and deferred taxes payable or refundable at the date of the consolidated financial statements as a result of all events recognized in the financial statements as measured by the provisions of enacted tax laws.
Under GAAP, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company has no uncertain tax positions that qualify for either recognition or disclosure in the consolidated financial statements.
Valuation of Contingent Consideration
On occasion, the Company may have acquisitions which include contingent consideration. Accounting for business combinations requires the Company to estimate the fair value of any contingent purchase consideration at the acquisition date. For a discussion of the estimate methodology and the significance of various inputs, please see the subheading below titled “Use of Estimates.” Changes in estimates regarding the fair value contingent purchase consideration are reflected as adjustments to the related liability and recognized within operating expenses in the consolidated statements of operations. Short and long-term contingent liabilities are presented within accrued expenses and other current liabilities and other long-term liabilities on the Company's consolidated balance sheets, respectively.
Classification of Financial Instruments
The Company classifies certain financial instruments issued as either equity or as liabilities. Determination of classification is based upon the underlying properties of the instrument. See specific discussion regarding the nature of instruments issued, the presentation on the consolidated financial statements and the related valuation method applied in Notes 9, 11, 12, and 13.
Revenue Recognition and Deferred Revenue
Revenue is recognized when it is realized or realizable and earned, in accordance with ASC 605,
Revenue Recognition
(“ASC 605”). Recognition occurs when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been performed; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectability is reasonably assured. The Company accrues for rights of refund, processing errors or penalties, or other related allowances based on historical experience.
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
More than 85% of the Company's gross revenue for the years ended September 30, 2018, 2017 and 2016 is derived from volume-based payment processing fees (“discount fees”) and other related fixed transaction or service fees. The remainder is comprised of sales of software licensing subscriptions, ongoing support, and other POS-related solutions the Company provides to its clients directly and through its processing bank relationships.
Discount fees represent a percentage of the dollar amount of each credit or debit transaction processed. Discount fees are recognized at the time the merchants’ transactions are processed. The Company follows the requirements of ASC 605-45
Revenue Recognition—Principal Agent Considerations
, in determining its merchant processing services revenue reporting. 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 on a gross basis equal to the full amount of the discount charged to the merchant. This amount includes interchange fees paid to card issuing banks and assessments paid to payment card networks pursuant to which such parties receive payments based primarily on processing volume for particular groups of merchants. 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 other fees.
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. Revenues derived from service fees are recognized at the time the services are performed and there are no further performance obligations. Revenue from the sale of equipment is recognized upon transfer of ownership and delivery to the customer, after which there are no further performance obligations.
Revenues from sales of the Company’s software licensing subscriptions are recognized when they are realized or realizable and earned. Contractual arrangements are evaluated for indications that multiple element arrangements may exist, including instances where more-than-incidental software deliverables are included. Arrangements may contain multiple elements, such as hardware, software products, maintenance, and professional installation and training services. Revenues are allocated to each element based on the selling price hierarchy. The selling price for a deliverable is based on vendor specific objective evidence of selling price, if available, third party evidence, or estimated selling price. 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 the product life cycle. In arrangements with multiple elements, the Company determines allocation of the transaction price at inception of the arrangement based on the relative selling price of each unit of accounting.
In multiple element arrangements where more-than-incidental software deliverables are included, the Company applies the residual method to determine the amount of software license revenues to be recognized. Under the residual method, if fair value exists for undelivered elements in a multiple-element arrangement, such fair value of the undelivered elements is deferred with the remaining portion of the arrangement consideration recognized upon delivery of the software license or services arrangement. The Company allocates the fair value of each element of a software-related multiple-element arrangement based upon its fair value as determined by vendor specific objective evidence of selling price, with any remaining amount allocated to the software license. If evidence of the fair value cannot be established for the undelivered elements of a software arrangement, then the entire amount of revenue under the arrangement is deferred until these elements have been delivered or objective evidence can be established. These amounts, if any, are included in deferred revenue in the consolidated balance sheets. Revenues related to software licensing subscriptions, maintenance or other support services with terms greater than one month are recognized ratably over the term of the agreement.
Revenues from sales of the Company
’
s combined hardware and software element are recognized when they are realized or realizable and earned 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 training, installation, and repair services are recognized as revenue as these services are performed.
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Deferred revenue represents amounts billed to customers by the Company for services contracts. 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 consolidated balance sheets.
Interchange and Network Fees and Other Cost of Services
Interchange and network fees consist primarily of fees that are directly related to discount fee revenue. These include interchange fees paid to issuers and assessment fees payable to card associations, which are a percentage of the processing volume the Company generates from Visa and Mastercard, as well as fees charged by card-issuing banks. Other costs of services include 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 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 consolidated balance sheets. The cost of equipment sold is also included in other cost of services. Interchange and other costs of services are recognized at the time the merchant's transactions are processed.
The Company accounts for all governmental taxes associated with revenue transactions on a net basis.
Advertising and Promotion Costs
Advertising and promotion costs are expensed as incurred. Advertising expense was $765, $654 and $413 for the years ended September 30, 2018, 2017 and 2016, respectively, and is included in selling, general and administrative expenses in the Consolidated Statements of Operations.
Equity-based Compensation
The Company accounts for grants of equity awards to employees in accordance with ASC 718,
Compensation—Stock Compensation
. This standard requires compensation expense to be measured based on the estimated fair value of the share-based awards on the date of grant and recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period.
Equity-based compensation was $1,567 for the year ended September 30, 2018. There was no equity-based compensation for the years ended September 30, 2017 and 2016.
Use of Estimates
The preparation of 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 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, warrant valuation, revenue recognition for multiple element arrangements, loss reserves, assumptions used in the calculation of equity-based compensation and in the calculation of income taxes, and certain tax assets and liabilities as well as the related valuation allowances. Actual results could differ from those estimates.
Below is a summary of the Company’s critical accounting estimates for which the nature of management’s assumptions are material due to the levels of subjectivity and judgment necessary to account for highly uncertain
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
matters or the susceptibility of such matters to change, and for which the impact of the estimates and assumptions on financial condition or operating performance is material.
Contingent Consideration in Acquisitions
On occasion, the Company may have acquisitions that include contingent consideration. Accounting for business combinations requires the Company to estimate the fair value of any contingent purchase consideration at the acquisition date. Where relevant, the fair value of 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.
Goodwill
The Company tests goodwill for impairment using a fair value approach at least annually, absent some triggering event that would require an interim impairment assessment. Absent any impairment indicators, the Company performs its goodwill impairment testing as of July 1 each year.
Significant estimates and assumptions are used in the Company’s goodwill impairment review and include the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units and determining the fair value of each reporting unit. The Company’s assessment of qualitative factors involves significant judgments about expected future business performance and general market conditions. In a quantitative assessment, the fair value of each reporting unit is determined based on a combination of techniques, including the present value of future cash flows, applicable multiples of competitors and multiples from sales of like businesses, and requires management to make estimates and assumptions regarding discount rates, growth rates and the Company's future long-term business plans. Changes in any of these estimates or assumptions could materially affect the determination of fair value and the associated goodwill impairment charge for each reporting unit.
Warrant Valuation
As of September 30, 2017, there were in the aggregate 1,423,688 of warrants (the “Mezzanine Warrants”) outstanding and exercisable to purchase common units in i3 Verticals, LLC related to the issuance of the Mezzanine Notes. The Mezzanine Warrants were mandatorily redeemable and embody a conditional obligation to redeem the instrument by a transfer of assets. The Mezzanine Warrants were remeasured at each reporting date through the settlement of the instrument and changes in value were reflected in earnings.
The Company used the Black-Scholes option pricing model to determine the fair market value of the Mezzanine Warrants at each reporting period. The option pricing model required the input of highly subjective assumptions, including the estimated enterprise value of the Company, expected term of the warrants, expected volatility, risk-free interest rates and discount for lack of marketability. To determine the fair value of the Mezzanine Warrants, the Company engaged an outside consultant to prepare a valuation of the unit price at each reporting date, using information provided by management and information obtained from private and public sources.
The Company used an expected volatility based on the historical volatilities of a group of guideline companies and estimated a liquidity event in June 2018 to determine the term of the warrants. The risk-free interest rates were obtained from publicly available U.S. Treasury yield curve rates. The discount for lack of marketability, if any, was determined using the Finnerty Model.
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Based on the Company’s analysis, the most highly sensitive input in the Company's option pricing model related to management’s forecasted earnings. For example, if management’s forecasted earnings increased, the Company would have recorded additional losses from the change in fair value of warrant liability. Conversely, if management’s forecasted earnings decreased, the Company would have recorded a gain from change in fair value of warrant liability. Other inputs such as expected volatility and the risk free interest rate had a less material impact of the valuation of the warrant liability.
The change in fair value of the warrant liabilities was an increase of $8,487 and a reduction of $415 and $28 for the years ended September 30, 2018, 2017 and 2016, respectively.
The fair market value of the warrants was $767 as of September 30, 2017. On June 25, 2018, in conjunction with the Reorganization Transactions described in Note 1, all existing Mezzanine Warrants were exercised for common units in i3 Verticals, LLC. See Note 9 for additional discussion of the Mezzanine Warrants.
