I3 VERTICALS, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)
You should read the following discussion and analysis of our financial condition and results of operations together with our audited financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those under the heading "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K. Certain amounts in this section may not foot due to rounding.
Executive Overview
The Company delivers seamless integrated software and services to customers in
strategic vertical markets. Building on its broad suite of software and services
solutions, the Company creates and acquires software products to serve the
specific needs of its customers. The Company's primary strategic verticals are
Public Sector (including Education) and Healthcare.
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COVID-19[feminine]
InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughoutthe United States and other parts of the world. The spread of COVID-19 and its variant strains brought about many precautions at the state and local government levels to mitigate the spread of the virus, including the closure of local government facilities and parks, schools, restaurants, many businesses and other locations of public assembly. Throughout fiscal 2020 and 2021 governments imposed restrictions in response to increased transmission rates of COVID-19 and eased such restrictions once the transmission rates declined across multiple cycles. The COVID-19 pandemic significantly affected overall economic conditions inthe United States . The economic impact of these conditions materially impacted our business. Our payment volume fluctuated as a result of the impact of the COVID-19 pandemic. Despite positive developments, such as the availability of vaccines, there are no reliable estimates of how long the pandemic will continue, how many people are likely to be affected by it or the duration or types of restrictions that will be imposed. For that reason, we are unable to predict the long-term impact of COVID-19 and its variant strains on our business at this time. Acquisitions
A central part of our growth strategy includes a disciplined approach to business and technology acquisitions, as evidenced by numerous platform and add-on acquisitions since our inception in 2012. Our acquisitions have opened up new strategic verticals, increased the number of businesses and organizations we provide solutions to and increased our existing payment and software solutions and capabilities.
Acquisitions subsequent to
Subsequent toSeptember 30, 2022 , we completed the acquisition of two business. One of the businesses is within the Company's Public Sector vertical and is a leading provider of enterprise software solutions for the motor carrier and motor vehicle markets in theU.S. andCanada . The other business supplements our capabilities in the Merchant Services segment. Total purchase consideration included$89.5 million in cash on hand and revolving line of credit proceeds.
Acquisitions during the year ended
During the year endedSeptember 30, 2022 , we completed the acquisition of three businesses to expand our software offerings in the Public Sector and Healthcare verticals. Total purchase consideration was$107.7 million , including$101.4 million in cash on hand and proceeds from the Company's revolving credit facility, and$6.3 million in contingent consideration.
Acquisitions during the year ended
OnNovember 17, 2020 , we completed the acquisition of substantially all of the assets ofImageSoft, Inc. to expand our software offerings, primarily in the Public Sector vertical. Total purchase consideration was$46.3 million , including$40.0 million in cash consideration, funded by proceeds from our revolving credit facility, and$6.3 million in contingent consideration. OnFebruary 1, 2021 , we completed the acquisition of substantially all the assets of Business Information Systems, GP, aTennessee general partnership andBusiness Information Systems, Inc. , aTennessee corporation (collectively "BIS") to expand our software offerings, primarily in the Public Sector vertical. Total purchase consideration was$95.5 million , including$52.5 million in cash on hand and proceeds from the Company's revolving credit facility, 1,202,914 shares of the Company's Class A Common Stock, and$7.8 million in contingent consideration. During the year endedSeptember 30, 2021 , we also completed the acquisitions of six unrelated businesses, to expand the Company's software offerings in the Public Sector and Healthcare vertical markets, and to add proprietary technology that will augment the Company's existing platform across several verticals. Total purchase consideration was$65.5 million , including$57.0 million in revolving credit facility proceeds, and$8.5 million of contingent consideration.
The results of operations of these acquired businesses have been included in our financial statements since the applicable acquisition dates. For more information, see note 4 of our consolidated financial statements.
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Our income and expenses
Revenue
We generate revenue from software licenses and subscriptions, other software
related services, and volume-based payment processing fees ("discount fees"),
and to a lesser extent, software licensing subscriptions, ongoing support and
other POS-related solutions that we provide to our customers directly and
through our distribution partners. Volume-based fees represent a percentage of
the dollar amount of each credit or debit transaction processed. Revenues are
also derived from a variety of fixed transaction or service fees, including
authorization fees, convenience fees, statement fees, annual fees and fees for
other miscellaneous services, such as handling chargebacks.
Interchange and network fees. Interchange and network fees consist primarily of
pass-through fees that make up a portion of discount fee revenue. These include
assessment fees payable to card associations, which are a percentage of the
processing volume we generate from Visa and Mastercard. Upon our adoption of
Financial Accounting Standards Board ("FASB") Accounting Standards Codification
("ASC") 606, Revenue from Contracts with Customers ("ASC 606") on October 1,
2019 , these fees are presented net within revenue.
