10-Q: i3 Verticals Shifts Focus to Public Sector Software

i3 Verticals, Inc. reports strong revenue growth in continuing operations and significant net income driven by the sale of its Healthcare RCM Business, while strategically focusing on its public sector software solutions.

Summary

• i3 Verticals, Inc. has completed the sale of its Healthcare RCM Business on May 5, 2025, and previously its Merchant Services Business on September 20, 2024, to strategically focus on its Public Sector software solutions, now operating as a single reportable segment.
• Revenue from continuing operations increased by 12.4% to $51.9 million for the three months ended June 30, 2025, compared to $46.2 million for the same period in 2024.
• For the nine months ended June 30, 2025, revenue from continuing operations grew by 13.1% to $158.3 million, up from $139.9 million in the prior year.
• The company reported a net income attributable to i3 Verticals, Inc. of $12.882 million for the three months ended June 30, 2025, a significant improvement from a net loss of $7.545 million in the prior year's comparable period.
• For the nine months ended June 30, 2025, net income attributable to i3 Verticals, Inc. was $14.784 million, a turnaround from a net loss of $4.569 million in the same period of 2024.
• Net income from discontinued operations, net of income taxes, was $19.421 million for the three months ended June 30, 2025, which includes a $26.0 million gain on the sale of the Healthcare RCM Business.
• Interest expense significantly decreased by 89.8% to $0.8 million for the three months ended June 30, 2025, and by 91.3% to $1.9 million for the nine months ended June 30, 2025, due to a lower average outstanding debt balance.
• Annualized recurring revenue (ARR) from continuing operations increased by 12% to $160.8 million as of June 30, 2025.
• The company acquired a Utility Billing Software Company for $10.3 million and another business for $2.0 million during the nine months ended June 30, 2025, expanding its public sector offerings.
• A new share repurchase program for up to $50.0 million of Class A common stock was approved on August 7, 2025, replacing the prior program which terminated on August 8, 2025.

Sentiment

Score: 7

Explanation: The company has successfully executed significant divestitures, leading to a strong cash position and a substantial reduction in debt and interest expense. The strategic focus on the public sector software business, which shows healthy recurring revenue growth, is a positive long-term move. While there's an increase in operating expenses and a shift to cash used in operations due to tax payments, the overall financial health and strategic clarity are improving. The new share repurchase program also signals management confidence.

Positives

• Strong revenue growth in continuing operations, with a 12.4% increase for the three months and 13.1% for the nine months ended June 30, 2025.
• Significant reduction in interest expense by 89.8% for the quarter and 91.3% for the nine-month period, reflecting a lower debt balance.
• Successful turnaround from net loss to net income for both the three and nine months ended June 30, 2025, driven by strategic divestitures and reduced interest costs.
• Realized a $26.0 million gain on the sale of the Healthcare RCM Business, contributing significantly to net income.
• Strategic divestiture of non-core businesses (Healthcare RCM and Merchant Services) allows for a focused approach on the higher-growth Public Sector software segment.
• Healthy liquidity position with $55.5 million in cash and cash equivalents and $400.0 million in available capacity under the 2023 Senior Secured Credit Facility as of June 30, 2025.
• Maintained strong compliance with debt covenants, reporting a consolidated interest coverage ratio of 87.1x and a total leverage ratio of 0.0x as of June 30, 2025.
• Annualized recurring revenue (ARR) from continuing operations grew by 12% to $160.8 million, indicating a robust and sustainable revenue base.
• Approved a new $50.0 million share repurchase program, signaling management's confidence in the company's valuation and commitment to shareholder returns.

Negatives

• Loss from operations in continuing operations increased to $(4.813) million for the three months ended June 30, 2025, from $(1.310) million in the prior year.
• Selling, general and administrative expenses increased significantly by 26.8% for the three months and 13.5% for the nine months ended June 30, 2025, partly due to M&A-related expenses and increased personnel costs.
• Net cash used in operating activities was $8.276 million for the nine months ended June 30, 2025, compared to net cash provided of $33.266 million in the prior year, primarily due to $35.1 million in income tax payments related to the Merchant Services Business sale.
• Change in fair value of contingent consideration resulted in a charge of $0.4 million for the nine months ended June 30, 2025, an increase from $0.2 million in the prior year.
• Net income from discontinued operations, net of income taxes, decreased slightly to $18.185 million for the nine months ended June 30, 2025, from $18.951 million in the prior year, despite the gain on sale of the Healthcare RCM Business.

