Good day everyone, and welcome to the i3 Verticals Second Quarter 2020 Earnings Conference Call. Today's call is being recorded and a replay will be available starting today through May 15th. The number for the replay is 719-457-0820 and the code is 8694705. The replay may also be accessed for 30 days at the Company's website. At this time, for opening remarks, I would like to turn the call over to Scott Meriwether, Chief Operating Officer. Please go ahead, sir.

Good morning and welcome to the second quarter 2020 conference call for i3 Verticals. Joining me on this call are Greg Daily, our Chairman and CEO; Clay Whitson, our CFO; and Rick Stanford, our President. To the extent any non-GAAP financial measure is discussed in today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by reviewing yesterday's earnings release. It is the Company's intent to provide non-GAAP financial information to enhance understanding of its consolidated financial information as prepared in accordance with GAAP. This non-GAAP information should be considered by each individual in addition to, but not instead of, the financial statements prepared in accordance with GAAP. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including statements among others regarding the Company's expected financial and operating performance and the expected and potential impact of the COVID-19 pandemic. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. You are hereby cautioned that these forward-looking statements may be affected by the important factors among others set forth in the Company's earnings release and in reports that are filed or furnished to the SEC including risk and uncertainties associated with the COVID-19 pandemic. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. Finally, the information shared on this call is valid as of today's date and the Company undertakes no obligation to update it except as may be required under applicable law. I'll now turn the call over to the Company's Chairman and CEO, Greg Daily.

Thanks, Scott, and good morning to all of you. We delivered strong second fiscal quarter results despite the impact of COVID-19. As we start this call, I want to first address our employees, many of whom are listening to this call. I'm extremely proud of our employees' response to this crisis; they've been flexible and focused, and I'm inspired by their dedication in supporting our customers. One highlight in the past quarter was a 25% increase in net revenue, as net revenue increased to $39.3 million in Q2 of fiscal year 2020 from $31.4 million in Q2 of fiscal year 2019, primarily from the growth in the Public Sector vertical. Pro forma adjusted EBITDA increased to $10 million in Q2 of 2020 from $8.7 million in Q2 of 2019. Our integrated payments volume continues to grow; 55% of our payment volume was integrated during Q2 fiscal year 2020, up from 49% during Q1 of fiscal year 2019. The Company had great momentum throughout the quarter until the second half of March, when we began to see the economic impact of COVID-19. The common phrase to use to describe this current crisis is 'in these unprecedented times.' I do not think any of us imagined a time when there would be government-mandated business closures, stay-at-home orders, or K-12 schools shutting down for the remainder of the school year. We anticipate a greater impact of COVID-19 in our financials for our third fiscal quarter. Our education and hospitality customers have had the greatest impact. From April 2019 to April 2020, our total run rate of net revenue in education was down 66%. The run rate of net revenue and payments in education was down 90%. Our SaaS software model helped offset the sharp decline in payments-related revenue to blend the 66%. Our restaurant and hotel customers also saw significant decreases. Payment volume fell in restaurants, as they were not allowed to host customers. The hotel traffic was slowed. Our net revenue from restaurants and hotels fell 32% in the month of March, as COVID-19 hit mid-month. We saw continued weakness in both payment volume and new POS system sales throughout April. Our Public Sector and B2B customers experienced less of an impact in payment volumes. Our diversification in multiple verticals has reduced the impact of any one market sector on our overall performance; we anticipate this diversification will also serve us well in the recovery. Going forward, i3 is focused on delivering solutions that provide contactless payments in an omni-channel platform across all verticals. COVID-19 has enhanced our customers' awareness of their needs for our solutions. We've responded with an intense focus on providing solutions that will enable our customers' businesses in the current environment and anticipated new normal. We believe COVID-19 will lead to further migration from check and cash through electronic payments. In particular, Public Sector and Education Verticals will accelerate their acceptance of electronic payments integrated with software platforms. These two verticals have historically been slower to adopt electronic payments. One lasting impact of COVID-19 will be a push from these two markets to upgrade their technology and ability to meet constituents' needs. We also believe the Public Sector and Education Verticals will face budget pressures in the short term. Our SaaS solution and payment platforms will alleviate many of these issues. While our payment volume in these two verticals has been impacted, local governance and K-12 schools don't go out of business. We expect these two verticals to rebound to their historic activity and growth rates. Rick will speak about M&A momentarily. I wanted to briefly touch on our strategy. Due to the uncertainty and economic environment, we paused all acquisition activity until there's greater visibility into the impacts of COVID-19. We put several deals on hold. Despite the current economic environment, our acquisition pipeline continues to build over the last several weeks. We have a strong balance sheet. Our recent convertible note offering provides us with plenty of ammunition for our acquisition activity. States are beginning to open. We exited April with stronger payment volume than we entered. As we see economic activity pick up, we anticipate our M&A activity heating up again. We feel like we simply hit pause for a few months, but we are well positioned to both weather the short-term crisis and grow in the rebound. We have technology solutions that meet our customers' needs. As May begins, we see signs of continued improvement in the economy and our payment volume. We look forward to economic recovery and are confident in our ability to gain market share and deliver strong future performances. Clay, would you please provide a financial overview?