Expenses
Other costs of services. Other costs of services include costs directly attributable to processing and bank sponsorship costs. These also include related costs such as residual payments to our distribution partners, which are based on a percentage of the net revenues (revenue less interchange and network fees) generated from customer referrals. Losses resulting from excessive chargebacks against a customer are included in other cost of services. The cost of equipment sold is also included in cost of services. Interchange and other costs of services are recognized at the time the customer's transactions are processed.
Selling, general and administrative expenses. Selling, general and administrative expenses include salaries and other personnel costs, professional services, rent and utilities, and other operating expenses.
Depreciation and amortization. Depreciation expense consists of depreciation on our investments in property, equipment and computer hardware and software. Depreciation expense is recognized on a straight-line basis over the estimated useful life of the asset. Amortization expense for acquired intangible assets and internally developed software is recognized using a proportional cash flow method. Amortization expense for internally developed software is recognized over the estimated useful life of the asset. The useful lives of contract-based intangible assets are equal to the terms of the agreement.
Interest expense, net. Our interest expense consists of interest on our outstanding debt under our senior secured credit facility and exchangeable notes, as well as amortization of debt discount and emission.
How we rate our business
Merchant services
Our Merchant Services segment provides comprehensive payment solutions to businesses and organizations. Our Merchant Services segment includes third-party integrated payment solutions as well as traditional merchant processing services across our strategic vertical markets.
Software and Services
Our Software and Services segment delivers vertical market software solutions to customers across all of our strategic vertical markets. These solutions often include embedded payments or other recurring services.
Other
Our Other category includes general business expenses, when presenting reportable segment information.
For more information on our segments, see note 17 to our consolidated financial statements.
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Key performance indicators
We assess our performance through key performance indicators, including:
•annualized recurring revenue (“ARR”);
•software and associated services as a percentage of total revenue; and
•the dollar volume of payments our customers process through us (“Payment Volume”).
ARR is the annualized revenue derived from software-as-a-service ("SaaS")
arrangements, software monetized with transaction-based fees, software
maintenance, recurring software-based services, payments revenue and other
recurring revenue sources within the quarter. This excludes contracts that are
not recurring or are one-time in nature. We focus on ARR because it helps us to
assess the health and trajectory of our business. ARR does not have a
standardized definition and is therefore unlikely to be comparable to similarly
titled measures presented by other companies. It should be reviewed
independently of revenue and it is not a forecast. The active contracts at the
end of a reporting period used in calculating ARR may or may not be extended or
renewed by our customers. ARR for the three months ended September 30, 2022 and
2021 was $281.2 million and $210.8 million , respectively, representing a
period-to-period growth rate of 33.4%.
Software and related services revenue includes the sale of subscriptions,
recurring services, ongoing support, licenses, and installation and
implementation services specific to software. We focus on software and related
services revenue as a percentage of total revenue because it is a strategic goal
to expand the software services we provide our customers. Software and related
services typically result in long-term partnerships with strong recurring
revenues. Software and related services revenue as a percentage of total revenue
for the years ended September 30, 2022 and 2021 was 49% and 39%.
Our payment volume for the years ended September 30, 2022 and 2021 was $22.6
billion and $18.8 billion , respectively, representing a period-to-period growth
rate of 20%. We focus on payment volume because it is a reflection of the scale
and economic activity of our customer base and because a significant part of our
revenue is derived as a percentage of our customers' dollar volume receipts.
Payment volume reflects the addition of new customers and same store payment
volume growth of existing customers, partially offset by customer attrition
during the period.
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Operating results
Year ended
The following table presents our historical results of operations for the
periods indicated:
Year ended September 30, Change
(in thousands) 2022 2021 Amount %
Revenue $ 317,862 $ 224,124 $ 93,738 41.8 %
Operating expenses
Other costs of services 73,367 57,706 15,661 27.1 %
Selling general and administrative 193,790 134,872 58,918 43.7 %
Depreciation and amortization 29,424 24,418 5,006 20.5 %
Change in fair value of contingent
consideration 23,725 7,140 16,585 n/m
Total operating expenses 320,306 224,136 96,170 42.9 %
Loss from operations (2,444) (12) (2,432) n/m
Other expenses
Interest expense, net 14,775 9,799 4,976 50.8 %
Other expense (income) 991 (2,595) 3,586 n/m
Total other expenses 15,766 7,204 8,562 118.9 %
Loss before income taxes (18,210) (7,216) (10,994) 152.4 %
Provision for income taxes 5,007 623 4,384 n/m
Net loss (23,217) (7,839) (15,378) 196.2 %
Net loss attributable to non-controlling
interest (6,115) (3,382) (2,733) 80.8 %
Net loss attributable to i3 Verticals $ (17,102) $ (4,457) $ (12,645) 283.7 %
n/m = not meaningful
Revenue
Revenue increased $93.7 million , or 41.8%, to $317.9 million for the year ended
September 30, 2022 from $224.1 million for the year ended September 30, 2021 .