Risks

• Ability to protect systems and data from continually evolving cybersecurity risks or other technological risks, including the impact of any cybersecurity incidents or security breaches.
• Liability and reputation damage from unauthorized disclosure, destruction or modification of data or disruption of services.
• Technical, operational and regulatory risks related to information technology systems and third-party providers' systems.
• Ability to execute on strategy and achieve goals following the completion of the sale of the Merchant Services Business and Healthcare RCM Business.
• Risks related to ongoing and future economic and geopolitical conditions, including the impact of inflationary pressures, elevated interest rates, current geopolitical instability (including in connection with current tensions between India and Pakistan), and tariff and trade-related developments.
• Potential adverse impact from Canadian governmental authorities or businesses canceling or not renewing contracts with U.S. companies due to current trade tensions.
• Potential disruption to operations if current tensions between India and Pakistan escalate, affecting employees in India.
• Changes in the budgets or regulatory environments of public sector customers, primarily local and state governments, that could negatively impact spending.
• Ability to successfully manage intellectual property.
• The triggering of impairment testing of fair-valued assets, including goodwill and intangible assets, in the event of a decline in the price of Class A common stock or otherwise.
• Ability to generate revenues sufficient to maintain profitability and positive cash flow.
• Competition in the industry and ability to compete effectively.
• Consolidation in the banking and financial services industry.
• Risk of shortages, price increases, changes, delays or discontinuations of hardware due to supply chain disruptions with respect to a limited number of suppliers.
• Ability to keep pace with rapid developments and changes in the industry and provide new products and services.
• Reliance on third parties for significant services.
• Exposure to economic conditions and political risks affecting consumer, commercial and government spending, including as a result of budgetary and political pressures to reduce government spending, as well as any decline in the use of credit cards.
• Risk of chargeback liabilities if customers refuse or cannot reimburse chargebacks resolved in favor of their customers.
• The impact of recent decisions of the U.S. Supreme Court regarding the actions of federal agencies.
• The impact of government investigations, claims, and litigation, including the PaySchools and S&S litigations.
• Risks related to international operations.
• Indebtedness and ability to maintain compliance with the financial covenants in the 2023 Senior Secured Credit Facility.
• Ability to meet liquidity needs.
• Ability to raise additional funds on terms acceptable, if at all, whether through debt, equity or a combination thereof.
• Operating and financial restrictions imposed by the 2023 Senior Secured Credit Facility.
• Historical statements of operations included in prior periodic reports are not comparable to current and future reports due to the effects of discontinued operations for the Healthcare RCM Business.

Future Outlook

The company's core business is now focused on providing mission-critical enterprise software solutions to public sector customers, with comprehensive cloud-native solutions addressing various government functions. Management expects current cash flow from operations, existing cash and cash equivalents, and available borrowing capacity under the 2023 Senior Secured Credit Facility to be sufficient to fund cash needs for at least the next twelve months and the foreseeable future. The growth strategy includes further acquisitions, which are expected to be funded through a combination of cash on hand, operating cash flows, credit facility borrowings, and potential equity or debt issuances. Obligations under the Infinx Transition Services Agreement are planned to be complete in the first quarter of fiscal 2026, while the Payroc Transition Services Agreement is expected to be substantially complete in the fourth quarter of fiscal 2025, and the Payroc Processing Services Agreement in the first quarter of fiscal 2029. The company is also evaluating the impact of recently issued accounting pronouncements and new tax legislation.

Management Comments

• Our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective (at the reasonable assurance level) as of the end of the period covered by this report.
• Management believes that the ongoing legal proceedings (PaySchools and S&S litigation) will not have a material impact on the company's consolidated balance sheet, results of operations, or cash flows.

Industry Context

The company is undergoing a significant strategic transformation, divesting its Merchant Services and Healthcare RCM businesses to concentrate solely on providing enterprise software solutions to the public sector. This move aligns with a broader industry trend towards specialization and recurring revenue models, particularly in vertical-specific software. By focusing on cloud-native solutions for state and local governments, the company aims to leverage its expertise and achieve deeper market penetration in a segment known for stable, long-term contracts. This strategic pivot positions the company to potentially capitalize on the increasing demand for efficient digital solutions within government agencies, differentiating itself from more diversified payment processors or general software providers.

Comparison to Industry Standards

• The filing does not provide specific comparable companies, projects, or results for direct industry benchmarks.

