| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements and related Notes included in this Quarterly Report on Form 10-Q and our Audited Financial Statements and related Notes and MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2018. This MD&A contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in other sections of this Quarterly Report on Form 10-Q. See “Special Note Regarding Forward-Looking Statements” for additional factors relating to such statements, and see “Risk Factors” in our documents we have filed or furnished with the SEC for a discussion of certain risk factors applicable to our business, financial condition and results of operations. Past operating results are not necessarily indicative of operating results in any future periods.
Overview
We are a rapidly growing and leading money remittance services company focused primarily on the U.S. to the LAC corridor, which includes Mexico, Central and South America and the Caribbean. We utilize our proprietary technology to deliver convenient, reliable and value-added services to our customers through a broad network of sending and paying agents. Our remittance services, which include a comprehensive suite of ancillary financial processing solutions and payment services, are available in 50 states, Washington D.C. and Puerto Rico, where customers can send money to beneficiaries in 17 LAC countries and four countries in Africa. Our services are accessible in person through over 100,000 sending and paying agents and company-operated stores, as well as online and via Internet-enabled mobile devices.
Money remittance services to Latin America, primarily Mexico and Guatemala, are the primary source of our revenue. These services involve the movement of funds on behalf of an originating customer for receipt by a designated beneficiary at a designated receiving location. Our remittances to Latin America are generated in the United States by customers with roots in Latin American and Caribbean countries, many of whom do not have an existing relationship with a traditional full-service financial institution capable of providing the services we offer. We provide these customers with flexibility and convenience to help them meet their financial needs. Other customers who use our services may have access to traditional banking services, but prefer to use our services based on reliability, convenience and value. We generate money remittance revenue from fees paid by our customers (i.e., the senders of funds), which we share with our sending agents in the United States and our paying agents in the destination country. Remittances paid in local currencies that are not pegged to the U.S. dollar also earn revenue through our daily management of currency exchange spreads.
Our money remittance services enable our customers to send and receive funds through our extensive network of locations in the United States that are primarily operated by third-party businesses, which we refer to as agents, and a small number of company-operated stores in the LAC corridor. In addition, our services are offered digitally through Intermexonline.com and via Internet-enabled mobile devices. We currently operate in the United States, Mexico, Guatemala and 20 additional countries. Since January 2015 through March 31, 2019, we have grown our agent network by more than 119% and increased our remittance transactions volume by approximately 117%. In the first quarter of 2019, we processed approximately 6.2 million remittances, representing over 23% growth in transactions as compared to the same period in 2018.
As a non-bank financial institution, we are regulated by the Department of Treasury, the Internal Revenue Service, FinCEN, the CFPB, the Department of Banking and Finance of the State of Florida and additionally by the various regulatory institutions of those states where we hold an operating license. We are duly registered as an MSB with FinCEN, the financial intelligence unit of the U.S. Department of the Treasury. We are also subject to a wide range of regulations in the United States and other countries, including anti-money laundering laws and regulations; financial services regulations; currency control regulations; anti-bribery law; money transfer and payment instrument licensing laws; escheatment laws; privacy, data protection and information security laws; and consumer disclosure and consumer protection laws.