Sure. The following pertains to the second quarter of fiscal year 2020, which is the three-month period ended March 31, 2020. Despite the COVID-19 downturn, we had a solid quarter with net revenues of $39.3 million and adjusted EBITDA of $10 million. Net revenues increased 25% for Q2 2020 from $31.4 million for Q2 2019, driven principally by acquisitions in our Public Sector and Education Verticals. Acquisitions contributed approximately $9 million in the quarter. Our net revenue yield, defined as net revenues divided by payment volume, improved to 110 basis points for Q2 2020 from 107 basis points for Q2 2019, reflecting increasing software revenues. As discussed on the call last quarter, the face of the income statement shows a decline in revenue as a result of adopting ASC 606. Q2 2019 presents revenues gross of interchange and network fees, while Q2 2020 presents revenues net of interchange and network fees. For an apples-to-apples comparison, please refer to the supplemental segment presentation contained in yesterday's 8-K filing. Excluding the purchased portfolios and our IPOS business, organic growth was flat for the quarter. We entered March on a 9% pace for organic growth, but government-mandated business closures, school closures, and stay-at-home orders took a toll on our organic growth, particularly during the last two weeks of March, and continued through April. We exited April with payment volumes for the same set of companies down approximately 30% on a year-over-year consolidated basis. The first week of May has predictably improved as economic activity has begun to resume in several areas, and we expect further improvement as more and more sectors of the economy open up. Adjusted EBITDA grew 14% to $10 million for Q2 2020 from $8.7 million for Q2 2019. Please see the press release for reconciliation between net income and adjusted EBITDA. Adjusted EBITDA as a percentage of net revenues was 25.3% for Q2 2020, down from 27.8% for Q2 2019, reflecting fixed costs spread over lower net revenues than anticipated due to the COVID-19 impact. In the absence of the COVID-19 impact, we would have expected to improve our EBITDA margin this quarter. Effective April 1st, we instituted previously disclosed cost savings that saved approximately $1 million per quarter. Adjusted diluted earnings per share were $0.20 for the quarter. Again, please refer to the press release for full description and reconciliation. Segment performance; please refer to the supplemental slides titled segment performance on our website and as an exhibit to yesterday's 8-K filing for reference with this discussion. In our proprietary software and payments segment, net revenues grew 93% to $14.8 million for Q2 2020 from $7.7 million for Q2 2019, reflecting acquisitions in our Public Sector and Education Verticals. Adjusted EBITDA increased 66% to $5.9 million from $3.6 million, principally reflecting recent acquisitions in our Public Sector vertical. EBITDA as a percentage of net revenues was 40% for Q2 2020, versus 46% for Q2 2019, principally reflecting school closures and the associated absence of payment revenues. Net revenues for our Merchant Services segment, excluding the purchased portfolios, increased 5% to $25 million for Q2 2020 from $23.8 million for Q2 2019, principally reflecting growth at our Pace Payments business, which works mainly with Public Sector software vendors, with good exposure to utilities, which have held up well in the COVID-19 environment. The purchased portfolios declined 33% to $1 million in line with expectations. Adjusted EBITDA for our Merchant Services segment declined 7% to $7.3 million for Q2 2020 from $7.8 million for Q2 2019. The EBITDA margin was 29% for Q2 2020 versus 33% for Q2 2019, reflecting the decline in the purchased portfolios, which carry higher margins. As for our balance sheet, we have a strong balance sheet. The convertible notes offering we executed in February brought in $138 million, which was used to repay borrowings under our revolving credit facility. As of March 31st, we had only $19 million borrowed under our revolving credit facility, which is a $275 million facility. Consequently, our senior leverage ratio was low at 0.4 times. Our total leverage ratio, which includes the convertible notes, was 3.4 times, while the current covenant is 5.0 times. The interest rate for the convertible notes is at 1%, while the interest rate for the revolver is currently around 4%. Over time, we expect to convert roughly two-thirds of EBITDA into free cash flow, which can either be used for acquisitions or debt repayments. Outlook: the COVID-19 pandemic has created significant uncertainty in the economy, and the extent to which COVID-19 will impact the Company's future results is difficult to reasonably estimate at this time. Therefore, the Company is not providing any financial outlook for the fiscal year ending September 30, 2020. However, to give a better understanding of our business mix with estimated representative net revenues by vertical on a run rate basis prior to COVID-19, we do not currently plan to update this in the future. Our Public Sector vertical represented 25%, hospitality 15% (that's both restaurant and hotel), education 10%, B2B 10%, health care 10%, retail 10%, nonprofit 5%, and other 15%. As Greg mentioned, we've seen the greatest impact from the pandemic in our education and hospitality verticals. During April, education payment net revenues were down 90%. We have SaaS software revenues which cushioned the declines, so the total run rates for education net revenues were down 66% in April. Our current expectation is for K-12 schools to reopen after Labor Day. Greg discussed the decline in hospitality. Our other verticals have seen lower impacts, and we believe that our diversification positions us well for recovery. Governments and schools do not go out of business; health care is an essential service, and B2B will grow over time. Digitization of payments away from cash and checks will continue, and we have differentiated payment solutions to offer our customers integrated through our software and other leading software providers. I'll now turn the call over to Rick for an update on M&A activity.