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-15,
Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
(Subtopic 350-40). The amendments in ASU 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. As a public business entity, the Company is an emerging growth company and has elected to use the extended transition period provided for such companies. As a result, the Company will not be required to adopt this ASU until October 1, 2021. The Company is currently evaluating the impact of the adoption of this principle on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13,
Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
(Topic 820). The amendments in ASU 2018-13 provide clarification and modify the disclosure requirements on fair value measurement in Topic 820,
Fair Value Measurement
. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. As a public business entity, the Company is an emerging growth company and has elected to use the extended transition period provided for such companies. As a result, the Company will not be required to adopt this ASU until October 1, 2021. The Company is currently evaluating the impact of the adoption of this principle on the Company’s consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07,
Compensation - Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting
(Topic 718). The amendments in ASU 2018-07 expand the scope of Topic 718,
Compensation—Stock Compensation
to include share-based payments issued to nonemployees for goods or services. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. As a public business entity, the Company is an emerging growth company and has elected to use the extended transition period provided for such companies. As a result, the Company will not be required to adopt this ASU until October 1, 2020. Early adoption is permitted, but no earlier than a company’s adoption date of ASU No. 2014-09 (defined below). The Company is currently evaluating the impact of the adoption of this principle on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation - Stock Compensation: Scope of Modification Accounting
(Topic 718). The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
period. The Company has adopted this standard as of April 1, 2018. There was no impact on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows: Restricted Cash
(Topic 230). The amendments in ASU 2016-18 require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. As an emerging growth company, the Company will not be required to adopt this ASU until October 1, 2019. The Company has adopted this standard as of July 1, 2018 and has included restricted cash along with the cash and cash equivalents balance for presentation on the consolidated statement of cash flows. The reconciliation between the consolidated balance sheet and the consolidated statements of cash flows is disclosed in the restricted cash section of this footnote.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
(Topic 230). The update clarifies how cash receipts and cash payments in certain transactions are presented and classified in the statement of cash flows. The effective date of this update is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. As an emerging growth company, the Company will not be required to adopt this ASU until October 1, 2019. The Company has adopted this standard as of July 1, 2018. There was no impact on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting
(Topic 718). The update requires all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) to be recognized as income tax expense or benefit in the statement of operations. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity should recognize excess tax benefits, and assess the need for a valuation allowance, regardless of whether a benefit reduces taxes payable in the current period. Cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity. The effective date of this update is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. As a public business entity, the Company is an emerging growth company and has elected to use the extended transition period provided for such companies. As a result, the Company will not be required to adopt this ASU until October 1, 2018. The Company has early adopted this standard as of July 1, 2018. There was no impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842). This ASU amends the existing guidance by recognizing all leases, including operating leases, with a term longer than twelve months on the balance sheet and disclosing key information about the lease arrangements. The effective date of this update is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. As a public business entity, the Company is an emerging growth company and has elected to use the extended transition period provided for such companies. As a result, the Company will not be required to adopt this ASU until October 1, 2020. The update requires modified retrospective transition, with the option to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment and elect various practical expedients. The Company is currently evaluating the impact of the adoption of this principle on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue From Contracts With Customers
(Topic 606) (“ASU No. 2014-09”). The ASU supersedes the revenue recognition requirements in ASC 605. The new standard provides a five-step analysis of transactions to determine when and how revenue is recognized, based upon the core principle that revenue is recognized to depict the transfer of goods or services to customers in an amount
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also requires additional disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard, as amended, is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. As an emerging growth company, the Company will not be required to adopt this ASU until October 1, 2019. The amendment allows companies to use either a full retrospective or a modified retrospective approach to adopt this ASU. The Company has formed a project team and is currently assessing the impact of the adoption of this principle on the Company’s consolidated financial statements.
3. CREDIT RISK AND OTHER CONCENTRATIONS
The Company places its cash with high credit quality financial institutions which provide Federal Deposit Insurance Corporation insurance. The Company performs periodic evaluations of the relative credit standing of these institutions and does not expect any losses related to such concentrations.
The Company’s revenues are earned by processing transactions for merchant businesses and other institutions under contract with the Company. The Company utilizes the funds settlement services of primarily six processing banks, from which most accounts receivable are remitted monthly.
No single merchant accounted for more than 1.0% of the Company's revenue during the years ended September 30, 2018, 2017 and
2016
. The Company believes that the loss of any single merchant would not have a material adverse effect on the Company's financial condition or results of operations.
The Company uses third party payment processors, three of which facilitate more than 10% of our processing revenues for the years ended September 30, 2018, 2017, and 2016.
4. ACQUISITIONS
During the years ended September 30, 2018, 2017 and 2016 the Company acquired the following intangible assets and businesses:
Residual Buyouts
From time to time, the Company acquires future commission streams 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 years ended September 30, 2018 and 2017, the Company purchased $1,567 and $476, respectively, in residual buyouts using a combination of cash on hand and borrowings on the Company's revolving line of credit. The acquired residual buyout intangible assets have an estimated amortization period of two years.
Merchant Relationships Portfolio Purchase
Effective March 31, 2017, the Company acquired a payment portfolio in an asset acquisition. The acquisition was completed to expand the Company’s merchant base. Total purchase consideration was $1,156, including $56 in acquisition-related costs, which was funded using a combination of cash on hand and long-term debt. The purchase consideration of the acquired assets was allocated based on the relative fair values to the merchant relationships intangible asset. The acquired merchant relationships intangible asset has an estimated amortization period of fifteen years.
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Referral Agreements
From time to time, the Company enters into referral agreements with agent banks or other organizations (“referral partner”). Under these agreements, the referral partner exclusively refers its customers to the Company for credit card processing services. Total consideration paid for these agreements in the year ended September 30, 2018 was $815, all of which was settled with cash on hand. Because the Company pays an up-front fee to compensate the referral partner, the amount is treated as an asset acquisition in which the Company has acquired an intangible stream of referrals. This asset is amortized over a straight-line period. The weighted-average amortization period for all intangibles acquired is five years.
2016 Business Combinations
During the year ended September 30, 2016, the Company completed the acquisitions of four businesses, including Axia Payments, LLC, and three additional unrelated businesses which were considered individually immaterial but collectively material.
Axia Payments, LLC
Effective April 1, 2016, the Company acquired certain assets of Axia Payments, LLC (“Axia”), a privately-held company engaged in business similar to the Company. The acquisition was completed to increase the Company's revenue and merchant base and to provide another strategic processing partner. Net purchase consideration was $28,565, which includes $665 of common units issued to the seller and cash payment which was funded using proceeds from the issuance of long-term debt.
The goodwill associated with the acquisition is deductible for tax purposes. The acquired merchant relationships intangible asset has an estimated amortization period of fifteen years. The non-compete agreement and trade name have an amortization period of three years. The weighted-average amortization period for all intangibles acquired is fourteen years.
Acquisition-related costs for Axia were $646 and were expensed as incurred.
Other 2016 Business Combinations
The Company completed the acquisitions of the three other businesses to expand the Company’s revenue within the integrated point-of-sale market and to provide additional service to the Company’s customers. Total purchase consideration for the three acquisitions was $5,857, including $4,377 in cash and revolving line of credit proceeds and $1,480 of contingent cash consideration.
The goodwill associated with the acquisitions of the three other businesses is tax-deductible. The weighted-average amortization period for all intangibles acquired is fourteen years. Acquisition-related costs for the three other businesses amounted to approximately $201 and were expensed as incurred.
Certain provisions in the purchase agreement for one of the three other businesses provided for additional consideration of up to $3,250, in the aggregate, to be paid based upon the achievement of specified financial performance targets, as defined in the purchase agreement, through December 2018. The Company determined the acquisition date fair value of the liability for the contingent consideration based on a discounted cash flow analysis. In each subsequent reporting period, the Company reassesses its current estimates of performance relative to the targets and adjusts the contingent liability to its fair value through earnings. See additional disclosures in Note 11.
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Summary of 2016 Business Combinations
The fair values assigned to certain assets and liabilities assumed, as of the acquisition dates, during the year ended September 30, 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Axia
|
|
Other
|
|
Total
|
Cash and cash equivalents
|
$
|
—
|
|
$
|
4
|
|
$
|
4
|
Inventories
|
—
|
|
104
|
|
104
|
Property and equipment
|
—
|
|
67
|
|
67
|
Capitalized software
|
10
|
|
378
|
|
388
|
Acquired merchant relationships
|
15,100
|
|
1,833
|
|
16,933
|
Non-compete agreements
|
20
|
|
98
|
|
118
|
Trade name
|
1,300
|
|
95
|
|
1,395
|
Goodwill
|
12,089
|
|
3,776
|
|
15,865
|
Other assets
|
46
|
|
59
|
|
105
|
Total assets acquired
|
28,565
|
|
6,414
|
|
34,979
|
|
|
|
|
|
|
Deferred revenue, current
|
—
|
|
557
|
|
557
|
Net assets acquired
|
$
|
28,565
|
|
$
|
5,857
|
|
$
|
34,422
|
2017 Business Combinations
During the year ended September 30, 2017, the Company completed the acquisitions of three businesses, including Fairway Payments, LLC, and two additional unrelated businesses which were considered individually immaterial but collectively material.
Fairway Payments, LLC
Effective August 1, 2017, the Company acquired certain assets and assumed certain liabilities of Fairway Payments, LLC (“Fairway”), a privately-held company engaged in business similar to the Company. The acquisition was completed to add independent software vendor distribution partners, to increase the Company's presence in the healthcare and non-profit verticals and to provide another vendor for the Company's payment processing services. Net purchase consideration was $39,275, which includes $275 of common units issued to the seller and cash payment which was funded using proceeds from the issuance of long-term debt and from proceeds from the issuance of Class A units in i3 Verticals, LLC.
The goodwill associated with the acquisition is not deductible for tax purposes. The acquired relationships contracts intangible asset has an estimated amortization period of fifteen years. The non-compete agreement and trade name have an amortization period of three years. The weighted-average amortization period for all intangibles acquired is fifteen years.
Acquisition-related costs for Fairway were $284 and were expensed as incurred.
Fairway had a defined benefit pension plan (“Fairway Defined Benefit Plan”). The Fairway Defined Benefit Plan was frozen as of the date of acquisition and, per the terms of the agreement, the funding obligation of the plan is the sole responsibility of the selling party. Accordingly, the Company has not recorded a liability for the Fairway Defined Benefit Plan.
Other 2017 Business Combinations
The Company completed the acquisitions of the two other businesses to expand the Company’s merchant base and to provide additional service to the Company’s customers. Total purchase consideration for the two
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
acquisitions was $6,396, including $5,175 in cash and revolving line of credit proceeds and $1,221 of contingent cash consideration.
The goodwill associated with the acquisitions of the two other businesses is tax-deductible. The weighted-average amortization period for all intangibles acquired is fifteen years. Acquisition-related costs for the two other businesses amounted to approximately $184 and were expensed as incurred.
Certain provisions in the purchase agreement for one of the two other businesses provided for additional consideration of up to $4,700, in the aggregate, to be paid based upon the achievement of specified financial performance targets, as defined in the purchase agreement, through December 2019. The Company determined the acquisition date fair value of the liability for the contingent consideration based on a discounted cash flow analysis. In each subsequent reporting period, the Company reassesses its current estimates of performance relative to the targets and adjusts the contingent liability to its fair value through earnings. See additional disclosures in Note 11.