Key Factors and Trends Affecting our Business
Various trends and other factors have affected and may continue to affect our business, financial condition and operating results, including:
| • | competition in the markets in which we operate; |
| • | cyber-attacks or disruptions to our information technology, computer network systems and data centers; |
| • | our ability to maintain agent relationships on terms consistent with those currently in place; |
| • | our ability to maintain banking relationships necessary for us to conduct our business; |
| • | credit risks from our agents and the financial institutions with which we do business; |
| • | bank failures, sustained financial illiquidity, or illiquidity at our clearing, cash management or custodial financial institutions; |
| • | our ability to meet our debt obligations and remain in compliance with our credit facility requirements; |
| • | new technology or competitors that disrupt the current ecosystem; |
| • | our success in developing and introducing new products, services and infrastructure; |
| • | customer confidence in our brand and in consumer money transfers generally; |
| • | our ability to maintain compliance with the regulatory requirements of the jurisdictions in which we operate or plan to operate; |
| • | consumer fraud and other risks relating to customer authentication; |
| • | international political factors or implementation of tariffs, border taxes or restrictions on remittances or transfers of money out of the United States; |
| • | changes in tax laws and unfavorable outcomes of tax positions we take; |
| • | political instability, currency restrictions and devaluation in countries in which we operate or plan to operate; |
| • | weakness in U.S. or international economic conditions; |
| • | change or disruption in international migration patterns; |
| • | our ability to protect our brand and intellectual property rights; |
| • | our ability to retain key personnel; and |
| • | changes in foreign exchange rates which could impact consumer remittance activity. |
Throughout 2018 and 2019, Latin American political and economic conditions remain unstable, as evidenced by high unemployment rates in key markets, currency reserves, currency controls, restricted lending activity, weak currencies and low consumer confidence, among other factors. Specifically, continued political and economic unrest in parts of Mexico and Guatemala contributed to volatility. Our business has generally been resilient during times of economic instability as money remittances are essential to many recipients, with the funds used by the receiving party for their daily needs. However, long-term sustained devaluation of the Mexican Peso or Guatemalan Quetzal as compared to the U.S. Dollar could negatively affect our revenues and profitability.
Money remittance businesses such as ours have continued to be subject to strict legal and regulatory requirements, and we continue to focus on and regularly review our compliance programs. In connection with these reviews, and in light of regulatory complexity and heightened attention of governmental and regulatory authorities related to cybersecurity and compliance activities, we have made, and continue to make, enhancements to our processes and systems designed to detect and prevent cyber-attacks, consumer fraud, money laundering, terrorist financing and other illicit activity, along with enhancements to improve consumer protection, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and similar regulations outside the United States. In coming periods, we expect these enhancements will continue to result in changes to certain of our business practices and may result in increased costs.
We maintain a regulatory compliance department, under the direction of our experienced Chief Administrative and Compliance Officer, whose foremost responsibility is to monitor transactions, detect suspicious activity, maintain financial records and train our employees and agents. An independent third-party consulting firm periodically reviews our policies and procedures to ensure the efficacy of our anti-money laundering and regulatory compliance program.
The market for money remittance services is very competitive. Our competitors include a small number of large money remittance providers, financial institutions and banks as well as a large number of small niche money remittance service providers that serve select regions. We compete with larger companies such as Western Union, MoneyGram and EuroNet and a number of other smaller MSB entities. We generally compete for money remittance agents on the basis of value, service, quality, technical and operational differences, commission structure and marketing efforts. We sell credible solutions to our agents, not discounts or higher commissions, as is typical for the industry. We compete for money remittance customers on the basis of trust, convenience, service, efficiency of outlets, value, technology and brand recognition.
We expect to encounter increasing competition as new technologies emerge that enable customers to send and receive money through a variety of channels, but we do not expect adoption rates to be as significant in the near term for the customer segment we serve. Regardless, we continue to innovate in the industry by differentiating our money remittance business through programs to foster loyalty among agents as well as customers and have expanded our channels through which our services are accessed to include online and mobile offerings in preparation for customer adoption.
We qualify as an “emerging growth company” pursuant to the provisions of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), enacted on April 5, 2012. An “emerging growth company” can take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” These provisions include:
| • | an exemption from the auditor attestation requirement of Section 404 of the Sarbanes-Oxley Act in the assessment of the emerging growth company’s internal control over financial reporting; |
| • | an exemption from the adoption of new or revised financial accounting standards until they would apply to private companies; and |
| • | an exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer. |
We will remain an “emerging growth company” until the earliest of: (i) the last day of the fiscal year during which we had total annual gross revenues of $1.07 billion or more; (ii) the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which we are deemed a “large accelerated filer,” which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30.