Thank you, Clay. Good morning everyone. Before I talk about our M&A status, I want to first quickly give you a few updates regarding information provided on the last call and some additional new information. First, we're continuing to pursue a unified product offering in our Public Sector vertical. We intend on offering our customers in this vertical a more robust and comprehensive suite of products that work together seamlessly. Second, relative to the Pace conversion, we set a goal for ourselves to have the non-integrated piece completed by the end of summer. It now looks as if we will be completed midsummer; the one caveat is that businesses start opening as planned. Third, on the ISV front, our total number of signed and integrated ISVs at the end of our second fiscal quarter is 53, with three more in the process of integration. Fourth, we've been discussing and implementing many new educational communications around products that are likely to be methods of choice with consumers, like contactless, in-app payments, and online payments with our existing verticals. COVID-19 is changing customer expectations in these areas, and we intend to meet those expectations. We are pleased with the products and methodologies that our business leaders are deploying on this front. Lastly, regarding M&A, we have continued to add to the pipeline during Q2 and are still preparing new term sheets for those deals that we are interested in having as part of the team. The pipeline is still very full at this time, and the recent downturn has not affected our pipeline. In fact, new opportunities have arisen over the past couple of months. Strong organic growth has always been a key driver in our decision-making process about acquiring a business. We have now added an extra level of diligence and understanding around how the potential acquisition partner was affected by COVID-19, and whether, when, or if the business is likely to grow in the new normal. We mentioned on the Q1 call that we have four executed term sheets in the process of full diligence, seeing the potential impact of the pandemic and industry trends. In mid-March, we made a decision to go tense and stay on with all diligence and closing preparations for those deals. Without exception, each of these sellers understood the circumstances and stand ready to restart their acquisition process. Although there are no guarantees in a COVID-19 world, we hope to start ramping up towards completing these four acquisitions in an effort to accelerate our vertical strategy in the near future, particularly in the Education and Public Sector. Our general pipeline is populated with an emphasis on Public Sector and Education, with some nonprofit and healthcare mixed in. We believe that we will remain successful in executing our M&A strategy once we start closing deals again. This concludes my comments. Lauren, at this time, we'll open the call up for questions.

Thank you. Our first question comes from George Mihalos with Cowen.

This is Allison on for George. Thank you for taking my questions and really glad to hear from everyone. My first question is given i3's unique strategy to diversify the business across key verticals, which we heard about, and your commentary around Public Sector and B2B, for example, being more insulated. What percentage of your revenue do you think will ultimately be impacted by COVID-19?

Well, I think all of it is impacted currently, and we've seen different declines across different verticals. Long-term, we expect government and education to bounce back 100% because those customers don't go out of business. Hospitality will see some attrition there, but we think we're well positioned on the other side to gain market share with our technologies.

And then I'm curious, if you can talk a little bit about the cadence of the volumes you're seeing. Clay, I heard you mention that payment volume exited April down 30% and improved in the first week of May. I think I got that right. I'm just curious how that volume trended throughout the month of April. And if you've experienced peak declines in mid-April similar to commentary from some of your payments peers?