Summary of 2017 Business Combinations
The fair values assigned to certain assets and liabilities assumed, as of the acquisition dates, during the year ended September 30, 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fairway
|
|
Other
|
|
Total
|
Accounts receivable
|
$
|
—
|
|
$
|
30
|
|
$
|
30
|
Inventories
|
—
|
|
15
|
|
15
|
Prepaid expenses and other current assets
|
226
|
|
—
|
|
226
|
Property and equipment
|
5
|
|
57
|
|
62
|
Acquired merchant relationships
|
19,200
|
|
2,160
|
|
21,360
|
Non-compete agreements
|
40
|
|
40
|
|
80
|
Trade name
|
500
|
|
—
|
|
500
|
Goodwill
|
19,309
|
|
4,152
|
|
23,461
|
Total assets acquired
|
39,280
|
|
6,454
|
|
45,734
|
|
|
|
|
|
|
Deferred rent
|
5
|
|
—
|
|
5
|
Deferred revenue, current
|
—
|
|
58
|
|
58
|
Net assets acquired
|
$
|
39,275
|
|
$
|
6,396
|
|
$
|
45,671
|
2018 Business Combinations
During the year ended September 30, 2018, the Company completed the acquisitions of four businesses, including San Diego Cash Register Company, Inc., and three additional unrelated businesses which were considered individually immaterial but collectively material.
Purchase of San Diego Cash Register Company, Inc.
On October 31, 2017, the Company closed an agreement to purchase all of the outstanding stock of San Diego Cash Register Company, Inc. (“SDCR, Inc.”). The acquisition was completed to expand the Company's revenue within the integrated POS market. Total purchase consideration was $20,834, which includes $104 of common units in i3 Verticals, LLC issued to the seller. The acquisition was funded using $20,000 in proceeds from
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
the issuance of long-term debt from the Senior Secured Credit Facility (as defined in Note 9) and $730 of contingent cash consideration.
The goodwill associated with the acquisition is not deductible for tax purposes. The acquired merchant relationships intangible asset has an estimated amortization period of twelve years. The non-compete agreement and trade name have an amortization period of two and five years, respectively. The weighted-average amortization period for all intangibles acquired is eleven years.
Acquisition-related costs for SDCR, Inc. were $293 and were expensed as incurred.
Certain provisions in the purchase agreement provide for additional consideration of up to $2,400, in the aggregate, to be paid based upon the achievement of specified financial performance targets, as defined in the purchase agreement, through October 2019. The Company determined the acquisition date fair value of the liability for the contingent consideration based on a discounted cash flow analysis. In each subsequent reporting period the Company reassesses its current estimates of performance relative to the targets and adjusts the contingent liability to its fair value through earnings. See additional disclosures in Note 11.
Other 2018 Business Combinations
The Company completed the acquisitions of the three other businesses to expand the Company's merchant base. Total purchase consideration for the three acquisitions was $15,604, including $13,700 in cash and revolving line of credit proceeds, $550 of restricted Class A common stock and $1,354 of contingent cash consideration. The purchase price allocations assigned for certain of these acquisitions are preliminary.
The goodwill associated with the acquisitions of the three other businesses is deductible for tax purposes. The acquired merchant relationships intangible assets have estimated amortization periods of between twelve and fifteen years. The exclusivity agreement acquired has an estimated amortization period of ten years. The non-compete agreements and trade name have weighted-average amortization periods of five years. The weighted-average amortization period for all intangibles acquired is twelve years.
Acquisition-related costs for the three other businesses amounted to approximately $233 and were expensed as incurred.
Certain provisions in the purchase agreements for the three other businesses provide for additional consideration of up to $11,800, in the aggregate, to be paid based upon the achievement of specified financial performance targets, as defined in the purchase agreements, through no later than January 2020. The Company determined the acquisition date fair values of the liabilities for the contingent consideration based on discounted cash flow analyses. In each subsequent reporting period, the Company will reassess its current estimates of performance relative to the targets and adjust the contingent liabilities to their fair values through earnings. See additional disclosures in Note 11.
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Summary of 2018 Business Combinations
The fair values assigned to certain assets and liabilities assumed, as of the acquisition dates, during the year ended September 30, 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SDCR, Inc.
|
|
Other
|
|
Total
|
Cash and cash equivalents
|
$
|
1,338
|
|
$
|
—
|
|
$
|
1,338
|
Accounts receivable
|
1,008
|
|
—
|
|
1,008
|
Settlement assets
|
—
|
|
350
|
|
350
|
Related party receivable
|
773
|
|
—
|
|
773
|
Inventories
|
1,318
|
|
—
|
|
1,318
|
Prepaid expenses and other current assets
|
1,176
|
|
8
|
|
1,184
|
Property and equipment
|
69
|
|
58
|
|
127
|
Capitalized software
|
—
|
|
200
|
|
200
|
Acquired merchant relationships
|
5,500
|
|
5,100
|
|
10,600
|
Exclusivity Agreements
|
—
|
|
100
|
|
100
|
Non-compete agreements
|
40
|
|
1,440
|
|
1,480
|
Trade name
|
1,340
|
|
200
|
|
1,540
|
Goodwill
|
16,523
|
|
8,914
|
|
25,437
|
Other assets
|
—
|
|
4
|
|
4
|
Total assets acquired
|
29,085
|
|
16,374
|
|
45,459
|
|
|
|
|
|
|
Accounts payable
|
1,342
|
|
—
|
|
1,342
|
Accrued expenses and other current liabilities
|
3,123
|
|
431
|
|
3,554
|
Settlement obligations
|
—
|
|
350
|
|
350
|
Deferred revenue, current
|
2,029
|
|
190
|
|
2,219
|
Other long-term liabilities
|
1,757
|
|
—
|
|
1,757
|
Net assets acquired
|
$
|
20,834
|
|
$
|
15,403
|
|
$
|
36,237
|
Pro Forma Results of Operations for 2018 Business Combinations
The following unaudited supplemental pro forma results of operations have been prepared as though each of the acquired businesses in the year ended September 30, 2018 had occurred on October 1, 2016. Pro forma adjustments were made to reflect the impact of depreciation and amortization, changes to executive compensation and the revised debt load, all in accordance with ASC 805. This supplemental pro forma information does not purport to be indicative of the results of operations that would have been attained had the acquisitions been made on these dates, or of results of operations that may occur in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
|
|
2018
|
|
2017
|
Revenue
|
$
|
355,015
|
|
$
|
314,172
|
Net income (loss)
|
$
|
(4,501)
|
|
$
|
5,217
|
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
5. PROPERTY AND EQUIPMENT, NET
A summary of the Company's property and equipment as of September 30, 2018 and 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful Life
|
|
2018
|
|
2017
|
Computer equipment and software
|
2 to 3 years
|
|
$
|
636
|
|
$
|
484
|
Furniture and fixtures
|
2 to 7 years
|
|
1,299
|
|
719
|
Terminals
|
2 to 3 years
|
|
588
|
|
991
|
Office equipment
|
2 to 5 years
|
|
107
|
|
87
|
Automobiles
|
3 years
|
|
114
|
|
56
|
Leasehold improvements
|
2 to 7 years
|
|
1,506
|
|
429
|
Accumulated depreciation
|
|
|
(1,292)
|
|
(1,346)
|
Property and equipment, net
|
|
|
$
|
2,958
|
|
$
|
1,420
|
Depreciation expense for the years ended September 30, 2018, 2017 and 2016 amounted to $802, $875 and $648, respectively.
6. CAPITALIZED SOFTWARE, NET
A summary of the Company's capitalized software as of September 30, 2018 and 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful Life
|
|
2018
|
|
2017
|
Software development costs
|
1 to 3 years
|
|
$
|
6,021
|
|
$
|
4,846
|
Development in progress
|
|
|
389
|
|
1,125
|
Accumulated amortization
|
|
|
(3,038)
|
|
(2,193)
|
Capitalized software, net
|
|
|
$
|
3,372
|
|
$
|
3,778
|
The Company capitalized software development costs (including acquisitions) totaling $1,292 and $1,452 during the years ended September 30, 2018 and 2017, respectively. Amortization expense for capitalized software development costs amounted to $1,696, $1,541 and $1,223 during the years ended September 30, 2018, 2017 and 2016, respectively.
7. GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchant Services
|
|
Proprietary Software and Payments
|
|
Other
|
|
Total
|
Balance at September 30, 2016 (net of accumulated impairment losses of $11,458, $0 and $0, respectively)
|
$
|
26,553
|
|
$
|
8,503
|
|
$
|
—
|
|
$
|
35,056
|
Goodwill attributable to 2017 acquisitions
|
22,620
|
|
841
|
|
—
|
|
23,461
|
Balance at September 30, 2017
|
49,173
|
|
9,344
|
|
—
|
|
58,517
|
Goodwill attributable to 2018 acquisitions
|
20,493
|
|
4,944
|
|
—
|
|
25,437
|
Balance at September 30, 2018
|
$
|
69,666
|
|
$
|
14,288
|
|
$
|
—
|
|
$
|
83,954
|
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Intangible assets consisted of the following as of September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Accumulated
Amortization
|
|
Carrying
Value
|
|
Amortization Life and Method
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
Merchant relationships
|
$
|
94,791
|
|
$
|
(34,086)
|
|
$
|
60,705
|
|
15 years – accelerated or straight-line
|
Non-compete agreements
|
1,890
|
|
(561)
|
|
1,329
|
|
2 to 5 years – straight-line
|
Website development costs
|
18
|
|
(14)
|
|
4
|
|
3 years – straight-line
|
Trade names
|
3,717
|
|
(1,850)
|
|
1,867
|
|
2 to 5 years – straight-line
|
Residual buyouts
|
2,043
|
|
(773)
|
|
1,270
|
|
2 years – straight-line
|
Referral and exclusivity agreements
|
915
|
|
(99)
|
|
816
|
|
1 to 10 years – straight-line
|
Total finite-lived intangible assets
|
103,374
|
|
(37,383)
|
|
65,991
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
Trademarks
|
32
|
|
—
|
|
32
|
|
|
Total identifiable intangible assets
|
$
|
103,406
|
|
$
|
(37,383)
|
|
$
|
66,023
|
|
|
Intangible assets consisted of the following as of September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Accumulated Amortization
|
|
Carrying Value
|
|
Amortization Life and Method
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
Merchant relationships
|
$
|
84,191
|
|
$
|
(26,855)
|
|
$
|
57,336
|
|
15 years – accelerated or straight-line
|
Non-compete agreements
|
446
|
|
(276)
|
|
170
|
|
2 to 3 years – straight-line
|
Website development costs
|
46
|
|
(33)
|
|
13
|
|
3 years – straight-line
|
Trade names
|
2,202
|
|
(922)
|
|
1,280
|
|
2 to 5 years – straight-line
|
Residual buyouts
|
476
|
|
(44)
|
|
432
|
|
2 years – straight-line
|
Total finite-lived intangible assets
|
87,361
|
|
(28,130)
|
|
59,231
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
Trademarks
|
28
|
|
—
|
|
28
|
|
|
Total identifiable intangible assets
|
87,389
|
|
(28,130)
|
|
59,259
|
|
|
Amortization expense for intangible assets amounted to $9,341, $7,669 and $8,027 during the years ended September 30, 2018, 2017 and 2016, respectively.