This increase was principally driven by incremental revenue from acquisitions
completed during the 2022 and 2021 fiscal years of $61.8 million , net of
intercompany eliminations, all of which were within Software and Services. In
addition to our growth through acquisitions, revenue from existing businesses
grew, resulting from growth in software and related services revenues, primarily
in our Public Sector verticals, and an increase in payment volume from new and
existing customers across the Company.
Revenue within Software and Services increased $79.0 million , or 69.0%, to
$193.4 million for the year ended September 30, 2022 from $114.4 million for the
year ended September 30, 2021 . This increase was principally driven by growth in
software and related services revenues in our Public Sector and Healthcare
verticals.
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Revenue within Merchant Services increased $12.6 million , or 11.3%, to $124.5
million for the year ended September 30, 2022 from $111.9 million for the year
ended September 30, 2021 . Payment volume from new and existing customers within
Merchant Services increased $3.4 billion , or 19.5%, to $20.5 billion for the
year ended September 30, 2022 from $17.1 billion for the year ended September
30, 2021 .
Other Costs of Services
Other costs of services increased $15.7 million , or 27.1%, to $73.4 million for
the year ended September 30, 2022 from $57.7 million for the year ended
September 30, 2021 . This increase was primarily driven by an increase in other
cost of services within the Merchant Services segment, driven by the increase in
payment volume.
Other costs of services within Merchant Services increased $8.4 million , or
16.4%, to $59.6 million for the year ended September 30, 2022 from $51.2 million
for the year ended September 30, 2021 , driven primarily by the growth in payment
volume.
Other costs of services within Software and Services increased $5.2 million , or
60.0%, to $13.8 million for the year ended September 30, 2022 from $8.6 million
for the year ended September 30, 2021 . Acquisitions completed during the 2021
and 2022 fiscal years contributed an incremental $3.4 million , net of
intercompany eliminations, to our other cost of services for the year ended
September 30, 2022 .
Selling, general and administrative expenses
Selling, general and administrative expenses increased$58.9 million , or 43.7%, to$193.8 million for the year endedSeptember 30, 2022 from$134.9 million for the year endedSeptember 30, 2021 . This increase was principally driven by a$48.2 million increase in employment expense, primarily resulting from an increase in headcount that resulted from acquisitions and an increase in stock compensation expense. The majority of the remaining increase was comprised of increases in technology expense, travel expense, rental expense and advertising expense.
Depreciation and amortization
Depreciation and amortization increased$5.0 million , or 20.5%, to$29.4 million for the year endedSeptember 30, 2022 from$24.4 million for the year endedSeptember 30, 2021 . Amortization expense increased$4.8 million to$26.9 million for the year endedSeptember 30, 2022 from$22.1 million for the year endedSeptember 30, 2021 primarily due to greater amortization expense resulting from acquisitions completed during the 2022 and 2021 fiscal years. Depreciation expense increased$0.2 million to$2.5 million for the year endedSeptember 30, 2022 from$2.3 million for the year endedSeptember 30, 2021 .
Change in fair value of contingent consideration
Change in fair value of contingent consideration to be paid in connection with acquisitions was a charge of$23.7 million for the year endedSeptember 30, 2022 due to the performance of some of our acquisitions exceeding our expectations. The change in fair value of contingent consideration for the year endedSeptember 30, 2021 was a charge of$7.1 million .
Interest expense, net
Interest expense, net, increased$5.0 million , or 50.8%, to$14.8 million for the year endedSeptember 30, 2022 from$9.8 million for the year endedSeptember 30, 2021 . The increase reflected a higher average interest rate and a higher average outstanding debt balance for the year endedSeptember 30, 2022 as compared to the year endedSeptember 30, 2021 .
