10-K: i3 Verticals Shifts to Public Sector, Reports Strong Revenue Growth

i3 Verticals, Inc. reports an 11.5% revenue increase in continuing operations for fiscal year 2025, driven by strategic divestitures and public sector software growth.

Summary

• i3 Verticals completed the sale of its Merchant Services Business in September 2024 for approximately $439.5 million in cash.
• The company also completed the sale of its Healthcare RCM Business in May 2025 for $96.3 million in cash.
• Revenue from continuing operations increased by $21.9 million, or 11.5%, to $213.2 million for the year ended September 30, 2025, compared to $191.2 million in 2024.
• Net income attributable to i3 Verticals, Inc. from continuing operations improved significantly to $3.627 million in 2025, from a net loss of $10.854 million in 2024.
• Annualized Recurring Revenue (ARR) from continuing operations grew 9.2% to $165.3 million as of September 30, 2025, from $151.4 million in 2024.
• Interest expense decreased by $27.0 million, or 92.1%, to $2.3 million in 2025 due to a lower average outstanding debt balance.
• The company completed two acquisitions in fiscal year 2025, expanding its public sector utility billing software and customer footprint, with total purchase consideration of $12.3 million.
• A new share repurchase program for up to $50.0 million of Class A common stock was approved on August 7, 2025, replacing a prior program under which $38.0 million of shares were repurchased.
• As of September 30, 2025, the company had $66.7 million in cash and cash equivalents and $400.0 million in available borrowing capacity under its 2023 Senior Secured Credit Facility, with no outstanding borrowings.
• The company is currently involved in two significant legal proceedings: a class action lawsuit related to PaySchools fees in New York and a lawsuit in Louisiana concerning alleged cybersecurity inadequacies in its S&S business.

Sentiment

Score: 8

Explanation: The company demonstrated strong financial improvement in continuing operations, turning a net loss into a profit, significant revenue growth, and substantial debt reduction. Strategic divestitures have streamlined its focus, and a new share repurchase program signals confidence. While legal risks and industry competition exist, the overall financial health and strategic direction appear positive.

Positives

• Revenue from continuing operations increased by 11.5% year-over-year, reaching $213.2 million in 2025.
• Net income attributable to i3 Verticals, Inc. from continuing operations turned positive at $3.627 million in 2025, a substantial improvement from a $10.854 million loss in 2024.
• Annualized Recurring Revenue (ARR) from continuing operations showed strong growth of 9.2%, reaching $165.3 million.
• Interest expense significantly decreased by 92.1% to $2.3 million due to reduced debt, improving profitability.
• The company maintains a strong liquidity position with $66.7 million in cash and $400.0 million in available credit, with no outstanding borrowings on its revolving credit facility.
• Successful divestitures of the Merchant Services Business ($439.5 million) and Healthcare RCM Business ($96.3 million) have streamlined the company's focus on the public sector.
• The company is in compliance with all financial covenants under its 2023 Senior Secured Credit Facility, with a consolidated interest coverage ratio of 96.8x and total leverage ratio of 0.0x.
• A new $50.0 million share repurchase program demonstrates confidence in the company's valuation and commitment to shareholder returns.

Negatives

• The company has a history of operating losses and will need to generate significant revenues to attain and maintain profitability and positive cash flow, especially for its acquisition program.
• The company is subject to ongoing legal proceedings, including a class action lawsuit regarding PaySchools fees and a lawsuit in Louisiana concerning alleged cybersecurity inadequacies, which could result in significant liabilities and reputational damage.
• Despite security measures, there is no assurance that the company will not experience a cybersecurity incident in the future that materially impacts its operations, reputation, or customer relationships.
• Reliance on a limited number of third-party hardware suppliers creates risk of shortages, price increases, or delays, which could disrupt business.
• The company's operating results are subject to seasonality and volatility, particularly with transactional revenue for education customers being strongest at the start of semesters and weakening in summer months.
• The evolving legal, ethical, and regulatory landscape over AI technologies creates uncertainties and potential risks related to competitive harm, legal liability, and intellectual property misappropriation.
• The company's indebtedness, while currently manageable, could adversely affect its financial health and competitive position if cash flow is insufficient or refinancing is unavailable on favorable terms.