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Based on gross carrying amounts at September 30, 2018, the Company's estimate of future amortization expense for intangible assets are presented in the table below.
|
|
|
|
|
|
2019
|
$
|
8,715
|
2020
|
7,039
|
2021
|
6,051
|
2022
|
5,712
|
2023
|
4,908
|
Thereafter
|
33,566
|
|
$
|
65,991
|
8. ACCRUED EXPENSES AND OTHER LIABILITIES
A summary of the Company's accrued expenses and other current liabilities as of September 30, 2018 and 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Accrued wages, bonuses, commissions and vacation
|
$
|
1,975
|
|
$
|
1,298
|
Accrued interest
|
75
|
|
529
|
Accrued contingent consideration --- current portion
|
3,813
|
|
2,229
|
Tax receivable agreement liability --- current portion
|
25
|
|
—
|
Accrued tax liabilities
|
836
|
|
42
|
Customer deposits
|
1,333
|
|
—
|
Other current liabilities
|
3,481
|
|
2,608
|
Accrued expenses and other current liabilities
|
$
|
11,538
|
|
$
|
6,706
|
A summary of the Company's long-term liabilities as of September 30, 2018 and 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Accrued contingent consideration --- long-term portion
|
$
|
2,186
|
|
$
|
1,111
|
Warrant liabilities
|
—
|
|
767
|
Tax receivable agreement liability --- long-term
|
791
|
|
—
|
Deferred tax liability --- long-term
|
1,100
|
|
—
|
Other long-term liabilities
|
649
|
|
187
|
Total other long-term liabilities
|
$
|
4,726
|
|
$
|
2,065
|
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
9. LONG-TERM DEBT, NET
A summary of long-term debt, net as of September 30, 2018 and September 30, 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
2018
|
|
2017
|
Notes payable to Mezzanine Lenders
|
November 29, 2020
|
|
$
|
—
|
|
$
|
10,500
|
Unsecured notes payable to related and unrelated creditors
|
February 14, 2019
|
|
—
|
|
16,108
|
Term loans to bank under the 2016 Senior Secured Credit Facility
|
April 29, 2020
|
|
—
|
|
14,000
|
Revolving lines of credit to banks under the 2016 Senior Secured Credit Facility
|
April 29, 2020
|
|
—
|
|
71,600
|
Term loans to bank under the Senior Secured Credit Facility
|
October 30, 2022
|
|
35,000
|
|
—
|
Revolving lines of credit to banks under the Senior Secured Credit Facility
|
October 30, 2022
|
|
3,250
|
|
—
|
Debt issuance costs, net
|
|
|
(1,474)
|
|
(1,372)
|
Total long-term debt, net of issuance costs
|
|
|
36,776
|
|
110,836
|
Less current portion of long-term debt
|
|
|
(5,000)
|
|
(4,000)
|
Long-term debt, net of current portion
|
|
|
$
|
31,776
|
|
$
|
106,836
|
Term loans payable to banks and revolving lines of credit payable to banks
In April and July 2016, the Company amended its existing syndicated credit facility (the “2016 Senior Secured Credit Facility”) with certain banks. The 2016 Senior Secured Credit Facility consisted of term loans in the principal amount of $19,000 and an $80,000 revolving line of credit. The 2016 Senior Secured Credit Facility accrued interest, payable monthly, at the prime rate plus a margin of 0.50% to 2.00% (1.50% as of September 30, 2017) or at the 30-day LIBOR rate plus a margin of 3.50% to 5.00% (4.50% as of September 30, 2017), in each case depending on the Company's ratio of consolidated debt-to-EBITDA, as defined in the agreement. Additionally, the 2016 Senior Secured Credit Facility required the Company to pay unused commitment fees of up to 0.30% (0.30% as of September 30, 2017) on any undrawn amounts under the revolving line of credit. Through the April and July 2016 amendments, the maturity date of the 2016 Senior Secured Credit Facility was extended to April 29, 2020. The amendments were accounted for as a modification under the guidance at ASC 470-50, Debt —
Modifications and Extinguishments
(“ASC 470-50”). Principal payments of $1,000 were due on the last day of each calendar quarter until the maturity date, when all outstanding principal and accrued and unpaid interest was due. At September 30, 2017, there was $8,400 available for borrowing under the revolving line of credit.
The 2016 Senior Secured Credit Facility was amended in July 2017 to enable the purchase of Fairway and to amend certain covenant requirements.
The 2016 Senior Secured Credit Facility was secured by substantially all assets of the Company. The lenders under the 2016 Senior Secured Credit Facility held senior rights to collateral and principal repayment over all other creditors.
The provisions of the 2016 Senior Secured Credit Facility placed certain restrictions and limitations upon the Company. These included, among others, restrictions on liens, investments, indebtedness, fundamental changes and dispositions; maintenance of certain financial ratios; and certain non-financial covenants pertaining to the activities of the Company during the period covered. The Company was in compliance with such covenants as of September 30, 2017. In addition, the 2016 Senior Secured Credit Facility restricted the Company's ability to make dividends or other distributions to the holders of the Company's equity. The Company was permitted to (i) make distributions to the holders of the Company's equity in order to pay taxes incurred by owners of equity in i3 Verticals, LLC by reason of such ownership, (ii) move intercompany cash between subsidiaries that were joined to the 2016 Senior Secured Credit Facility, (iii) repurchase equity from employees, directors, officers or consultants after an initial public offering of the Company's equity in an aggregate total not to exceed $1.50 million per year,
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
and (iv) make other dividends or distributions in an aggregate amount not to exceed 5% of the net cash proceeds received from any additional common equity issuance after an initial public offering. The Company was also permitted to make noncash dividends in the form of additional equity issuances. All other forms of dividends or distributions were prohibited under the 2016 Senior Secured Credit Facility.
The 2016 Senior Secured Credit Facility was modified on October 30, 2017 and replaced by a new credit agreement (the “Senior Secured Credit Facility”), as discussed below.
Senior Secured Credit Facility
On October 30, 2017, the Company replaced its existing credit facility with the Senior Secured Credit Facility. The Company concluded that the Senior Secured Credit Facility should be accounted for as a debt modification based on the guidance in ASC 470-50. The Senior Secured Credit Facility consists of term loans in the original principal amount of $40,000 and a $110,000 revolving line of credit. The Senior Secured Credit Facility accrues interest, payable monthly, at the prime rate plus a margin of 0.50% to 2.00% (0.50% as of September 30, 2018) or at the 30-day LIBOR rate plus a margin of 2.75% to 4.00% (2.75% as of September 30, 2018), in each case depending on the ratio of consolidated debt-to-EBITDA, as defined in the agreement. Additionally, the Senior Secured Credit Facility requires the Company to pay unused commitment fees of up to 0.15% to 0.30% (0.15% as of September 30, 2018) on any undrawn amounts under the revolving line of credit. The maturity date of the Senior Secured Credit Facility is October 30, 2022. Principal payments of $1,250 are due on the last day of each calendar quarter until the maturity date, when all outstanding principal and accrued and unpaid interest are due. At September 30, 2018, there was $106,750 available for borrowing under the revolving line of credit.
The Senior Secured Credit Facility is secured by substantially all assets of the Company. The lenders under the Senior Secured Credit Facility hold senior rights to collateral and principal repayment over all other creditors.
The provisions of the Senior Secured Credit Facility place certain restrictions and limitations upon the Company. These include, among others, restrictions on liens, investments, indebtedness, fundamental changes and dispositions; maintenance of certain financial ratios; and certain non-financial covenants pertaining to the activities of the Company during the period covered. The Company was in compliance with such covenants as of September 30, 2018. In addition, the Senior Secured Credit Facility restricts the Company's ability to make dividends or other distributions to the holders of the Company's equity. The Company is permitted to (i) make cash distributions to the holders of the Company's equity in order to pay taxes incurred by owners of equity in i3 Verticals, LLC, by reason of such ownership, (ii) move intercompany cash between subsidiaries that are joined to the Senior Secured Credit Facility, (iii) repurchase equity from employees, directors, officers or consultants after the Reorganization Transactions in an aggregate amount not to exceed $1,500 per year, and (iv) make other dividends or distributions in an aggregate amount not to exceed 5% of the net cash proceeds received from any additional common equity issuance after the IPO. The Company is also permitted to make non-cash dividends in the form of additional equity issuances. All other forms of dividends or distributions are prohibited under the Senior Secured Credit Facility.
Notes to Mezzanine Lenders
During 2013, the Company issued notes payable in the aggregate principal amount of $10,500 (the “Mezzanine Notes”) to three creditors. The Mezzanine Notes accrued interest at a fixed rate of 12.0%, payable monthly, and initially were due to mature in February 2018. In April 2016, the Mezzanine Notes were amended and restated and the maturity dates were extended to November 29, 2020, when all outstanding principal and accrued and unpaid interest was due. The amendment was accounted for as a modification under the guidance at ASC 470-50. The Mezzanine Notes were secured by substantially all assets of the Company in accordance with the terms of a security agreement and were subordinate to the Senior Secured Credit Facility.
The provisions of the Mezzanine Notes placed certain restrictions and limitations upon the Company. These included restrictions on additional borrowings, capital expenditures, maintenance of certain financial ratios, and certain non-financial covenants pertaining to the activities of the Company during the period covered. The
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Company was in compliance with such covenants as of September 30, 2017. The Mezzanine Lenders participated in the July 2017 Class A unit offerings (see Note 13).
In June 2018, all of the outstanding aggregate principal balance and accrued interest on the Mezzanine Notes was repaid with proceeds from the Company’s IPO. As part of the extinguishment of the Mezzanine Notes, $78 of unamortized debt issuance costs were written off.
Mezzanine Warrants
In connection with the issuance of the Mezzanine Notes, the Company granted the Mezzanine Warrants to purchase 1,423,688 common units in i3 Verticals, LLC. The Mezzanine Warrants were determined to have no material value as of the grant date. The intrinsic value of the Mezzanine Warrants was $767 as of September 30, 2017, and they had an exercise price of $0.01. On June 25, 2018, in conjunction with the Reorganization Transactions described in Note 1, all existing Mezzanine Warrants were exercised for common units in i3 Verticals, LLC. The intrinsic value of the Mezzanine Warrants at that date was $9,241. The change in the fair market value of the warrants for the year ended September 30, 2018 is reflected within the consolidated statement of operations.