Other expenses (income)
Other expense was$1.0 million for the year endedSeptember 30, 2022 , relating to adjustments of liabilities under our Tax Receivable Agreement related to the remeasurement of the underlying deferred tax asset for changes in estimated income tax rates. Other income was$2.6 million for the year endedSeptember 30, 2021 , relating to a net gain on sales of investments of$2.1 million and adjustments of liabilities under our Tax Receivable Agreement related to the remeasurement of the underlying deferred tax asset for changes in estimated income tax rates of$0.5 million . 59 --------------------------------------------------------------------------------
Provision for income taxes
The provision for income taxes was to$5.0 million for the year endedSeptember 30, 2022 as compared to$0.6 million for the year endedSeptember 30, 2021 . The provision for deferred income taxes increased to an provision for the year endedSeptember 30, 2022 from a benefit for the year endedSeptember 30, 2021 . Additionally, the provision for current income tax expense increased for the year endedSeptember 30, 2022 from the year endedSeptember 30, 2021 , due to the mix of earnings within the Company. Our effective tax rate of (27)% for the year endedSeptember 30, 2022 differs from the federal statutory rate primarily due to the increase in the valuation allowance and as well as decrease in state taxes and increase in the tax effect of the revaluation of liabilities.i3 Verticals, Inc. is subject to federal, state and local income taxes with respect to its allocable share of any taxable income ofi3 Verticals, LLC and is taxed at the prevailing corporate tax rates.
Year ended
For discussion of our results of operations for fiscal 2021 compared to fiscal 2020, refer to the Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of our Form 10-K for the fiscal year endedSeptember 30, 2021 , filed with theSEC onNovember 22, 2021 .
Seasonality
We have experienced in the past, and may continue to experience, seasonal fluctuations in our revenues as a result of consumer and business spending patterns. Revenues during the first quarter of the calendar year, which is our second fiscal quarter, tend to decrease in comparison to the remaining three quarters of the calendar year on a same store basis. This decrease is due to the relatively higher number and amount of electronic payment transactions related to seasonal retail events, such as holiday and vacation spending in their second, third and fourth quarters of the calendar year. The number of business days in a month or quarter also may affect seasonal fluctuations. Revenue in our Education vertical fluctuates with the school calendar. Revenue for our Education customers is strongest in August, September, October, January and February, at the start of each semester, and generally weakens throughout the semester, with little revenue in the summer months of June and July. Operating expenses show less seasonal fluctuation, with the result that net income is subject to the same seasonal factors as our revenues. The growth in our business may have partially overshadowed seasonal trends to date, and seasonal impacts on our business may be more pronounced in the future. Furthermore, we are not able to predict the impact that the COVID-19 pandemic may have on the seasonality of our business.
Cash and capital resources
We have historically financed our operations (not including acquisitions) and working capital through net cash from operating activities. As ofSeptember 30, 2022 , we had$3.5 million of cash and cash equivalents and available borrowing capacity of$90.0 million under our Senior Secured Credit Facility, subject to the financial covenants. We usually minimize cash balances by making payments on our revolving credit facility to minimize borrowings and interest expense. As ofSeptember 30, 2022 , we had borrowings outstanding of$185.0 million under the Senior Secured Credit Facility. Our primary cash needs are to fund working capital requirements, invest in our technology infrastructure, fund acquisitions and related contingent consideration, make scheduled principal and interest payments on our outstanding indebtedness and pay tax distributions to members. We historically have had positive cash flow provided by operations. We currently expect that our cash flow from operations, current cash and cash equivalents and available borrowing capacity under the Senior Secured Credit Facility will be sufficient to fund our operations and planned capital expenditures and to service our debt obligations for at least the next twelve months and foreseeable future. 60 -------------------------------------------------------------------------------- Our liquidity profile reflects our completed offering inFebruary 2020 of an aggregate principal amount of$138.0 million in 1.0% Exchangeable Senior Notes due 2025, with substantially all the proceeds being used to pay down outstanding borrowings under our Senior Secured Credit Facility, as well as ourSeptember 2020 Public Offering as described below under the heading "Follow-on Offerings." During the year endedSeptember 30, 2020 , we repurchased$21.0 million in aggregate principal amount of the Exchangeable Notes for an aggregate purchase price of approximately$17.4 million . We recorded a loss on retirement of debt of$2.3 million due to the carrying value exceeding the fair value of the repurchased portion of the Exchangeable Notes at the dates of repurchases. We may elect from time to time to purchase our outstanding debt in open market purchases, privately negotiated transactions or otherwise. Any such debt repurchases will depend upon prevailing market conditions, our liquidity requirements, contractual restrictions, applicable securities law and other factors. Our Senior Secured Credit Facility, as amended, requires us to maintain a consolidated interest coverage ratio not less than 3.00 to 1.00, a total leverage ratio not exceeding 5.00 to 1.00 and a consolidated senior secured leverage ratio not exceeding 3.25 to 1.00, provided that for each of the four fiscal quarters immediately following a qualified acquisition, the total leverage ratio and the consolidated senior secured leverage ratio would increase by up to 0.25, subject to certain limitations. As ofSeptember 30, 2022 , we were in compliance with these covenants with a consolidated interest coverage ratio, total leverage ratio and consolidated senior leverage ratio of 8.17x, 3.68x and 2.24x, respectively. Although we believe our liquidity position remains strong, there can be no assurance that we will be able to raise additional funds, in the form of debt or equity, or to amend our Senior Secured Credit Facility on terms acceptable to us, if at all, even if we determined such actions were necessary in the future. Any material adverse change in customer demand and our ability to retain customers, competitive market forces, as well as other factors listed under the heading "Note Regarding Forward-looking Statements," and in our risk factors included herein could affect our ability to continue to fund our liquidity needs from business operations. Cash Flows
The following table presents a summary of cash flows from operating, investing and financing activities for the following comparative periods.