It improves sequentially all across April and continued to improve the first week of May. The first week of May had a marked improvement as the economy was opening back up in certain areas.

Okay, great. That's good to hear. And then just one last question.

Well, the end of March was probably the worst, and then April improved and May has improved again.

And then just last one from me, with respect to the M&A pipeline, do you think it would be feasible to close a transaction by the end of this fiscal year? And then also lastly, given the environment we are in, how have you seen multiple trending?

Yes, I definitely think that we'll be able to close some deals by year end. As far as multiples, we're very tuned in to the market and we'll respond appropriately.

So just maybe, Rick, appreciate the comments on M&A, but maybe we're following the last question. What sort of capacity do you have? And how should we think about leverage in the COVID world, kind of where I would be willing to take leverage on the other side of this or maybe close deals later this fiscal year?

Well, first of all, most of our deals are small, and those would probably be the ones we would address first. And then, those that are trending well in April, in the current environment, we have a lot of capacity under our credit line, only $19 million borrowed out of $275 million. And then we have strong cash flow. And so, between those things, we'll see how it goes, but we currently believe we have the ability to make some strategic acquisitions that are smaller in size. Our leverage covenant is 5.0, and we're currently at 3.4.

Okay, I would assume in this environment, you're not going to push the upper limits to that. Is that fair?

That's fair.

And then maybe Clay or Greg maybe just talk a little bit about the geographic mix of the school education business. What states are biggest? And as we kind of think about reopened ease and who is likely going back to school in the fall?

Ohio, Colorado, and California are three; we do have a nice group of businesses in New Jersey. I think they may be impacted a little bit more than Ohio and California, but we are in tune with what's going on in each of the states, and we believe they will open on time in the fall.

And then remind me that I think, Clay, you had mentioned that Q2 is seasonally the weakest. So as we think about the education mix for the full year, maybe just help us think about the cadence, which quarter is strongest in education as we think about the model going forward into the back to school in the fall?

They're a little different for PaySchools and SchoolPay. SchoolPay has their strongest quarter in the September quarter. SchoolPay has their strongest quarter in the March quarter. Both fall off in the June quarter, as you get about a half a month in May and then zero in June. If I had to pick a quarter for this to happen, this wouldn't be the quarter, but it's still very painful.

And then maybe last one for me. I really appreciate the breakout on the different verticals, the percentage of overall revenue there. But maybe comment on healthcare. Have you guys seen significant negative impacts there? I think we've heard some not horror stories, but some pretty bad healthcare numbers elsewhere. Just curious to know what you're seeing in your healthcare vertical?

No, our healthcare held up very nicely.

Our next question comes from Jason Kupferberg with Bank of America.

This is Cassy on for Jason, thanks for taking my question. My first one is just to ask about sort of an update on trends maybe in states, where you've already seen stay-at-home orders being lifted versus states that haven't seen restrictions lifted. Have you seen sort of an increase in payment volume trends as people are searching more to online or mobile transactions? Thank you.

So I think everybody's mentioned we have seen a nice uptick at the end of April. That has continued in May. I believe the states started opening around May 1, and we definitely saw the increase. But it's hard. I don't think I can tell you by state how we've seen it. But a lot of our business is online, so it's not like that makes us change. But it's improving on a daily basis.

Our card-not-present number tracks pretty closely with our integrated number that we report. So 55% of our traffic is card-not-present. That has been increasing over time, as you know, and we think that will continue industry-wide to improve over time. So we're well positioned there.

And as a follow-up to that, which verticals have you seen bounce back the fastest sort of incrementally throughout April and into May now?

Not schools; they have been completely closed. Probably retail and restaurants have improved as states have opened up.

Thanks. And just one more question from me. I just wanted to get a little bit more detail about which areas of cost you're sort of focused on reducing. And obviously, the payroll expenses will come back later as things ramp up again, but sort of how sustainable or maybe some of the other areas of long-run cost cutting? Thank you.

Okay. We have a gross margin of about 70%, slightly less than that. For your revenue projections, you can use that percentage. Our operating expenses were just over $17 million this quarter, but the cuts we’ve made will bring that down to $16 million. This figure is relatively fixed, mainly related to headcount, rent, insurance, and employee-related costs. Unless we make further cuts, that number will remain the same, and if our revenues increase, it could go up over time. Currently, we’re looking at a run rate of just over $16 million per quarter. Does that help, Cassy?

Our next question comes from Josh Beck with KeyBanc.