Unsecured notes payable to related and unrelated creditors
During 2014, the Company issued the Junior Subordinated Notes in the aggregate principal amount of $17,608 to unrelated and related creditors. The Junior Subordinated Notes accrued interest, payable monthly, at a fixed rate of 10.0% and were due to mature on February 14, 2019, when all outstanding principal and accrued and unpaid interest was due. However, the unsecured notes were subordinate to the Mezzanine Notes and the Senior Secured Credit Facility, which both had maturities beyond the Junior Subordinated Notes, and the provisions of the Mezzanine Notes and Senior Secured Credit Facility did not permit the payment of any subordinated debt prior to its maturity. Should the Junior Subordinated Notes have reached maturity and the terms of the Mezzanine Notes and Senior Secured Credit Facility remained in place, the term of the Junior Subordinated Notes would have been extended until after the maturity of the Mezzanine Notes and Senior Secured Credit Facility, in accordance with the terms of the Junior Subordinated Notes.
In connection with the issuance of the Junior Subordinated Notes, the Company granted detachable warrants (“Junior Subordinated Notes Warrants”) to purchase 1,433,920 common units in i3 Verticals, LLC. Management determined that the warrants had no material value as of the grant date, and none of the proceeds from the notes was attributed to the warrants. The warrants are accounted for as equity. See additional disclosures in Note 13.
In July 2017, $500 of the Junior Subordinated Notes were retired and exchanged for 148 Class A units of the Company. The fair value of the Class A units issued approximated the carrying amount of the Junior Subordinated Notes, so no extinguishment gain or loss was recognized. See additional disclosures in Note 13 and Note 15.
At September 30, 2017, $16,108 of the Junior Subordinated Notes remained outstanding.
In June 2018, in connection with the Company's IPO and as part of the Reorganization Transactions, $8,054 of the Junior Subordinated Notes were converted to newly issued shares of the Company's Class A common stock, as described in Note 1, and the remaining $8,054 of the Junior Subordinated Notes was repaid with proceeds from the Company's IPO. As part of the extinguishment of the Junior Subordinated Notes, $43 of unamortized debt issuance costs were written off.
Debt issuance costs
During the years ended September 30, 2018 and 2017, the Company incurred debt issuance costs totaling $1,170 and $254, respectively, in connection with the issuance of long-term debt. The debt issuance costs are being amortized over the related term of the debt using the straight-line method and are presented net against long-term debt in the consolidated balance sheets. As part of the April 2016 amendment to the 2016 Senior Secured Credit Facility, the Company expensed a nominal amount of unamortized debt issuance costs related to
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
the exit of a participating bank from the 2016 Senior Secured Credit Facility. The amortization of deferred debt issuance costs is included in interest expense and amounted to approximately $1,072, $453 and $443 during the years ended September 30, 2018, 2017 and 2016, respectively.
10. 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.
As of September 30, 2018 and 2017, the Company had accrued no interest and no penalties related to uncertain tax positions. It is the Company’s policy to recognize interest and/or penalties related to income tax matters in income tax expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Current:
|
|
|
|
|
|
Federal tax expense
|
$
|
668
|
|
$
|
—
|
|
$
|
—
|
State tax expense
|
351
|
|
121
|
|
246
|
Deferred
|
|
|
|
|
|
Federal tax (benefit)
|
(685)
|
|
—
|
|
—
|
State tax expense (benefit)
|
3
|
|
56
|
|
(3)
|
Income tax expense
|
$
|
337
|
|
$
|
177
|
|
$
|
243
|
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
A reconciliation of income tax expense from operations computed at the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Expected U.S. federal income taxes at statutory rate
|
$
|
(1,139)
|
24.6
|
%
|
|
$
|
370
|
34.3
|
%
|
|
$
|
(629)
|
34.0
|
%
|
Partnership income not taxed at federal level
|
294
|
(6.4)
|
%
|
|
(1,352)
|
(125.3)
|
%
|
|
(3,103)
|
167.7
|
%
|
Valuation allowance
|
965
|
(20.9)
|
%
|
|
914
|
84.7
|
%
|
|
3,679
|
(198.9)
|
%
|
State and local income taxes, net of federal benefit
|
295
|
(6.4)
|
%
|
|
177
|
16.4
|
%
|
|
244
|
(13.2)
|
%
|
Nondeductible expenses
|
398
|
(8.6)
|
%
|
|
67
|
6.2
|
%
|
|
47
|
(2.5)
|
%
|
Federal tax rate change
|
(471)
|
10.2
|
%
|
|
—
|
—
|
%
|
|
—
|
—
|
%
|
Other
|
(5)
|
0.1
|
%
|
|
1
|
0.1
|
%
|
|
5
|
(0.3)
|
%
|
Income tax expense
|
$
|
337
|
(7.3)
|
%
|
|
$
|
177
|
16.4
|
%
|
|
$
|
243
|
(13.1)
|
%
|
Deferred income taxes are provided for the temporary differences between the financial reporting basis and tax basis of the Company’s assets and liabilities. Net deferred taxes as of September 30, 2018 and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
Investment in partnership
|
$
|
21,958
|
|
$
|
—
|
Stock-based compensation
|
186
|
|
—
|
Tax Receivable Agreement
|
193
|
|
—
|
Deferred revenue
|
571
|
|
—
|
Accrued expenses
|
29
|
|
3
|
Intangible assets
|
—
|
|
68
|
Net operating loss carryforwards
|
103
|
|
94
|
Other
|
33
|
|
10
|
Gross deferred tax assets
|
23,073
|
|
175
|
Valuation allowance
|
(21,360)
|
|
(93)
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Intangible assets
|
$
|
(1,656)
|
|
$
|
—
|
Other
|
(5)
|
|
(4)
|
Net deferred tax asset
|
$
|
52
|
|
$
|
78
|
Federal and state net operating loss carryforwards for the Company were $27,061 as of September 30, 2018 and will expire between years 2027 and 2038. The net operating loss carryforwards are included in Other assets within the Consolidated Balance Sheets. The use of these federal and state net operating losses is limited to the future taxable income of separate legal entities. Based on expectations of future taxable income, management believes that it is more likely than not that the results of operations for certain separate legal entities will not
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
generate sufficient taxable income to realize portions of these net operating loss benefits. As a result, a valuation allowance has been provided for the loss carryforwards for these specific legal entities.
On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law. The new legislation contains several key tax provisions, including the reduction of the federal corporate income tax rate to 21% effective January 1, 2018, as well as a variety of other changes, including limitation of the tax deductibility of interest expense, acceleration of expensing of certain business assets and reductions in the amount of executive pay that could qualify as a tax deduction. The Company is assessing the impact of the enacted tax law on its business and its consolidated financial statements and recorded a provisional discrete tax benefit related to the re-measurement of its deferred tax assets and liabilities at SDCR, Inc. of $471 for the reduced federal tax rates during the year ended September 30, 2018.
Tax Receivable Agreement
On June 25, 2018, the Company entered into a Tax Receivable Agreement with i3 Verticals, LLC and each of the Continuing Equity Owners (the “Tax Receivable Agreement”) that provides for the payment by the Company to the Continuing Equity Owners of 85% of the amount of certain tax benefits, if any, that it actually realizes, or in some circumstances, is deemed to realize in its tax reporting, as a result of (i) future redemptions funded by the Company or exchanges, or deemed exchanges in certain circumstances, of Common Units of i3 Verticals, LLC for Class A common stock of i3 Verticals, Inc. or cash, and (ii) certain additional tax benefits attributable to payments made under the Tax Receivable Agreement. These tax benefit payments are not conditioned upon one or more of the Continuing Equity Owners maintaining a continued ownership interest in i3 Verticals, LLC. If a Continuing Equity Owner transfers Common Units but does not assign to the transferee of such units its rights under the Tax Receivable Agreement, such Continuing Equity Owner generally will continue to be entitled to receive payments under the Tax Receivable Agreement arising in respect of a subsequent exchange of such Common Units. In general, the Continuing Equity Owners’ rights under the Tax Receivable Agreement may not be assigned, sold, pledged or otherwise alienated to any person, other than certain permitted transferees, without (a) the Company's prior written consent, which should not be unreasonably withheld, conditioned or delayed, and (b) such persons becoming a party to the Tax Receivable Agreement and agreeing to succeed to the applicable Continuing Equity Owner’s interest therein. The Company expects to benefit from the remaining 15% of the tax benefits, if any, that the Company may realize.
During the year ended September 30, 2018, in conjunction with the Company's IPO, i3 Verticals, Inc. purchased Class B common stock from a Continuing Equity Owner for $4,635. This transaction triggered an increase in the tax basis of the Company's Common Units in i3 Verticals, LLC subject to the provisions of the Tax Receivable Agreement. The Company recognized a deferred tax asset in the amount of $960 and a corresponding liability of $816, representing 85% of the tax benefits due to the Continuing Equity Owners related to exchanges in the year ended September 30, 2018.
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
11. 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 September 30, 2018 and 2017, because of the relatively short maturity dates on these instruments. The carrying amount of debt approximates fair value as of September 30, 2018 and 2017, because interest rates on these instruments approximate market interest rates.
The Company has no Level 1 or Level 2 financial instruments. The following tables present the changes in the Company's Level 3 financial instruments that are measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
Mezzanine Warrants
|
|
Accrued Contingent Consideration
|
Balance at September 30, 2016
|
$
|
1,182
|
|
$
|
5,537
|
Change in the fair value of warrant liabilities, included in Other expenses
|
(415)
|
|
—
|
Contingent consideration accrued at time of business combination
|
—
|
|
1,221
|
Change in fair value of contingent consideration included in Operating expenses
|
—
|
|
(218)
|
Contingent consideration paid
|
—
|
|
(3,200)
|
Balance at September 30, 2017
|
$
|
767
|
|
$
|
3,340
|
|
|
|
|
Change in the fair value of warrant liabilities, included in Other expenses
|
8,487
|
|
—
|
Exercise of warrant liabilities into Common Units
|
(9,254)
|
|
—
|
Contingent consideration accrued at time of business combination
|
—
|
|
1,877
|
Change in fair value of contingent consideration included in Operating expenses
|
—
|
|
3,851
|
Contingent consideration paid
|
—
|
|
(3,069)
|
Balance at September 30, 2018
|
$
|
—
|
|
$
|
5,999
|
Approximately $3,813 and $2,229 of contingent consideration was recorded in accrued expenses and other current liabilities as of September 30, 2018 and 2017, respectively. Approximately $2,186 and $1,111 of contingent consideration was recorded in other long-term liabilities as of September 30, 2018 and 2017, respectively.