Risks

• Unauthorized disclosure, destruction or modification of data or disruption of services due to cybersecurity incidents could lead to liability, costly litigation, and reputation damage.
• Software and systems, or those of third-party providers, may fail or be discontinued, interrupting business, causing loss of business, and increasing costs.
• Failure to comply with open-source software licenses could negatively affect the business.
• Inability to keep pace with rapid developments and changes in the industry could lead to a decline in product and service use and reduced revenues.
• Failure to comply with Visa and Mastercard payment network requirements could result in fines, suspension, or termination of registrations.
• Termination of bank sponsorship without securing a new one would prevent the company from conducting its business.
• Termination of the processing services agreement with Payroc without a replacement could adversely impact payment processing services for affected software customers.
• Consolidation in the banking and financial services industry could lead to less favorable contractual terms or increased in-house services by larger institutions.
• Potential liability for chargebacks if customers refuse or cannot reimburse them, and inability to accurately anticipate these liabilities.
• Increases in interchange and sponsorship fees, if not passed along to customers, will reduce profit margins.
• Shortages, price increases, changes, delays, or discontinuations of third-party hardware due to reliance on a limited number of suppliers.
• Adverse impacts from general economic and geopolitical conditions, including inflation, interest rate fluctuations, trade tensions, and government spending reductions.
• A decline in the use of cards and ACH as payment mechanisms or adverse developments in the electronic payment industry could negatively affect business.
• Inability to successfully execute the strategy of growth through acquisitions, including identifying targets, securing financing, and effective integration.
• Post-closing risks and indemnification claims associated with the sale of the Merchant Services Business and Healthcare RCM Business.
• Acquisitions may generate less revenue and profit than anticipated, integration processes could face delays, and undisclosed liabilities may be uncovered.
• Inability to successfully manage intellectual property or being subject to infringement claims.
• Loss of key personnel or damage to their reputations, or failure to attract and retain qualified employees.
• Operating results and metrics are subject to seasonality and volatility.
• Exposure to fluctuations in foreign currency exchange rates, negatively affecting financial condition and operating results.
• Additional risks associated with international operations, including political instability, natural disasters, and stringent foreign data privacy regulations.
• Extensive laws and government regulations, with significant compliance costs and potential penalties for non-compliance.
• Compliance with the Dodd-Frank Act and other federal and state regulations may increase costs, limit revenues, and negatively affect business.
• Violations of FERPA or PPRA could result in material contract breaches, reputational harm, and suspension of access to student information.
• Violations of laws and regulations governing participants in the healthcare industry with respect to conduct prior to the sale of the Healthcare RCM Business.
• Failure to comply with laws and regulations prohibiting unfair or deceptive acts or practices (UDAAP) could lead to enforcement actions and liabilities.
• Violations of the FCPA and similar anti-bribery laws in other countries.
• Regulatory challenges related to money transmitter issues and potential liability under FCRA or Housing Assistance Tax Act.
• Changes in tax laws or their interpretations, or becoming subject to additional U.S., state, or local taxes that cannot be passed through to customers.
• Changing laws and governmental rules and regulations designed to protect or limit access to or use of personal information could adversely affect the ability to provide products and services.
• The evolving legal, ethical, and regulatory landscape over AI technologies creates uncertainties and potential risks.
• Ongoing focus on environmental, social, and governance (ESG) practices could increase costs, harm reputation, and adversely impact financial results.
• Indebtedness could adversely affect financial health and competitive position, and inability to secure additional financing on favorable terms.
• As a holding company, dependence on distributions from i3 Verticals, LLC to pay taxes and other expenses.
• Interests of other Continuing Equity Owners may conflict with Class A common stock holders.
• Inability to realize all or a portion of expected tax benefits from future redemptions or exchanges of common units.
• Payments under the Tax Receivable Agreement may be accelerated or significantly exceed actual benefits realized.
• i3 Verticals, LLC may be required to make substantial distributions, potentially limiting funds for reinvestment.
• Failure to maintain effective internal control over financial reporting could have a significant adverse effect.
• Certain provisions of Delaware law and anti-takeover provisions in organizational documents could delay or prevent a change of control.
• Future issuances of preferred stock or additional Class A common stock/common units could dilute existing stockholders and lower stock price.