On December 22, 2017, the U.S. enacted tax reform legislation known as H.R. 1, commonly referred to as the “Tax Cuts and Jobs Act” (the “Act”), resulting in significant modifications to existing law. All changes to the tax code that were effective as of January 1, 2018 were applied by the Company in computing its income tax expense for the year ended December 31, 2018. Additional guidance issued by the U.S. Treasury Department, the IRS and other standard-setting bodies may materially impact the provision for income taxes and effective tax rate in the period in which the guidance is issued.
The Merger
On July 26, 2018 (the “Closing Date”), International Money Express, Inc. (formerly FinTech Acquisition Corp. II) consummated the previously announced merger by and among FinTech, Merger Sub 1, a wholly-owned subsidiary of FinTech, Merger Sub 2, a wholly-owned subsidiary of FinTech, Intermex Holdings, and SPC Intermex (the "Merger"). In connection with the closing of the Merger, FinTech changed its name to International Money Express, Inc.
The Merger was accounted for as a reverse recapitalization where FinTech was treated as the “acquired” company for financial reporting purposes. This determination was primarily based on the facts that, following the Merger, the former stockholders of Intermex Holdings control the majority of the voting rights in respect of the board of directors of the Company, Intermex Holdings’ comprising the ongoing operations of the Company and Intermex Holdings’ senior management comprising the senior management of the Company. Accordingly, the Merger was treated as the equivalent of Intermex Holdings issuing stock for the net assets of FinTech, accompanied by a recapitalization. The net assets of FinTech were stated at historical cost, with no goodwill or other intangible assets resulting from the Merger. The consolidated assets, liabilities and results of operations prior to the Closing Date of the Merger are those of Intermex Holdings, and FinTech’s assets, liabilities and results of operations were consolidated with Intermex Holdings beginning on the Closing Date. The shares and corresponding capital amounts included in common stock and additional paid-in capital, pre-merger, have been retroactively restated as shares reflecting the exchange ratio in the Merger.
The Merger was approved by FinTech’s stockholders at the Special Meeting of FinTech Stockholders held on July 20, 2018. In connection with the closing of the Merger, FinTech redeemed a total of 4.9 million shares of its common stock at a redemption price of $10.086957 per share, resulting in a total payment to redeemed stockholders of approximately $49.8 million. The aggregate consideration paid in the Merger consisted of approximately (i) $102.0 million in cash and (ii) 17.2 million shares of FinTech common stock.
After the completion of the transactions on the Closing Date, there were 36.2 million shares of International Money Express, Inc. outstanding common stock, warrants to purchase 9 million shares of common stock ("Warrants") and 3.4 million shares reserved for issuance under the International Money Express, Inc. 2018 Equity Compensation Plan, of which stock options to purchase 2.8 million shares of common stock and restricted stock units in respect of 21.2 thousand shares of common stock were granted to employees and independent directors of the Company in connection with the completion of the transaction. As of the Closing Date, the former stockholders of Intermex owned approximately 48.3% and the former stockholders of FinTech owned approximately 51.7%, respectively, of the combined Company’s outstanding common stock.
On March 28, 2019, the Company announced the commencement of its offer (the “Tender Offer”) to each holder of the Warrants to purchase shares of common stock of the Company to receive a combination of shares of its common stock and cash, for each Warrant tendered by the holder and exchanged pursuant to the Tender Offer. In addition, the Company solicited consents from the holders of the Warrants to amend the Warrant Agreement as described below.
On April 29, 2019, the Company entered into Amendment No. 1 (the “Warrant Amendment”) to the Warrant Agreement, dated as of January 19, 2017 (the “Warrant Agreement”). The Warrant Amendment amends the Warrant Agreement to permit the Company to require that each Warrant that is outstanding upon the closing of the Offer to be converted into a combination of 0.181 shares of common stock, par value $0.0001 per share, of the Company and $1.00 in cash (the "Conversion Consideration"). The Company intends to exchange all remaining untendered Warrants for the Conversion Consideration in accordance with the terms of the Warrant Agreement, as amended, on or about May 20, 2019. For the three months ended March 31, 2019, the Company incurred in approximately $513 thousand in professional and legal fees related to the Tender Offer. These expenses were recorded as other selling, general and administrative expenses in the statement of operations and comprehensive income (loss).