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
12. EQUITY-BASED COMPENSATION
A summary of equity-based compensation expense recognized during the years ended September 30, 2018, 2017 and 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
TRA non-participation compensatory shares
|
$
|
741
|
|
$
|
—
|
|
$
|
—
|
Stock options
|
826
|
|
—
|
|
—
|
Equity-based compensation expense
|
$
|
1,567
|
|
$
|
—
|
|
$
|
—
|
Amounts are included in general and administrative expense on the consolidated statements of operations. No income tax benefits were recognized related to equity-based compensation during the years ended September 30, 2018, 2017, and 2016.
TRA Non-Participation Compensatory Shares
On June 25, 2018, the Company entered into the Tax Receivable Agreement as described in Note 10. The Former Equity Owners did not participate in the Tax Receivable Agreement. Therefore, as part of the Reorganization Transactions, the Class B common units held by the Former Equity Owners were converted into shares of Class A common stock based on a conversion ratio that provided an equitable adjustment to reflect the full value of the Class B common units. For employees who are Former Equity Owners, this arrangement was a modification under ASC 718. The Company recognized stock-based compensation expense of $741 as part of the Reorganization Transactions as a result of this conversion.
Stock Options
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 year, beginning with the 2019 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%. In connection with the IPO, the Company granted 2,045,000 stock options to its directors and certain employees. The stock options were granted with an exercise price of $13.00 per share and vest ratably over a three year period.
The fair value of stock option awards was determined on the grant date using the Black-Scholes valuation model based on the following weighted-average assumptions:
|
|
|
|
|
|
Expected volatility
(1)
|
26.2
|
%
|
Expected dividend yield
(2)
|
—
|
%
|
Expected term
(3)
|
6 years
|
Risk-free interest rate
(4)
|
2.8
|
%
|
_________________
1.
Expected volatility is based on the historical volatility of a selected peer group over a period equivalent to the expected term.
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.
4.
The risk-free rate is an interpolation of yields on U.S. Treasury securities with maturities equivalent to the expected term.
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
A summary of stock option activity for the year ended September 30, 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Weighted Average Exercise Price
|
Outstanding at beginning of period
|
—
|
|
$
|
—
|
Granted
|
2,143,500
|
|
13.13
|
Exercised
|
—
|
|
—
|
Forfeited
|
(5,000)
|
|
13.00
|
Outstanding at end of period
|
2,138,500
|
|
$
|
13.13
|
The weighted-average grant date fair value of stock options granted during the year ended September 30, 2018 was $4.17. As of September 30, 2018, there were 2,138,500 stock options outstanding, of which none were exercisable. As of September 30, 2018, total unrecognized compensation expense related to unvested stock options, including an estimate for pre-vesting forfeitures, was $8,100, which is expected to be recognized over a weighted-average period of 2.7 years.
13. STOCKHOLDERS' / MEMBERS' EQUITY AND REDEEMABLE CLASS A UNITS
In connection with the Company’s IPO, the Company’s board of directors approved an amended and restated certificate of incorporation (the “Amended and Restated Certificate of Incorporation”), which became effective on June 25, 2018. The Amended and Restated Certificate of Incorporation authorizes the issuance of up to 150,000,000 shares of Class A common stock, up to 40,000,000 shares of Class B common stock and 10,000,000 shares of preferred stock, each having a par value of $0.0001 per share. Shares of Class A common stock have both economic and voting rights. Shares of Class B common stock have no economic rights, but do have voting rights. Holders of shares of Class A common stock and Class B common stock are entitled to one vote per share on all matters presented to stockholders generally. The Company’s board of directors has the discretion to determine the rights, preferences, privileges, and restrictions of any series of preferred stock.
On June 25, 2018, the Company completed the IPO of 7,647,500 shares of its Class A common stock. In connection with the IPO, the Company and i3 Verticals, LLC completed the Reorganization Transactions, pursuant to which all outstanding vested and non-vested Class A units, Class P units and common units were converted into new Common Units. Former Equity Owners' Common Units were converted into newly issued shares of Class A common stock. Continuing Equity Owners received newly issued shares of Class B common stock. For further descriptions of the IPO and Reorganization Transactions, see Note 1.
i3 Verticals, LLC Recapitalization
As noted above, the i3 Verticals, LLC Limited Liability Company Agreement, among other things, appointed the Company as i3 Verticals, LLC’s sole managing member and reclassified all outstanding membership interests in i3 Verticals, LLC as non-voting common units. As the sole managing member of i3 Verticals, LLC, the Company controls the management of i3 Verticals, LLC. As a result, the Company consolidates i3 Verticals, LLC’s financial results and reports a non-controlling interest related to the economic interest of i3 Verticals, LLC held by the Continuing Equity Owners.
The Amended and Restated Certificate of Incorporation and the i3 Verticals, LLC Limited Liability Company Agreement discussed above require i3 Verticals, LLC and the Company, at all times, to maintain (i) a one-to-one ratio between the number of shares of Class A common stock issued by the Company and the number of Common Units owned by the Company and (ii) a one-to-one ratio between the number of shares of Class B common stock owned by the Continuing Equity Owners and the number of Common Units owned by the Continuing Equity Owners (other than shares of the Company's Class A common stock under unvested options the Company issues, treasury stock and preferred stock (the “Excluded Common Units”)). The Company may issue shares of Class B common stock only to the extent necessary to maintain the one-to-one ratio between the
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
number of Common Units of i3 Verticals, LLC held by the Continuing Equity Owners (other than the Excluded Common Units) and the number of shares of Class B common stock issued to the Continuing Equity Owners. Shares of Class B common stock are transferable only together with an equal number of Common Units of i3 Verticals, LLC. Only permitted transferees of Common Units held by the Continuing Equity Owners will be permitted transferees of Class B common stock.
The Continuing Equity Owners may from time to time at each of their options (subject, in certain circumstances, to time-based vesting requirements) require i3 Verticals, LLC to redeem all or a portion of their Common Units in exchange for, at i3 Verticals, LLC’s election, newly-issued shares of our Class A common stock on a one-for-one basis or a cash payment equal to a volume weighted average market price of one share of Class A common stock for each Common Unit redeemed, in each case in accordance with the terms of the i3 Verticals, LLC Limited Liability Company Agreement; provided that, at the Company’s election, the Company may effect a direct exchange of such Class A common stock or such cash, as applicable, for such Common Units. The Continuing Equity Owners may exercise such redemption right for as long as their Common Units remain outstanding. Simultaneously with the payment of cash or shares of Class A common stock, as applicable, in connection with a redemption or exchange of Common Units pursuant to the terms of the i3 Verticals, LLC Limited Liability Company Agreement, a number of shares of the Company's Class B common stock registered in the name of the redeeming or exchanging Continuing Equity Owner will be canceled for no consideration on a one-for-one basis with the number of Common Units so redeemed or exchanged.
Redeemable Class A Units
Prior to the Company's recapitalization, as of September 30, 2017, there were 4,900,000 redeemable Class A units issued and outstanding. Upon receipt of a redemption request following the termination of employment of the current Chief Executive Officer of the Company (the redemption event), the Company was required to redeem all of the outstanding redeemable Class A units held by certain members. The redemption price of the redeemable Class A units was equal to the greater of (i) the fair value of the redeemable Class A unit or (ii) original issue price per redeemable Class A unit plus any preferred returns through the date of the redemption request.
Holders of redeemable Class A units had preferred return rights in preference to any declaration or distribution to holders of Class P units or common units, and equal to other Class A units. Preferred returns on the redeemable Class A units accrued at an amount equal to 10.0% per unit per annum of the original issue price, compounded annually, whether or not declared by the board of directors, and were cumulative. After preferential payment to the holder of redeemable Class A units and other Class A units, any additional distributions declared were distributed pro-rata to the holders of Class A units, common units and Class P units, in proportion to their respective units. Total cumulative preferred returns included within the carrying amount of the redeemable Class A units amounted to $3,376 and $2,823 as of June 25, 2018, the date of the Reorganization Transactions, and September 30, 2017, respectively.
During 2017, as obligated under the provisions of its member agreements, the Company declared distributions of approximately $131 to its redeemable Class A unit holders in connection with the members’ estimated tax liabilities.
As described in Note 1, the redeemable Class A units were converted into Common Units in i3 Verticals, LLC in connection with the Reorganization Transactions.
Class A Units, Class P Units and Common Units
Prior to the Company's recapitalization, as of September 30, 2017, the Company had authorized the issuance of Class A units, Class P units and common units. As described in Note 1, the Class A units, Class P units and Common Units were converted to Common Units in i3 Verticals, LLC in connection with the Reorganization Transactions.
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Class A Units
As of September 30, 2017, there were 13,892,129 Class A units issued and outstanding.
Holders of Class A units had preferred return rights in preference to any declaration or distribution to holders of Class P units or common units. Preferred returns on the Class A units accrued at an amount equal to 10.0% per unit per annum of the original issue price, compounded annually, whether or not declared by the board of directors, and were cumulative. After preferential payment to the holder of Class A units, any additional distributions declared were distributed pro-rata to the holders of Class A units, common units and Class P units, in proportion to their respective units. Total cumulative preferred returns included within the carrying amount of the Class A units amounted to $7,627 and $5,105 as of June 25, 2018, the date of the Reorganization Transactions, and September 30, 2017, respectively.
During 2017, as obligated under the provisions of its member agreements, the Company declared distributions of approximately $625 to its Class A unit holders in connection with the members’ estimated tax liabilities.
Common Units
As of September 30, 2017, there were 1,548,722 common units issued and outstanding. Common units were generally issued in association with acquisitions.
Junior Subordinated Notes Warrants
As of September 30, 2017, there were in the aggregate 1,433,920 warrants outstanding and exercisable to purchase common units which are classified as equity instruments. The warrants were issued in connection with the issuance of the Junior Subordinated Notes (Note 9). As of September 30, 2017, the intrinsic value of the junior subordinated warrants was $0.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
Expiration
|
|
Exercise Price
|
Junior Subordinated Notes Warrants
|
1,433,920
|
|
February 14, 2024
|
|
$
|
2.095
|
The Junior Subordinated Notes Warrants were issued at zero value and were reflected within members’ equity within the accompanying Consolidated Balance Sheets. On June 25, 2018, in conjunction with the Reorganization Transactions described in Note 1, all existing Junior Subordinated Notes Warrants were exercised for common units in i3 Verticals, LLC.
Mezzanine Warrants
As of September 30, 2017, there were in the aggregate 1,423,688 warrants outstanding and exercisable to purchase Common Units which are classified as long-term liabilities. The warrants were issued in connection with the issuance of the Mezzanine Notes. See additional disclosures in Note 9.