Future Outlook

The company expects its cash needs to increase in the coming years to fund additional acquisitions, market products and services, expand customer support, hire personnel, and implement new operational and financial systems. It anticipates that cash flow from operations, current cash, and available borrowing capacity will be sufficient to meet these needs for at least the next twelve months and the foreseeable future. The company continues to focus on organic growth through expanding recurring revenue streams, strategic market selection, and product investment, with approximately 76% of revenue from continuing operations considered recurring. The company also plans to thoughtfully incorporate AI capabilities into its platforms and workflows.

Management Comments

• Our mission is to enable state and local governments and related agencies to perform their functions and serve their constituents as effectively and efficiently as possible.
• The ability to organically grow revenue over the long term is the result of expanding recurring revenue streams, strategic selection of markets and continued investment in our products.
• We focus on solutions in Public Sector markets because of technologically underserved markets, large and growing total addressable markets, fragmented competitive landscape, ample opportunity for transaction-based revenues, and insulation from market cycles.
• Ongoing investment into improving existing platforms and strategically creating new platforms and products is an essential part of our long-term strategy.
• A core component of our growth strategy includes a disciplined approach to acquisitions of both companies and technology.
• We have been endeavoring to thoughtfully incorporate AI capabilities into our platforms and workflows-enhancing automation, decision-making, and customer experience without adding unnecessary complexity.
• Our Board of Directors will determine the appropriate uses for excess cash which may be held by the Company following any future tax distributions, which may include, among other uses, after giving effect to the payment of obligations under the Tax Receivable Agreement, effecting a recapitalization transaction similar to the recapitalization transaction associated with the 2025 LLC Tax Distribution as described above, and/or approving the payment of a cash dividend on our Class A common stock.

Industry Context

i3 Verticals is strategically repositioning itself as a pure-play public sector enterprise software provider, having divested its Merchant Services and Healthcare RCM businesses. This move aligns with a trend towards specialization and focus within the technology sector, particularly in government and public administration, which are often characterized by stable, recurring revenue streams and a need for modernized, cloud-native solutions. The company's emphasis on integrated payments within its software offerings positions it to capitalize on the digital transformation efforts of state and local governments. The competitive landscape in enterprise software for the public sector is fragmented, offering ample opportunity for growth through both organic expansion and strategic acquisitions, which the company actively pursues. The increasing regulatory scrutiny on data privacy and AI technologies, as highlighted in the risks, is a broader industry trend impacting all software providers.

Comparison to Industry Standards

• The company's focus on public sector markets, characterized by being technologically underserved, large and growing addressable markets, and fragmented competition, suggests a strategy to target less saturated segments compared to broader enterprise software markets.
• The 9.2% growth in Annualized Recurring Revenue (ARR) to $165.3 million indicates solid performance in building a stable revenue base, which is a key metric for SaaS and subscription-based software companies, often compared to peers like Tyler Technologies, Inc. or Constellation Software, Inc. (though specific comparable ARR growth rates are not provided in the filing).
• The company's consolidated interest coverage ratio of 96.8x and total leverage ratio of 0.0x as of September 30, 2025, following significant debt reduction, are exceptionally strong compared to industry averages for technology companies, which often carry higher leverage to fund growth. This indicates a very healthy balance sheet and low financial risk from debt.
• The company's acquisition strategy, targeting founder-led, growing, cash-flow-generating businesses that augment existing solutions and lack integrated payment functionality, is a common approach in fragmented software markets, similar to strategies employed by larger consolidators like Constellation Software, Inc.

Corporate Governance

Legal Proceedings

• **PaySchools Litigation:** On May 16, 2025, a class action complaint was filed against i3 Verticals, LLC and CP-DBS, LLC d/b/a PaySchools in New York, alleging unlawful practices related to fees charged for school lunch services. The plaintiff seeks unspecified monetary damages, restitution, disgorgement, attorneys' fees, and injunctive relief. The case was removed to federal court on June 20, 2025, and a motion to dismiss is pending.
• **S&S Litigation:** On June 2, 2021, the State of Louisiana and a putative class of sheriffs and law enforcement districts filed a petition against i3-Software & Services, LLC (S&S) and other defendants, seeking monetary damages of $15.0 million (State) and $7.0 million (Sheriffs/Districts) for network remediation, return of purchase prices, and other expenses. The claims relate to a third-party remote access software product and alleged cybersecurity inadequacies. The case was remanded to state court on February 22, 2024, and is currently in the discovery phase.