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and financial measures. The key indicators of the financial condition and operating performance of our business are revenues, services charges from agents and banks, salaries and benefits and selling, general and administrative expenses. To help us assess our performance with these key indicators, we use Adjusted EBITDA as a non-GAAP financial measure. We believe this non-GAAP measure provides useful information to investors and expanded insight to measure our revenue and cost performance as a supplement to our U.S. GAAP consolidated financial statements. See the “Adjusted EBITDA” sections below for reconciliations of Adjusted EBITDA to our net income, the closest GAAP measure.
Revenues
Transaction volume is the primary generator of revenue in our business. Revenue on transactions is derived primarily from transaction fees paid by customers to transfer money. Revenues per transaction vary based upon send and receive locations and the amount sent. In certain transactions involving different send and receive currencies, we generate foreign exchange revenues based on the difference between the set exchange rate charged by us to the sender and the rate available to us in the wholesale foreign exchange market.
Operating Expenses
Service Charges from Agents and Banks
Service charges and fees primarily consist of agent commissions and bank fees. Service charges and fees vary based on agent commission percentages and the amount of fees charged by the banks. Sending agents earn a commission on each transaction they process of approximately 50% of the transaction fee. Service charges and fees may increase if banks or payer organizations increase their fee structure. Service charges also vary based on the method the customer selects to send the transfer and payer organization that facilitates the transaction.
Salaries and Benefits
Salaries and benefits include cash and share-based compensation associated with our corporate employees and sales team as well as employees at our company-operated stores. Corporate employees include management, customer service, compliance, information technology, finance and human resources. Our sales team, located throughout the United States, is focused on supporting and growing our sending agent network.
Other Selling, General and Administrative
General and administrative expenses primarily consist of fixed overhead expenses associated with our operations, such as information technology, rent expense, insurance, professional services, facilities maintenance and other similar types of expenses. A portion of these expenses relate to our 32 company-operated stores; however, the majority relate to the overall business and compliance for being a public company. Selling expenses include expenses such as advertising and promotion, provision for bad debt and expenses associated with increasing our network of agents. These expenses are expected to continue to increase in line with increase in revenues.
Transaction Costs
We incurred transaction costs associated with the Merger. These costs included all internal and external costs directly related to the transaction, consisting primarily of legal, consulting, accounting, advisory fees and certain incentive bonuses. Due to their significance, they are presented separately in our condensed consolidated financial statements.
Depreciation and Amortization
Depreciation largely consists of depreciation of computer equipment and software that supports our technology platform. Amortization of intangible assets is primarily related to our agent relationships, trade name and developed technology.
Non-Operating Expenses
Interest Expense
Interest expense consists primarily of interest associated with our debt, which consisted of a term loan and revolving credit facility that were both refinanced on November 7, 2018. As of March 31, 2019 and December 31, 2018, the interest rates for the term loan and revolving credit facility related to our current Credit Agreement were 7.0% and 7.0%, and 7.34% and 7.01%, respectively. Interest on the term loan facility and revolving credit facility is determined by reference to either LIBOR or a “base rate”, in each case, plus an applicable margin of 4.50% per annum for LIBOR loans or 3.50% per annum for base rate loans. The Company is also required to pay a fee on the unused portion of the revolving credit facility equal to 0.35% per annum.