Legal Proceedings

• **PaySchools Litigation**: A class action complaint was filed on May 16, 2025, against i3 Verticals, LLC and CP-DBS, LLC d/b/a PaySchools, alleging unlawful fees for school lunch services. The plaintiff seeks unspecified monetary damages, restitution, disgorgement, attorneys' fees, and injunctive relief. The case was removed to the U.S. District Court for the Eastern District of New York on June 20, 2025. Management is unable to predict the outcome but does not believe it will have a material adverse effect.
• **S&S Litigation**: A petition was filed on June 2, 2021, by the State of Louisiana and a putative class against i3-Software & Services, LLC (S&S), i3 Verticals, Inc., and others. Claims relate to network remediation costs ($15.0 million by the State and $7.0 million by Sheriffs/Districts), return of purchase prices, and potential data breach notification obligations due to alleged cybersecurity inadequacies. The case was remanded to Louisiana state court on February 22, 2024, and is currently in the discovery phase. Management is unable to predict the outcome but does not believe it will have a material adverse effect.

Related Party Transactions

• **Tax Receivable Agreement**: The company is party to an agreement with i3 Verticals, LLC and its Continuing Equity Owners, providing for payments of 85% of certain tax benefits realized from future redemptions or exchanges of Common Units. As of June 30, 2025, the total amount due under this agreement was $35.117 million, with payments expected to range from $0 to $3.501 million per year over the next 26 years.
• **Recapitalization Actions**: On January 23, 2025, the company contributed $21.396 million in cash to i3 Verticals, LLC in exchange for 896,763 newly-issued common units. This was followed by a reverse unit split to maintain a one-to-one ratio between the company's Class A common stock and the common units held by the company, increasing its economic ownership interest in i3 Verticals, LLC from approximately 70.05% to 70.83%.

Stakeholder Impact

• **Shareholders**: Potential positive impact from the new share repurchase program, increased net income (though influenced by one-time gains), and a clearer strategic focus on the public sector software segment, which may lead to more predictable long-term growth.
• **Employees**: Employees of the divested Healthcare RCM and Merchant Services businesses were impacted, with some transitioning to the acquiring entities and others having equity vesting accelerated. New acquisitions may lead to new employment opportunities within the public sector segment.
• **Customers**: Public sector customers are expected to benefit from the company's concentrated focus and expanded offerings in utility billing software. Customers of the divested businesses are now served by Infinx and Payroc under transition agreements.
• **Creditors**: The significant reduction in outstanding debt and interest expense, coupled with strong compliance with financial covenants, positively impacts the company's credit profile and reduces financial risk.
• **Regulatory Authorities**: The company continues to comply with SEC filing requirements and is actively managing ongoing legal and regulatory matters.

Next Steps

• Complete obligations under the Infinx Transition Services Agreement in the first quarter of fiscal 2026.
• Substantially complete obligations under the Payroc Transition Services Agreement in the fourth quarter of fiscal 2025.
• Complete obligations under the Payroc Processing Services Agreement in the first quarter of fiscal 2029.
• Continue to evaluate the impact of new accounting pronouncements (ASU 2023-09, 2023-07, 2024-03) on financial statement disclosures.
• Continue to evaluate the future impact of the 'One Big Beautiful Bill Act' tax legislation.
• Execute on the new $50.0 million share repurchase program, which terminates on the earlier of September 30, 2026, or when the maximum dollar amount is expended.
• Continue a disciplined approach to acquisitions to expand public sector utility billing software offerings and customer footprint.
• Continue to manage and monitor ongoing legal proceedings, including the PaySchools and S&S litigations.

Key Dates

Recommendation

The company has made significant strategic moves by divesting non-core assets and focusing on the public sector software segment, leading to a much healthier balance sheet with substantially reduced debt and improved liquidity. The return to overall net income and the initiation of a new share repurchase program are strong positive signals. However, the core continuing operations still show an increase in operating loss for the recent quarter, and the full benefits of the strategic pivot need more time to consistently materialize in operational profitability. The ongoing legal proceedings also present a degree of uncertainty. For a seasoned investor, a 'hold' recommendation is appropriate to observe the sustained execution of the refined strategy and the consistent operational performance of the focused public sector business.

Keywords

Public Sector Software, Payment Processing, SEC Filing, 10-Q, Financial Results, Corporate Strategy, Divestiture, Acquisition, Share Repurchase, Recurring Revenue, Cybersecurity, Geopolitical Risk, Litigation, i3 Verticals, IIIV