Year ended
Year endedSeptember 30, 2022
2021
(in thousands) Net cash provided by operating activities$ 45,846 $ 44,533 Net cash used in investing activities$ (113,045) $ (149,306) Net cash provided by financing activities$ 73,033 $ 102,103
Cash flow from operating activities
Net cash provided by operating activities increased$1.3 million to$45.8 million for the year endedSeptember 30, 2022 from$44.5 million for the year endedSeptember 30, 2021 . While our net loss increased$15.4 million for the year endedSeptember 30, 2022 from the year endedSeptember 30, 2021 , most of this increase was driven by non-cash expenses that do not impact cash flows from operating activities. The primary reason cash provided by operating activities increased despite the increase in net loss was that the increase in net loss was driven by an increase in non-cash contingent consideration of$16.6 million , an increase in equity-based compensation expense of$5.4 million and an increase in depreciation and amortization expense of$5.0 million , all of which increase the net loss but are not cash expenditures. Other changes include decreases in operating assets and liabilities of$17.9 million , which are impacted by the timing of collections and payments, an increase in the provision for deferred income taxes of$2.9 million , a decrease in the gain on sale of investments of$2.1 million and an increase in non-cash lease expense of$1.7 million for the year endedSeptember 30, 2022 compared to the year endedSeptember 30, 2021 . 61 --------------------------------------------------------------------------------
Cash flow from investing activities
Net cash used in investing activities decreased$36.3 million to$113.0 million for the year endedSeptember 30, 2022 from$149.3 million for the year endedSeptember 30, 2021 . The largest driver of cash used in investing activities for the years endedSeptember 30, 2022 and 2021 was cash used in acquisitions, net of cash acquired. For the year endedSeptember 30, 2022 , we used$100.7 million of cash for acquisitions, net of cash acquired compared to$142.5 million for the year endedSeptember 30, 2021 . Additionally, expenditures for purchases of merchant portfolios and residual buyouts decreased$1.8 million for the year endedSeptember 30, 2022 compared to the year endedSeptember 30, 2021 . These changes in cash used in investing activities were partially offset by an increase in expenditures for capitalized software of$4.0 million and a decrease in proceeds from the sale of investments of$3.2 million for the year endedSeptember 30, 2022 compared to the year endedSeptember 30, 2021 .
Cash flow from financing activities
Net cash provided by financing activities decreased$29.1 million to$73.0 million for the year endedSeptember 30, 2022 from$102.1 million for the year endedSeptember 30, 2021 . The decrease in net cash provided by financing activities was primarily the result of an increase in payments on the revolving credit facility of$56.7 million and an increase in cash paid for contingent consideration up to our original estimates of$22.4 million , partially offset by an increase in proceeds from the revolving credit facility of$32.9 million and an increase in proceeds from issuance of Class A common stock, net of underwriting discounts and offering costs of$17.7 million for the year endedSeptember 30, 2022 from year endedSeptember 30, 2021 .