Income tax provision (benefit)
Our income tax provision (benefit) includes the expected benefit of all deferred tax assets, including our net operating loss carryforwards. With few exceptions, our net operating loss carryforwards will expire from 2029 through 2037 and are subject to annual utilization limitations; however, our current assessment is that no valuation allowance is required for any of our deferred tax assets. Our income tax provision (benefit) has been impacted by non-deductible expenses, including shared-based compensation and transaction costs. The Act, enacted in December 2017, reduced our federal corporate tax rate from 34% to 21% beginning in 2018.
Net Income (Loss)
Net income (loss) is determined by subtracting operating and non-operating expenses from revenues.
Segments
Our business is organized around one reportable segment that provides money transmittal services primarily between the USA and Latin America. This is based on the objectives of the business and how our chief operating decision maker, the CEO and President, monitors operating performance and allocates resources.
Results of Operations
The following table summarizes key components of our results of operations for the periods indicated:
|
| Three Months Ended March 31, |
|
|
|
|
|
| (in thousands) | | 2019 | | | 2018 | | | % Change | |
| | | (Unaudited) | | | | |
| Revenues: | | | | | | | | | |
| Wire transfer and money order fees | | $ | 58,451 | | | $ | 47,854 | | | | 22 | % |
| Foreign exchange | | | 9,402 | | | | 7,731 | | | | 22 | % |
| Other income | | | 496 | | | | 371 | | | | 34 | % |
| Total revenues | | | 68,349 | | | | 55,956 | | | | 22 | % |
| | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | |
| Service charges from agents and banks | | | 45,569 | | | | 37,937 | | | | 20 | % |
| Salaries and benefits | | | 7,597 | | | | 6,223 | | | | 22 | % |
| Other selling, general and administrative expenses | | | 5,723 | | | | 4,009 | | | | 43 | % |
| Transaction costs | | | - | | | | 1,461 | | | | (100 | %) |
| Depreciation and amortization | | | 3,152 | | | | 3,789 | | | | (17 | %) |
| Total operating expenses | | | 62,041 | | | | 53,419 | | | | 16 | % |
| | | | | | | | | | | | | |
| Operating income | | | 6,308 | | | | 2,537 | | | | 149 | % |
| | | | | | | | | | | | | |
| Interest expense | | | 2,071 | | | | 3,284 | | | | (37 | %) |
| | | | | | | | | | | | | |
| Income (loss) before income taxes | | | 4,237 | | | | (747 | ) | | | 667 | % |
| | | | | | | | | | | | | |
| Income tax provision (benefit) | | | 1,081 | | | | (207 | ) | | | 622 | % |
| Net income (loss) | | $ | 3,156 | | | $ | (540 | ) | | | 684 | % |
Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018
Revenues
Revenues for the above periods are presented below:
| |
| Three Months Ended March 31, 2019 |
|
| % of Revenues |
|
| Three Months Ended March 31, 2018 |
|
| % of Revenues |
|
| |
| ($ in thousands) |
| | | | | | | | | | | | | |
| Revenues: | | | | | | | | | | | | |
| Wire transfer and money order fees | | $ | 58,451 | | | | 85 | % | | $ | 47,854 | | | | 85 | % |
| Foreign exchange | | | 9,402 | | | | 14 | % | | | 7,731 | | | | 14 | % |
| Other income | | | 496 | | | | 1 | % | | | 371 | | | | 1 | % |
| Total revenues | | $ | 68,349 | | | | 100 | % | | $ | 55,956 | | | | 100 | % |
Wire transfer and money order fees of $58.5 million for the three months ended March 31, 2019 increased by $10.6 million from $47.9 million for the three months ended March 31, 2018. This increase of $10.6 million was due to a 24% increase in transaction volume compared to the first quarter of 2018, largely due to the continued growth in our agent network, which has grown by 21% from March 2018 to March 2019.
Revenues from foreign exchange of $9.4 million for the three months ended March 31, 2019 increased by $1.7 million from $7.7 million for the three months ended March 31, 2018. This increase of $1.7 million was primarily due to higher transaction volume achieved by growth in our agent network.