Restricted Class P Units
As of September 30, 2017, there were 7,647,350 restricted Class P units issued and outstanding to certain members of the Company's Board of Directors and employees.
All Class P units were issued at a participation threshold above the valuation of the Company at the grant date. As a result, they had a nominal value, individually and in the aggregate, at the grant date. Using an option-pricing model and considering liquidation preferences of the Class P units, as well as the lack of marketability, management determined that any compensation expense related to the restricted units was immaterial to the consolidated financial statements.
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
14. COMMITMENTS AND CONTINGENCIES
Leases
The Company utilizes office space and equipment under operating leases. Rent expense under these leases amounted to $1,555 and $997 during the years ended September 30, 2018 and 2017, respectively.
A summary of approximate future minimum payments under these leases as of September 30, 2018 is as follows:
|
|
|
|
|
|
Years ending September 30:
|
|
2019
|
$
|
1,763
|
2020
|
1,637
|
2021
|
1,282
|
2022
|
1,149
|
2023
|
1,061
|
Thereafter
|
1,277
|
Total
|
$
|
8,169
|
Minimum Processing Commitments
The Company has non-exclusive agreements with several processors to provide it 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 it would have received if it had submitted the required minimum number of transactions. As of September 30, 2018, such minimum fee commitments were as follows:
|
|
|
|
|
|
Years ending September 30:
|
|
2019
|
$
|
2,500
|
2020
|
2,866
|
2021
|
2,757
|
2022
|
3,346
|
2022
|
3,621
|
Thereafter
|
243
|
Total
|
$
|
15,333
|
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, the 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.
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
In addition, 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 and otherwise not described below. The Company has considered all such ordinary course legal proceedings in formulating its disclosures and assessments.
On June 14, 2016, Expert Auto Repair, Inc., for itself and on behalf of a class of additional plaintiffs, and Jeff Straight initiated a class action lawsuit against the Company, as alleged successor to Merchant Processing Solutions, LLC, in the Los Angeles County Superior Court of California, seeking damages, restitution and declaratory and injunctive relief (the “Expert Auto Litigation”). The plaintiffs alleged that Merchant Processing Solutions, LLC, the Company's alleged predecessor, engaged in unfair business practices in the merchant services sector including unfairly inducing merchants to obtain credit and debit card processing services and thereafter assessing them with improper fees. Subject to final court approval, the Company has entered into a settlement agreement to settle the plaintiffs’ claims for $995. On April 10, 2018, the Court granted conditional class certification and preliminary approval of the agreed settlement and scheduled the final fairness hearing and final approval of the settlement in December 2018. Notice was provided to all class members and they were given an opportunity to either file a claim, opt-out, file an objection or do nothing (in which case they would be included in the class settlement). The deadline for class members to take one of these four actions was November 8, 2018. No class member opted out or filed an objection to the settlement before that deadline. The reserved amount is reflected in accrued expenses and other current liabilities as of September 30, 2018. The amount was included in general and administrative expenses in the consolidated statement of operations for the year ended September 30, 2017.
In connection with the Expert Auto Litigation, on November 3, 2016 the Company's insurance carrier, Starr Indemnity and Liability Company, Inc. (“Starr”), filed a complaint against the Company in the United States District Court for the Middle District of Tennessee, seeking a declaration from the court that Starr's policy provided no coverage for the Expert Auto Litigation. This action was subsequently dismissed for lack of subject matter jurisdiction, prompting Starr to move the court to reconsider and on February 15, 2017 to file a complaint against the Company in the Twentieth Judicial District of the Davidson County Chancery Court of Tennessee repeating its federal court claims (although Starr has since dismissed the complaint in the Davidson County Chancery Court). Thereafter, after reconsidering its dismissal for lack of subject matter jurisdiction, the United States District Court for the Middle District of Tennessee revived Starr’s complaint, allowing Starr’s action to continue in federal court.
On April 13, 2018, the court issued an order to (i) stay discovery in the matter, (ii) allow Starr to file a motion for judgment on the pleadings by May 21, 2018 (which was filed) and (iii) require the Company to respond to such motion by June 8, 2018 (which the Company did). In the meantime, the Company filed its answer and counterclaim to Starr’s complaint and Starr then filed a motion to dismiss a portion of this counterclaim. On August 7, 2018, the court denied Starr's motion for judgment on the pleadings and also denied Starr's motion to dismiss in relation to the Company's counterclaim.
Following the denial of Starr’s motion, Starr requested the court’s permission to file a motion for leave to file a first amended complaint to allege an additional basis for denying coverage. The court granted Starr’s request to file such motion. Following the briefing by the parties, the court granted Starr’s motion and ordered it to file and serve its first amended complaint within ten days, which Starr did. In response, the Company filed its answer to Starr’s first amended complaint in which the Company again asserted its counterclaim against Starr.
Discovery is expected to get underway soon and trial is currently set for November 19, 2019.
The Company intends to continue to vigorously defend against Starr’s claims and to continue to pursue its own counterclaim.
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
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.
15. RELATED PARTY TRANSACTIONS
Related parties held $6,158 of the Company’s Junior Subordinated Notes as of September 30, 2017. As described Note 9, in connection with the Company's IPO and as part of the Reorganization Transactions, $924 of the Junior Subordinated Notes held by related parties was converted to newly issued shares of the Company's Class A common stock. Also in June 2018, the remaining $5,234 of the Junior Subordinated Notes held by related parties were repaid with proceeds from the Company's IPO. Interest expense to related parties for the Company’s Junior Subordinated Notes amounted to $457, $632 and $831 during the years ended September 30, 2018, 2017 and 2016, respectively.
All lenders party to the Company
’
s Mezzanine Notes are considered related parties, through their ownership interest in the Company and affiliated director relationships. Outstanding Mezzanine Notes payable to related parties amounted to $10,500 as of September 30, 2017. In June 2018, the Mezzanine Notes were repaid in full with proceeds from the Company's IPO. Interest expense to related parties for the Company’s Mezzanine Notes amounted to $952, $1,282 and $1,280 during the years ended September 30, 2018, 2017 and 2016, respectively.
In April, 2016, the Company entered into a purchase agreement to purchase certain assets of Axia, LLC. On April 29, 2016, the Company entered into a Processing Services Agreement (the “Axia Tech Agreement”) with Axia Technologies, LLC (“Axia Tech”), an entity controlled by the previous owner of Axia, LLC. Under the Axia Tech Agreement, the Company agreed to provide processing services for certain merchants as designated by Axia Tech from time to time. In accordance with ASC 605-45, revenue from the processing services is recognized net of interchange, residual expense and other fees. The Company earned net revenues related to the Axia Tech Agreement of $53, $27 and $5 during the years ended September 30, 2018, 2017 and 2016 respectively. i3 Verticals, LLC, the Company's CEO and Clay Whitson, the Company's CFO, own 2.0%, 10.7% and 0.4%, respectively, of the outstanding equity of Axia Tech.
In connection with our IPO, we entered into a Tax Receivable Agreement with certain non-controlling interest holders 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 10 for further information. As of September 30, 2018, the total amount due under the Tax Receivable Agreement was $816.
16. SEGMENTS
The Company determines its operating segments based on ASC 280,
Segment Reporting
, how the chief operating decision making group monitors and manages the performance of the business and the level at which financial information is reviewed. The Company’s operating segments are strategic business units that offer different products and services.
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
The Company's core business is delivering seamless integrated payment and software solutions to SMBs and organizations in strategic vertical markets. This is accomplished through the Merchant Services and Proprietary Software and Payments segments.
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 payment services across the Company's strategic vertical markets.
The Proprietary Software and Payments segment delivers embedded payment solutions to the Company's clients through company-owned software. Payments are delivered through both the PayFac model and the traditional merchant processing model. The Company's Proprietary Software and Payments clients are primarily in the education, property management and public sector markets.
The Other category includes corporate overhead expenses, when presenting reportable segment information.
The Company primarily uses processing margin to measure operating performance. The following is a summary of reportable segment operating performance for the years ended September 30, 2018, 2017 and 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year ended September 30, 2018
|
|
|
|
|
|
|
|
Merchant Services
|
|
Proprietary Software and Payments
|
|
Other
|
|
Total
|
Revenue
|
$
|
302,929
|
|
$
|
20,582
|
|
$
|
(3)
|
|
$
|
323,508
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
Interchange and network fees
|
209,695
|
|
4,848
|
|
—
|
|
214,543
|
Other costs of services
|
38,399
|
|
1,916
|
|
(1)
|
|
40,314
|
Selling general and administrative
|
23,291
|
|
7,602
|
|
9,692
|
|
40,585
|
Depreciation and amortization
|
9,535
|
|
2,097
|
|
207
|
|
11,839
|
Change in fair value of contingent consideration
|
1,772
|
|
2,094
|
|
—
|
|
3,866
|
Income (loss) from operations
|
$
|
20,237
|
|
$
|
2,025
|
|
$
|
(9,901)
|
|
$
|
12,361
|
|
|
|
|
|
|
|
|
Processing margin
(1)
|
$
|
68,811
|
|
$
|
14,371
|
|
$
|
(2)
|
|
$
|
83,180
|
Total assets
|
$
|
58,342
|
|
$
|
7,553
|
|
$
|
109,247
|
|
$
|
175,142
|
Goodwill
|
$
|
69,666
|
|
$
|
14,288
|
|
$
|
—
|
|
$
|
83,954
|
__________________________
1.
Processing margin is equal to revenue less interchange and network fees, less other costs of services.
$13,976, $553 and $0 of residual expense, a component of other costs of services, are added back to the Merchant Services segment, Proprietary Software and Payments segment, and Other category, respectively.
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year ended September 30, 2017
|
|
|
|
|
|
|
|
Merchant Services
|
|
Proprietary Software and Payments
|
|
Other
|
|
Total
|
Revenue
|
$
|
248,005
|
|
$
|
14,582
|
|
$
|
(16)
|
|
$
|
262,571
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
Interchange and network fees
|
185,141
|
|
3,971
|
|
—
|
|
189,112
|
Other costs of services
|
27,350
|
|
1,559
|
|
(111)
|
|
28,798
|
Selling general and administrative
|
13,858
|
|
7,194
|
|
6,142
|
|
27,194
|
Depreciation and amortization
|
8,029
|
|
1,938
|
|
118
|
|
10,085
|
Change in fair value of contingent consideration
|
192
|
|
(410)
|
|
—
|
|
(218)
|
Income (loss) from operations
|
$
|
13,435
|
|
$
|
330
|
|
$
|
(6,165)
|
|
$
|
7,600
|
|
|
|
|
|
|
|
|
Processing margin
(1)
|
$
|
47,389
|
|
$
|
9,423
|
|
$
|
(53)
|
|
$
|
56,759
|
Total assets
|
$
|
113,568
|
|
$
|
8,901
|
|
$
|
17,522
|
|
$
|
139,991
|
Goodwill
|
$
|
49,173
|
|
$
|
9,344
|
|
$
|
—
|
|
$
|
58,517
|
__________________________
1.