Year ended
For a discussion of cash flows for the year ended
compared to the year ended
Senior Secured Credit Facility
OnMay 9, 2019 , we replaced our then existing credit facility with a new Amended and Restated Credit Agreement with the guarantors and lenders party thereto andBank of America, N.A ., as administrative agent (the "Senior Secured Credit Facility"). The Senior Secured Credit Facility, as amended in October, 2022, consists of a$375.0 million revolving credit facility. The Senior Secured Credit Facility provides that we have the right to seek additional commitments to provide additional term loan facilities or additional revolving credit commitments in an aggregate principal amount up to$50.0 million so long as, among other things, after giving pro forma effect to the incurrence of such additional borrowings and any related transactions, our consolidated interest coverage ratio would not be less than 3.00 to 1.00, our total leverage ratio would not exceed 5.00 to 1.00 and our consolidated senior leverage ratio would not exceed 3.25 to 1.00, provided that for each of the four fiscal quarters immediately following a qualified acquisition, the total leverage ratio and the consolidated senior secured leverage ratio would increase by up to 0.25, subject to certain limitations. The provision of any such additional amounts under the additional term loan facilities or additional revolving credit commitments are subject to certain additional conditions and the receipt of certain additional commitments by existing or additional lenders. The lenders under the Senior Secured Credit Facility are not under any obligation to provide any such additional term loan facilities or revolving credit commitments. The proceeds of the Senior Secured Credit Facility, together with proceeds from any additional amounts under the additional term loan facilities or additional revolving credit commitments, may only be used by us to (i) finance working capital, capital expenditures and other lawful corporate purposes, (ii) finance permitted acquisitions and (iii) to refinance certain existing indebtedness. Borrowings under the Senior Secured Credit Facility will be made, at our option, at the base rate or the Term SOFR rate, plus, in each case, an applicable margin. The base rate is a fluctuating rate of interest per annum equal to the highest of (a) the federal funds rate plus ½ of 1%, (b) the interest announced from time to time by 62 -------------------------------------------------------------------------------- Bank of America as its prime rate and (c) the Term SOFR rate plus an adjustment of 0.10%, plus 1%. The Term SOFR rate will be the rate of interest per annum equal to SOFR (based upon an interest period of one, three or six months), plus an adjustment of 0.10%. The applicable margin is based upon our consolidated total leverage ratio, as reflected in the schedule below: Consolidated Total Leverage Ratio Commitment Fee Letter of Credit Fee Term SOFR Rate Loans Base Rate Loans > 3.00 to 1.0 0.30% 3.25% 3.25% 1.25% > 2.50 to 1.0 but < 3.00 to 1.0 0.25% 2.75% 2.75% 0.75% > 2.00 to 1.0 but < 2.50 to 1.0 0.20% 2.50% 2.50% 0.50% < 2.00 to 1.0 0.15% 2.25% 2.25% 0.25% In addition to paying interest on outstanding principal under the Senior Secured Credit Facility, we will be required to pay a commitment fee equal to the product of between 0.15% and 0.30% (the applicable percentage depending on our consolidated total leverage ratio as reflected in the schedule above) times the actual daily amount by which$375.0 million exceeds the total amount outstanding under the Senior Secured Credit Facility and available to be drawn under all outstanding letters of credit. We will be permitted to voluntarily reduce the unutilized portion of the commitment amount and repay outstanding loans under the Senior Secured Credit Facility, whether such amounts are issued under the Senior Secured Credit Facility or under the additional term loan facilities or additional revolving credit facilities, at any time without premium or penalty.
In addition, if the aggregate amount borrowed under the senior secured credit facility exceeds
All obligations under the Senior Secured Credit Facility are unconditionally guaranteed byi3 Verticals, Inc. , aDelaware corporation, and each ofi3 Verticals, Inc.'s existing and future direct and indirect material, wholly owned domestic restricted subsidiaries, subject to certain exceptions. The obligations are secured by first-priority security interests in substantially all of our tangible and intangible assets,i3 Verticals, Inc. and each subsidiary guarantor, in each case whether owned on the date of the initial borrowings or thereafter acquired. The Senior Secured Credit Facility places certain restrictions on the ability of us,i3 Verticals, Inc. and their restricted subsidiaries to, among other things, incur debt and liens; merge, consolidate or liquidate; dispose of assets; enter into hedging arrangements; make certain restricted payments; undertake transactions with affiliates; enter into sale-leaseback transactions; make certain investments; prepay or modify the terms of certain indebtedness; and modify the terms of certain organizational agreements. The Senior Secured Credit Facility contains customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, certain events of bankruptcy and insolvency, material judgments, certain ERISA events, invalidity of loan documents and certain changes in control.
From
Follow-up offers
OnSeptember 15, 2020 , we completed a public offering (the "September 2020 Public Offering") of 3,737,500 shares of our Class A common stock, at a public offering price of$23.50 per share, which included a full exercise of the underwriters' option to purchase 487,500 additional shares of Class A common stock from us. We received approximately$83.4 million of net proceeds, after deducting underwriting discounts and commissions, but before offering expenses. We used the net proceeds to purchase (1) 3,250,000 Common Units directly fromi3 Verticals, LLC , and (2) 487,500 Common Units pursuant to the exercise of the underwriters' option to purchase additional shares in full and an equivalent number of Class B common stock (which shares were then canceled) from certain Continuing Equity Owners, in each case at a price per Common Unit equal to the price per share paid by the underwriters for shares of our Class A common stock in the offering.i3 Verticals, LLC received$72.0 million in net 63 -------------------------------------------------------------------------------- proceeds from the sale of Common Units to the Company, which we used to repay outstanding indebtedness. In connection with this offering, we recognized an additional deferred tax asset of$3.0 million related to the Tax Receivable Agreement and a corresponding liability of$2.5 million .