Operating Expenses
Operating expenses for the above periods are presented below:
| | | Three Months Ended March 31, 2019 |
|
| % of Revenues |
|
| Three Months Ended March 31, 2018 |
|
| % of Revenues |
|
| |
| ($ in thousands) |
| | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | |
| Service charges from agents and banks | | $ | 45,569 | | | | 67 | % | | $ | 37,937 | | | | 68 | % |
| Salaries and benefits | | | 7,597 | | | | 11 | % | | | 6,223 | | | | 11 | % |
Other selling, general and administrative expenses | | | 5,723 | | | | 8
| % | | | 4,009 | | | | 7 | % |
| Transaction costs | | | - | | | | 0 | % | | | 1,461 | | | | 3 | % |
| Depreciation and amortization | | | 3,152 | | | | 5 | % | | | 3,789 | | | | 7 | % |
| Total operating expenses | | $ | 62,041 | | | | 91 | % | | $ | 53,419 | | | | 96 | % |
Service charges from agents and banks — Service charges from agents and banks were $45.6 million, or 67% of revenues, for the three months ended March 31, 2019 compared to $37.9 million, or 68% of revenues, for the three months ended March 31, 2018. The increase of $7.7 million was primarily due to a 24% increase in transaction volume largely related to the continued growth in our agent network, which has grown by 21% from March 2018 to March 2019.
Salaries and benefits — Salaries and benefits were $7.6 million for the three months ended March 31, 2019, an increase of $1.4 million from $6.2 million for the three months ended March 31, 2018. The increase of $1.4 million primarily consisted of $0.8 million in increased wages, largely in management and compliance areas associated with our transition to a publicly-traded company and to support our growing operations and a $0.4 million increase related to share-based compensation in connection with the International Money Express, Inc. 2018 Omnibus Equity Compensation Plan.
Other selling, general and administrative expenses — Other selling, general and administrative expenses of $5.7 million for the three months ended March 31, 2019 increased by $1.7 million from $4.0 million for the three months ended March 31, 2018. The increase primarily related to $0.9 million of legal and other professional fees associated with the Company’s SEC filings, including the Tender Offer for the Company’s outstanding warrants, and $0.3 million in IT related expenses.
Transaction costs — Transaction costs of $1.5 million for the three months ended March 31, 2018 include legal and other professional fees all directly related to the Merger.
Depreciation and amortization — Depreciation and amortization of $3.2 million for the three months ended March 31, 2019 decreased by $0.6 million from $3.8 million for the three months ended March 31, 2018. This decrease of $0.6 million is primarily due to $0.8 million less amortization related to the trade name, developed technology and agent relationships during the first quarter of 2019 as these intangibles are being amortized on an accelerated basis, which will decline over time. This decrease was partially offset by an increase in depreciation of $0.2 million associated primarily with additional computer equipment to support our growing business and agent network.
Non-Operating Expenses
Interest expense — Interest expense was $2.1 million for the three months ended March 31, 2019, a decrease of $1.2 million from $3.3 million for the three months ended March 31, 2018. The decrease of $1.2 million was primarily due to a reduction in the interest rates and lower principal balance outstanding of the facilities under the Credit Agreement.
Income tax provision (benefit) — Income tax provision was $1.1 million for the three months ended March 31, 2019, a change of $1.3 million, from an income tax benefit of $0.2 million for the three months ended March 31, 2018. The change in the income tax provision included a $1.3 million increase to tax expense related to taxable income attributable for both federal and state taxes in the three months ended March 31, 2019.
Net Income (Loss)
We had a net income of $3.2 million for the three months ended March 31, 2019 compared to a net loss of $0.5 million for the three months ended March 31, 2018 due primarily to the same factors discussed above.
Adjusted EBITDA
Adjusted EBITDA is defined as net income (loss) before depreciation and amortization, interest expense, income taxes, and also adjusted to add back certain charges and expenses, such as transaction costs and non-cash compensation costs, as these charges and expenses are not considered a part of our core business operations and are not an indicator of ongoing, future company performance.