Processing margin is equal to revenue less interchange and network fees, less other costs of services.
$11,875, $371 and $(148) of residual expense, a component of other costs of services, are added back to the Merchant Services segment, Proprietary Software and Payments segment, and Other category, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year ended September 30, 2016
|
|
|
|
|
|
|
|
Merchant Services
|
|
Proprietary Software and Payments
|
|
Other
|
|
Total
|
Revenue
|
$
|
187,720
|
|
$
|
12,018
|
|
$
|
(94)
|
|
$
|
199,644
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
Interchange and network fees
|
137,801
|
|
3,175
|
|
22
|
|
140,998
|
Other costs of services
|
20,318
|
|
1,668
|
|
(52)
|
|
21,934
|
Selling general and administrative
|
8,970
|
|
6,439
|
|
4,984
|
|
20,393
|
Depreciation and amortization
|
8,233
|
|
1,556
|
|
109
|
|
9,898
|
Change in fair value of contingent consideration
|
2,371
|
|
87
|
|
—
|
|
2,458
|
Income (loss) from operations
|
$
|
10,027
|
|
$
|
(907)
|
|
$
|
(5,157)
|
|
$
|
3,963
|
|
|
|
|
|
|
|
|
Processing margin(1)
|
$
|
37,992
|
|
$
|
7,670
|
|
$
|
(92)
|
|
$
|
45,570
|
Total assets
|
$
|
73,652
|
|
$
|
7,958
|
|
$
|
18,672
|
|
$
|
100,282
|
Goodwill
|
$
|
26,553
|
|
$
|
8,503
|
|
$
|
—
|
|
$
|
35,056
|
__________________________
1.
Processing margin is equal to revenue less interchange and network fees, less other costs of services.
$8,391, $495 and $(28) of residual expense, a component of other costs of services, are added back to the Merchant Services segment, Proprietary Software and Payments segment, and Other category, respectively.
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
17. 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 September 30, 2018, i3 Verticals, Inc. owned 9,112,042 of i3 Verticals, LLC's Common Units, representing a 34.6% economic ownership interest in i3 Verticals, LLC.
18. 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.
Prior to the IPO, the i3 Verticals, LLC membership structure included Class A units, common units and Class P units. The Company analyzed the calculation of earnings per unit for periods prior to the IPO using the two-class method and determined that it resulted in values that would not be meaningful to the users of these consolidated financial statements. Therefore, earnings per share information has not been presented for the fiscal 2018 periods ended June 24, 2018 and the year ended September 30, 2017. The basic and diluted earnings per share for the year ended September 30, 2018 represents only the period from June 25 through September 30, 2018.
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, 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:
|
|
|
|
|
|
|
Year ended
September 30, 2018
|
Basic net income per share:
|
|
Numerator
|
|
Net income
(1)
|
$
|
2,673
|
Less: Net income attributable to non-controlling interests
|
1,937
|
Net income attributable to Class A common stockholders
|
$
|
736
|
Denominator
|
|
Weighted average shares of Class A common stock outstanding
(2)
|
8,812,630
|
Basic net income per share
|
$
|
0.08
|
|
|
Dilutive net income per share:
|
|
Numerator
|
|
Net income attributable to Class A common stockholders
|
$
|
736
|
Reallocation of net income assuming conversion of common units
(
3
)
|
1,478
|
Net income attributable to Class A common stockholders - diluted
|
$
|
2,214
|
Denominator
|
|
Weighted average shares of Class A common stock outstanding
(2)
|
8,812,630
|
Weighted average effect of dilutive securities
|
18,061,248
|
Weighted average shares of Class A common stock outstanding - diluted
|
26,873,878
|
Diluted net income per share
|
$
|
0.08
|
____________________
1.
Basic and diluted earnings per Class A common stock is presented only for the period after the Company’s Reorganization Transactions. As such, net
income used in the calculation represents the net income attributable to Class A common stockholders for the period from June 25 through September 30, 2018.
2.
Excludes
299,412 restricted Class A common stock units.
3.
The reallocation of net income
assuming conversion of common units represents the tax effected net income attributable to non-controlling interest using the effective income tax rates described in Note 10 above and assuming all common units of i3 Verticals, LLC were exchanged for Class A common stock at the beginning of the year The common units of i3 Verticals, LLC held by the Continuing Equity Owners are potentially dilutive securities, and the computations of pro forma diluted net income per share assume that all common units of i3 Verticals, LLC were exchanged for shares of Class A common stock at the beginning of the year.
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.
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
19. SIGNIFICANT NON-CASH TRANSACTIONS
The Company engaged in the following significant non-cash investing and financing activities during the years ended September 30, 2018, 2017, and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Conversion of unsecured note payable to related party into Class A Units
|
$
|
—
|
|
$
|
—
|
|
$
|
1,000
|
Exchange of Junior Subordinated Notes for Class A Units
|
$
|
—
|
|
$
|
500
|
|
$
|
1,000
|
Common Units issued as part of acquisitions' purchase consideration (Note 4)
|
$
|
104
|
|
$
|
275
|
|
$
|
665
|
Restricted Class A common stock issued as part of acquisitions' purchase consideration (Note 4)
|
$
|
550
|
|
$
|
—
|
|
$
|
—
|
Acquisition date fair value of contingent consideration in connection with business combinations
|
$
|
2,084
|
|
$
|
1,221
|
|
$
|
1,480
|
Replacement of 2016 Senior Secured Credit Facility with Senior Secured Credit Facility
|
$
|
87,525
|
|
$
|
—
|
|
$
|
—
|
Mezzanine Notes net settled with Mezzanine Warrant exercises
|
$
|
14
|
|
$
|
—
|
|
$
|
—
|
Unsecured notes payable to related and unrelated creditors net settled with Junior Subordinated Notes Warrants
|
$
|
2,565
|
|
$
|
—
|
|
$
|
—
|
Settlement of warrant liability with equity as a result of Mezzanine Warrant exercise
|
$
|
9,253
|
|
$
|
—
|
|
$
|
—
|
Preferred return on Redeemable Class A Units
|
$
|
552
|
|
$
|
701
|
|
$
|
639
|
Preferred return on Class A Units
|
$
|
2,522
|
|
$
|
2,223
|
|
$
|
1,080
|
Debt issuance costs financed with proceeds from Senior Secured Credit Facility
|
$
|
904
|
|
$
|
—
|
|
$
|
—
|
Conversion of notes payable to related and unrelated creditors to Class A common stock
|
$
|
8,054
|
|
$
|
—
|
|
$
|
—
|
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
20. QUARTERLY INFORMATION (UNAUDITED)
The tables below present summarized unaudited quarterly results of operations for the years ended September 30, 2018 and 2017. Management believes that all necessary adjustments have been included in the amounts stated below for a fair presentation of the results of operations for the periods presented when read in conjunction with the consolidated financial statements for the years ended September 30, 2018 and 2017. Results of operations for a particular quarter are not necessarily indicative of results of operations for an annual period and are not predictive of future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
|
|
|
|
|
|
December 31,
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
Fiscal Year 2017:
|
|
|
|
|
|
|
|
Revenue
|
$
|
62,331
|
|
$
|
62,135
|
|
$
|
66,326
|
|
$
|
71,779
|
Income from operations
|
$
|
1,096
|
|
$
|
1,709
|
|
$
|
2,717
|
|
$
|
2,078
|
(Loss) income before income taxes
|
$
|
(497)
|
|
$
|
58
|
|
$
|
1,058
|
|
$
|
460
|
Net (loss) income attributable to i3 Verticals, Inc.
|
$
|
(417)
|
|
$
|
48
|
|
$
|
887
|
|
$
|
384
|
Fiscal Year 2018:
|
|
|
|
|
|
|
|
Revenue
|
$
|
77,221
|
|
$
|
77,698
|
|
$
|
84,536
|
|
$
|
84,053
|
Income from operations
|
$
|
3,347
|
|
$
|
2,596
|
|
$
|
2,923
|
|
$
|
3,495
|
(Loss) income before income taxes
|
$
|
(721)
|
|
$
|
(6,586)
|
|
$
|
37
|
|
$
|
2,646
|
Net (loss) income attributable to i3 Verticals, Inc.
(
1
)
|
$
|
(332)
|
|
$
|
(6,836)
|
|
$
|
(564)
|
|
$
|
834
|
Basic (loss) earnings per share attributable to i3 Verticals, Inc.
(
2
)
|
|
|
|
|
$
|
(0.01)
|
|
$
|
0.09
|
Diluted (loss) earnings per share attributable to i3 Verticals, Inc.
(
2
)(
3
)
|
|
|
|
|
$
|
(0.01)
|
|
$
|
0.09
|
____________________
4.
Represents net loss of i3 Verticals, LLC for the
periods prior to the Company's Reorganization Transactions.
5.
Basic and diluted
(loss) earnings per Class A common stock is presented only for the period after the Company’s Reorganization Transactions. As such, net loss used in the calculation for the quarter ended June 30, 2018 represents the loss for the period from June 25 through June 30, 2018.
6.
Basic
(loss) earnings per share excludes 299,412 restricted Class A common stock units from the calculation.
21. SUBSEQUENT EVENTS
On October 31, 2018, the Company completed the acquisitions of two unrelated businesses. The acquisitions expanded our software offerings in the public sector vertical market and provided technology that enhances our Burton Platform. Total purchase consideration included $21,000 in revolving line of credit proceeds.
Certain provisions in the purchase agreements provide for additional consideration of up to $14,000, in the aggregate, to be paid based upon the achievement of specified financial performance targets, as defined in the purchase agreements, through no later than October 2020. The Company is in process of determining the acquisition date fair values of the liabilities for the contingent consideration based on discounted cash flow analyses. In each subsequent reporting period, the Company will reassess its current estimates of performance relative to the targets and adjust the contingent liabilities to their fair values through earnings.
The effect of the acquisitions will be included in the consolidated statements of operations beginning November 1, 2018.
The Company is still evaluating the allocation of the preliminary purchase consideration and pro forma results of operations.
i3 VERTICALS, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except warrant, unit, share and per share amounts)
Acquisition-related costs to date for the businesses amounted to approximately $79 and will be expensed as incurred.