Thanks everyone for doing the call, a lot of helpful color, and glad to hear everyone is staying well. I wanted to ask a little bit of a broader question. And it might be a little tough to discern, but I would ask. Just given you have a decent number of small businesses within your portfolio, have you seen any impacts or release as some of these PPP loans have been made over the last month? I know it might be a little tough to discern, but just thought I'd ask.

We haven't noticed an increase in merchant attrition. While we expect there may be some, our data at the end of March did not reflect this. I may not have enough detailed information to discuss the impact of the PPP, but we have definitely observed a rebound in volume during May.

And I'm not sure you've cut the business this way, but I think you mentioned the card-not-present mix is a good proxy for your integrated mix. If you were just to look at the card-not-present mix, is it have a pretty substantially different growth rate, and is there any way to quantify that? But I'm not sure you really cut it that way?

Well, we've reported that number every quarter, and it's been increasing as we have made more software acquisitions. But I don't know that we've seen a spike just because of the environment; it's been more as a result of business mix, I would say.

Okay. And I think there's been a couple of different ways, but if you look across your verticals, are there any that actually had positive year-over-year growth in the last couple of weeks? I was thinking about some of the ones that you're highlighting as more defensive or even close to flat, I guess, in terms of the year-over-year trends, and we still just not there maybe within say, Public Sector or some of the more resilient ones?

Public Sector performed well in March, benefiting from the warrant roundup, and overall it was a solid year until the last two weeks. I'm not able to provide much insight on the small increase in rent share. B2B showed decent results, and healthcare non-profit exceeded our expectations. However, hospitality and education are dragging us down, although we anticipate that education will recover.

It seems that the outlook for your business is quite positive. I want to clarify something regarding the $16 million figure you mentioned. Is that a projection for the next couple of quarters, or does it represent a steady run rate? I'm asking this to ensure I model April correctly.

Well, so the March quarter was $17.4 million, and then effective April 1st, we cut a million dollars. So that would go to $16.4 million. So, it's not something that happens over time. We got it done on April 1st.

Our next question comes from Peter Heckmann with D.A. Davidson.

In regards to Public Sector space, it seems as if some of the pressure that we will probably see on state and local budgets really should play pretty well for an integrated payment solution that includes convenience fees that's effectively self-funded. Have you seen an uptick in interest there? Or is it still a little early? And if it's early, do you agree with that thesis?

Well, there are a lot of pushes to get more automated or digitized in the exchange of money. And we've seen that. We're going to be willing to see more of that in schools and in government. We have a different business mix in education and government; we're 60%, only 40% of revenues are payments. And so that's helped cushion this downturn. Education, on the other hand, is 70% payments. And so, they have a little different dynamics there. Our software revenues have increased over time. This quarter, software represented 24% and payments represented 67%. So that number continues to go up. And software is generally more insulated than payments, as you know. So, we think we're very well positioned. Both schools and governments are probably not the leaders technology-wise; they're slow to adopt until they really need to, but now they really need to, and so we think that'll help us.

And then another question just in regards to the ISPs. Any change there in terms of kind of the terms relative number of partners that some of these ISVs are getting? And is there any thoughts about revenue share or any other terms that are notable in terms of changing?

We haven't seen any changes. We're continuing to sign ISVs; revenue shares range anywhere from 20% to 35%. They're looking for technology solutions. Ease is important to them. But we haven't seen any movement in revenue share or the number of ISVs that we're able to secure that are looking for payment integration.

Okay. And as regards that, do you see more ISVs? I mean, what would be the average number of partners that an ISV might have? Might they have 2 or 3? Or are there some champion-challenger type relationships?

I can't speak to the numbers. But I can tell you that we are seeing an increased number of ISV opportunities with the Pace acquisition. When that went down, we combined our internal ISV team with Pace, and they've proven to be a market force. We've expanded our reach to all of our subsidiaries, and we've got salespeople across the country that are referring ISVs into the Pace organization now. So, we're seeing an uptick there. I think most of it was education, but we brought on some really talented people with Pace that know the ISV space, and that's helped as well.

And at this time, there are no further questions. I'd like to turn the conference back to Greg Daily for any additional or closing remarks.

Thank you, everyone. So, this is an interesting time. I think you'll see us talk more about the increase from check and cash to electronic payments in our future calls because it is coming. We're prepared for the rebound. I think it's already started. The numbers that we're seeing from May are very positive. And so anyway, thanks everybody for being on our call. Thank you.

That does conclude today's conference. We thank you for your participation. You may now disconnect.