Exchangeable tickets
OnFebruary 18, 2020 ,i3 Verticals, LLC issued$138.0 million aggregate principal amount of its 1.0% Exchangeable Senior Notes dueFebruary 15, 2025 . The Exchangeable Notes bear interest at a fixed rate of 1.0% per year, payable semiannually in arrears onFebruary 15 andAugust 15 of each year, beginning onAugust 15, 2020 . The Exchangeable Notes are exchangeable on the terms set forth in the Indenture into cash, shares of Class A common stock, or a combination thereof, ati3 Verticals, LLC's election. The Exchangeable Notes mature onFebruary 15, 2025 , unless earlier exchanged, redeemed or repurchased. We received approximately$132.8 million in net proceeds from the sale of the Exchangeable Notes, as determined by deducting estimated offering expenses paid to third-parties from the aggregate principal amount.i3 Verticals, LLC used a portion of the net proceeds of the Exchangeable Notes offering to pay down outstanding borrowings under the Senior Secured Credit Facility in connection with the effectiveness of the operative provisions of the Amendment and to pay the cost of the note hedge transactions. During the year endedSeptember 30, 2020 , we repurchased$21.0 million in aggregate principal amount of the Exchangeable Notes for an aggregate purchase price of approximately$17.4 million . As ofSeptember 30, 2022 ,$117.0 million of the original aggregate principal amount of$138.0 million was outstanding.
Program on the market
OnAugust 20, 2021 , we, together withi3 Verticals, LLC , entered into an at-the-market offering sales agreement withRaymond James & Associates, Inc. ,Morgan Stanley & Co. LLC andBTIG, LLC (each a "Sales Agent"), under which we may issue and sell, from time to time and through the Sales Agents, shares of our Class A common stock having an aggregate offering price of up to$125 million (the "ATM Program"). During the quarter and year endedSeptember 30, 2022 , we sold 722,000 shares of Class A common stock, raising$17.9 million in net proceeds under the ATM Program. The aggregate compensation paid by the Company to the Sales Agents with respect to such sales was$0.4 million . As ofSeptember 30, 2022 , we had a remaining capacity to sell up to$107.1 million of our Class A common stock under the ATM Program.
The proceeds of these issuances were used to repay outstanding indebtedness under the senior secured credit facility and for other general corporate purposes.
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Material cash needs
The following table summarizes our significant cash requirements as of
Payments due by period
Less than 1 More than 5 Material Cash Requirements Total year 1 to 3 years 3 to 5 years years (in thousands) Processing minimums(1)$ 5,832 $ 4,512 $ 1,320 $ - $ - Facility leases 21,166 5,492 8,798 4,865 2,011 Senior Secured Credit Facility and related interest(2) 204,763 11,260 193,503 - - Exchangeable Notes and related interest(3) 119,779 1,170 118,609 - - Contingent consideration(4) 22,833 21,385 1,448 - - Total$ 374,373 $ 43,819 $ 323,678 $ 4,865 $ 2,011 __________________________ 1.We have non-exclusive agreements with several processors to provide us services related to transaction processing and transmittal, transaction authorization and data capture, and access to various reporting tools. Certain of these agreements require us to submit a minimum monthly number of transactions for processing. If we submit a number of transactions that is lower than the minimum, we are required to pay to the processor the fees it would have received if we had submitted the required minimum number of transactions. 2.We estimated interest payments through the maturity of our Senior Secured Credit Facility by applying the interest rate of 6.24% in effect on the outstanding balance as ofSeptember 30, 2022 , plus the unused fee rate of 0.30% in effect as ofSeptember 30, 2022 . 3.We calculated interest payments through the maturity of our Exchangeable Notes by applying the coupon interest rate of 1.00% on the outstanding principal balance as ofSeptember 30, 2022 of$117.0 million . 4.In connection with certain of our acquisitions, we may be obligated to pay the seller of the acquired entity certain amounts of contingent consideration as set forth in the relevant purchasing documents, whereby additional consideration may be due upon the achievement of certain specified financial performance targets. i3Verticals, Inc. accounts for the fair values of such contingent payments in accordance with the Level 3 financial instrument fair value hierarchy at the close of each subsequent reporting period. The acquisition-date fair value of contingent consideration is valued using a Monte Carlo simulation.i3 Verticals, Inc. subsequently reassesses such fair value based on probability estimates with respect to the acquired entity's likelihood of achieving the respective financial performance targets.
Potential payments under the Tax Receivables Agreement are not reflected in this table. See “-Tax Receivables Agreement” below.