Adjusted EBITDA is one of the primary metrics used by management to evaluate the financial performance of our business. We present Adjusted EBITDA because we believe it is frequently used by analysts, investors and other interested parties to evaluate companies in our industry. Further, we believe it is helpful in highlighting trends in our operating results, because it excludes, among other things, certain results of decisions that are outside the control of management, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the jurisdictions in which we operate and capital investments.
Adjusted EBITDA is a non-GAAP financial measure and should not be considered as an alternative to operating income or net income as a measure of operating performance or cash flows or as a measure of liquidity. Non-GAAP financial measures are not necessarily calculated the same way by different companies and should not be considered a substitute for or superior to GAAP. Some of these limitations include the following:
| • | Adjusted EBITDA does not reflect the significant interest expense, or the amounts necessary to service interest or principal payments on our senior secured credit facility; |
| • | Adjusted EBITDA does not reflect income tax provision (benefit), and because the payment of taxes is part of our operations, tax expense is a necessary element of our costs and ability to operate; |
| • | Although depreciation and amortization are eliminated in the calculation of Adjusted EBITDA, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any costs of such replacements; |
| • | Adjusted EBITDA does not reflect the noncash component of employee compensation; |
| • | Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters we consider not to be reflective, on a recurring basis, of our ongoing operations; and |
| • | Other companies in our industry may calculate Adjusted EBITDA or similarly titled measures differently than we do, limiting its usefulness as a comparative measure. |
We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only as supplemental information.
Adjusted EBITDA for the three months ended March 31, 2019 was $10.8 million, representing an increase of $2.0 million, or 22%, from $8.8 million for the three months ended March 31, 2018. The increase in Adjusted EBITDA was primarily due to the increase in revenues of $12.4 million less the increase in service charges from agents and banks of $7.7 million as well as increases in other operating expenses to support the growth in our business.
The following table presents the reconciliation of net income (loss), our closest GAAP measure, to Adjusted EBITDA.
| | | Three Months Ended March 31, | |
| (in thousands) | | 2019 | | | 2018 | |
| | | | | | | |
| Net income (loss) | | $ | 3,156 | | | $ | (540 | ) |
| Adjusted for: | | | | | | | | |
| Interest expense | | | 2,071 | | | | 3,284 | |
| Income tax provision (benefit) | | | 1,081 | | | | (207 | ) |
| Depreciation and amortization | | | 3,152 | | | | 3,789 | |
| EBITDA | | | 9,460 | | | | 6,326 | |
| Transaction costs (a) | | | - | | | | 1,461 | |
| Incentive units plan (b) | | | - | | | | 228 | |
| Share-based compensation, 2018 Plan (c) | | | 626 | | | | - | |
| Tender Offer costs (d) | | | 513 | | | | - | |
| Management Fees (e) | | | - | | | | 195 | |
| TCPA Settlement (f) | | | - | | | | 192 | |
| Other employee severance (g) | | | 106 | | | | - | |
| Other charges and expenses (h) | | | 59 | | | | 426 | |
| Adjusted EBITDA | | $ | 10,764 | | | $ | 8,828 | |
| (a) | Represents direct costs for the three months ended March 31, 2018 related to the Merger, which were expensed as incurred and included as “transaction costs” in our condensed consolidated statements of operations and comprehensive income (loss). |
| (b) | In connection with the Stella Point acquisition, Class B, C and D incentive units were granted to our employees by Interwire LLC. The three months ended March 31, 2018 included expense regarding these incentive units, which became fully vested and were paid out upon the Closing Date of the Merger. As a result, employees no longer hold profits interests following the Merger. |
| (c) | Stock options and restricted stock were granted to employees and independent directors of the Company in connection with the completion of the Merger. The Company recorded $0.6 million of expense related to these equity instruments during the three months ended March 31, 2019. |
| (d) | The Company incurred $0.5 million of expenses during the three months ended March 31, 2019 for professional fees in connection with the Tender Offer of the Company’s outstanding warrants. |
| (e) | Represents payments under our management agreement with Stella Point pursuant to which we paid a quarterly fee for certain advisory and consulting services. In connection with the Merger, this agreement was terminated. |
| (f) | Represents payments related to the settlement of a lawsuit during the three months ended March 31, 2018 related to the Telephone Consumer Protection Act (“TCPA”), which includes a $0.1 million settlement payment and $0.1 million in related legal expenses. |
| (g) | Represents $0.1 million of severance costs during the three months ended March 31, 2019 related to departmental changes. |
| (h) | Both periods include loss on disposal of fixed assets, foreign currency (gains) losses and legal expenses considered to be non-recurring. |
Liquidity and Capital Resources
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, debt service, acquisitions, contractual obligations and other commitments. We consider liquidity in terms of cash flows from operations and their sufficiency to fund our operating and investing activities. To meet our payment service obligations at all times we must have sufficient highly liquid assets and be able to move funds on a timely basis.