Related Party Transactions

• The company is party to a Tax Receivable Agreement with i3 Verticals, LLC and its Continuing Equity Owners, requiring payments of 85% of certain tax benefits realized from future redemptions or exchanges of common units. As of September 30, 2025, the total amount due under this agreement was $34.911 million, with annual payments expected to range from $0 to $5.364 million over the next 22 years.
• On January 23, 2025, the company and i3 Verticals, LLC executed recapitalization actions. This involved the company contributing $21.396 million in cash to i3 Verticals, LLC for newly-issued common units, followed by a reverse unit split and retirement of Class B common stock. This was done to reduce excess cash held by the company after a tax distribution related to the Merchant Services Business sale, and it adjusted ownership interests in i3 Verticals, LLC.

Stakeholder Impact

• **Shareholders:** The new $50.0 million share repurchase program could positively impact Class A common stockholders by reducing share count and potentially increasing earnings per share. The improved net income from continuing operations and strong liquidity are also beneficial. However, potential dilution from future equity issuances for acquisitions or incentive plans remains a risk. The Tax Receivable Agreement benefits Continuing Equity Owners more than Class A common stockholders.
• **Employees:** The company emphasizes a safe and healthy workplace, competitive compensation and benefits, and opportunities for growth, aiming for strong talent attraction and retention. Equity-based compensation plans align employee incentives with company performance. Flexible work arrangements are offered.
• **Customers (Public Sector Entities):** The company's strategic focus on mission-critical enterprise software solutions aims to enhance efficiency and service delivery for state and local governments. The integration of payment technology provides a single point of access for various public sector payments. Ongoing investment in technology and AI capabilities is intended to meet evolving customer needs.
• **Creditors:** The company's strong compliance with financial covenants (interest coverage ratio of 96.8x, total leverage ratio of 0.0x) and $400.0 million in available credit indicate a healthy financial position, reducing risk for creditors. Significant debt reduction has also improved creditworthiness.
• **Acquisition Targets:** The company's disciplined acquisition strategy, targeting founder-led, growing, cash-flow-generating businesses, provides an exit and growth opportunity for smaller software companies, especially those lacking integrated payment functionality.

Next Steps

• Continue to make additional acquisitions as a core growth strategy.
• Market products and services to expand customer base.
• Expand customer support and service operations.
• Hire additional marketing, customer support, and administrative personnel.
• Implement new and upgraded operational and financial systems, procedures, and controls.
• Thoughtfully incorporate AI capabilities into platforms and workflows.
• Address ongoing legal proceedings (PaySchools and S&S litigation) through discovery and motions.
• Potentially declare cash dividends on Class A common stock or effect further recapitalization actions with excess cash from tax distributions.
• Repurchase up to $50.0 million of Class A common stock under the New Share Repurchase Program by September 30, 2026.

Key Dates

Recommendation

The company's strategic pivot to a pure-play public sector software provider, evidenced by the successful divestitures of its Merchant Services and Healthcare RCM businesses, is a strong positive. The significant improvement in net income from continuing operations, robust revenue growth of 11.5%, and impressive 9.2% ARR growth demonstrate the strength and potential of its core business. The substantial reduction in interest expense and a healthy balance sheet with no outstanding revolving debt and ample liquidity provide financial flexibility for future growth and acquisitions. The new $50.0 million share repurchase program signals management's confidence in the company's valuation. While legal proceedings and industry competition present risks, the overall financial performance and clear strategic direction make this an attractive investment opportunity for long-term growth in a stable market.

Keywords

Public Sector Software, Enterprise Software Solutions, Government Technology, Payment Processing, Cloud-Native Solutions, Acquisitions, Recurring Revenue, SEC Filing, 10-K, Financial Results, Cybersecurity, Risk Management, Corporate Governance, Share Repurchase, Legal Proceedings, Tax Receivable Agreement, Dodd-Frank Act, Privacy Regulations, AI Technologies, ESG Practices