Agreement on tax claims
We are a party to a Tax Receivable Agreement withi3 Verticals, LLC and each of the Continuing Equity Owners, as described in Note 11 of our consolidated financial statements. As a result of the Tax Receivable Agreement, we have been required to establish a liability in our consolidated financial statements. That liability, which will increase upon the redemptions or exchanges of Common Units for our Class A common stock, generally represents 85% of the estimated future tax benefits, if any, relating to the increase in tax basis associated with the Common Units we received as a result of the Reorganization Transactions and other redemptions or exchanges by holders of Common Units. If this election is made, the accelerated payment will be based on the present value of 100% of the estimated future tax benefits and, as a result, the associated liability reported on our consolidated financial statements may be increased. We expect that the payments required under the Tax Receivable Agreement will be substantial. The actual increase in tax basis, as well as the amount and timing of any payments under the Tax Receivable Agreement, will vary depending upon a number of factors, including the timing of redemptions or exchanges by the holders of Common Units, the price of our Class A common stock at the time of the redemption or exchange, whether such redemptions or exchanges are taxable, the amount and timing of the taxable income we generate in the future and the tax rate then applicable as well as the portion of our payments under the Tax Receivable Agreement constituting imputed interest. We intend to fund the payment of the amounts due under the Tax Receivable Agreement out of the cash savings that we actually realize in respect of the attributes to which Tax Receivable Agreement relates. 65 -------------------------------------------------------------------------------- As ofSeptember 30, 2022 , the total amount due under the Tax Receivable Agreement was$40.8 million , and payments to the Continuing Equity Owners related to exchanges throughSeptember 30, 2022 will range from approximately$0 to$3.3 million per year and are expected to be paid over the next 26 years years. The amounts recorded as ofSeptember 30, 2022 , approximate the current estimate of expected tax savings and are subject to change after the filing of the Company'sU.S. federal and state income tax returns. Future payments under the Tax Receivable Agreement with respect to subsequent exchanges would be in addition to these amounts. Critical Accounting Estimates The preparation of consolidated financial statements and related disclosures in conformity withU.S. generally accepted accounting principles ("GAAP") and the Company's discussion and analysis of its financial condition and operating results requires the Company's 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. Note 2, "Summary of Significant Accounting Policies" in the notes to the accompanying consolidated financial statements in Part II, Item 8 of this Form 10-K describe the significant accounting policies and methods used in the preparation of the Company's consolidated financial statements. Estimates include, but are not limited to, the value of purchase consideration paid and identifiable assets acquired and assumed in acquisitions, goodwill and intangible asset impairment review, determination of performance obligations for revenue recognition, loss reserves, assumptions used in the calculation of equity-based compensation and in the calculation of income taxes, and certain tax assets and liabilities as well as the related valuation allowances. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates. Below is a summary of our 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 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, we may have acquisitions that include contingent consideration. Accounting for business combinations requires us to estimate the fair value of any contingent purchase consideration at the acquisition date. Where relevant, the fair value of material contingent consideration included in an acquisition is calculated using a Monte Carlo simulation. The contingent consideration is revalued each period until it is settled. Management reviews the historical and projected performance of each acquisition with contingent consideration and uses an income probability method to revalue the contingent consideration. The revaluation requires management to make certain assumptions and represent management's best estimate at the valuation date. The probabilities are determined based on a management review of the expected likelihood of triggering events that would cause a change in the contingent consideration paid. For example, if management's forecasted performance for an acquisition increased, we would have anticipated a higher probability of contingent consideration being paid on the acquisition and would have recorded additional losses from the change in fair value of contingent consideration. Conversely, if management's forecasted performance for an acquisition decreased, we would have anticipated a higher probability of contingent consideration being paid on the acquisition and would have recorded a gain from change in fair value of contingent consideration. As ofSeptember 30, 2022 , the fair value of contingent consideration recorded is$22.8 million , with maximum contingent consideration payout of$81.3 million dependent upon achievement of specified financial performance targets, as defined in the purchase agreements.
We test 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, we perform our goodwill impairment testing as ofJuly 1 each year. 66 -------------------------------------------------------------------------------- In our goodwill impairment review, we use significant estimates and assumptions that 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. Our 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 our 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. For example, if management's forecasted earnings decreased for a reporting unit, we may have recorded an impairment loss for that reporting unit.
Related parties
Transactions involving related parties cannot be presumed to be carried out at an arm's length basis, as the requisite conditions of competitive, free-dealing markets may not exist. A description of related-party transactions is provided in Note 16 in the accompanying consolidated financial statements.
Recently issued accounting pronouncements
Refer to Note 2, “Summary of Significant Accounting Policies” in the Notes to the accompanying Consolidated Financial Statements for further discussion.
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