Our principal sources of liquidity are our cash generated by operating activities and supplemented with borrowings under our revolving credit facility. Our primary cash needs are for day to day operations, to pay interest and principal on our indebtedness, to fund working capital requirements and to make capital expenditures.
We expect to continue to finance our liquidity requirements through internally generated funds and supplemented with borrowings under our revolving credit facility. We believe that our projected cash flows generated from operations, together with borrowings under our revolving credit facility are sufficient to fund our principal debt payments, interest expense, our working capital needs and our expected capital expenditures for the next twelve months.
On November 7, 2018 and further amended on December 7, 2018, the Company entered into a new financing agreement (the “Credit Agreement”) with, among others, certain of its domestic subsidiaries as borrowers, certain other domestic subsidiaries and a group of banking institutions. The Credit Agreement provides for a $35.0 million revolving credit facility, a $90.0 million term loan facility and up to a $30.0 million incremental facility. The Credit Agreement also provides for the issuance of letters of credit, which would reduce availability under the revolving credit facility. The proceeds of the loans were used to repay existing indebtedness under the Senior Secured Credit Facility, for working capital purposes and to pay fees and expenses in connection with the transaction. The maturity date of the Credit Agreement is November 7, 2023.
On March 25, 2019, the Company entered into an Increase Joinder No. 1 to the Credit Agreement (the “Increase Joinder”) under which the Company received $12 million from the incremental facility in the second quarter of 2019. The proceeds of the Increase Joinder will be primarily used to pay for the cash portion of the Tender Offer.
Interest on the term loan facility and revolving credit facility for the Credit Agreement is determined by reference to either LIBOR or a “base rate”, in each case plus an applicable margin of 4.50% per annum for LIBOR loans or 3.50% per annum for base rate loans. The Company is also required to pay a fee on the unused portion of the revolving credit facility equal to 0.35% per annum. The effective interest rates as of March 31, 2019 for the term loan and revolving credit facility were 7.72% and 8.78%, respectively.
The principal amount of the term loan facility for the Credit Agreement must be repaid in consecutive quarterly installments of 5% in year 1, 7.5% in years 2 and 3, 10% in years 4 and 5, in each case on the last day of each quarter, commencing in March 2019 with a final payment at maturity. The loans under the Credit Agreement may be prepaid at any time without payment or penalty.
The Credit Agreement contains covenants that limit the Company’s and its subsidiaries’ ability to, among other things, grant liens, incur additional indebtedness, make acquisitions or investments, dispose of certain assets, make dividends and distributions, change the nature of their businesses, enter into certain transactions with affiliates or amend the terms of material indebtedness. The Credit Agreement allows for redemptions or acquisitions of the Company’s equity interests subject to certain dollar limitations.
The Credit Agreement also contains financial covenants which require the Company to maintain a quarterly minimum fixed charge coverage ratio of 1.25:1.00 and a quarterly maximum consolidated leverage ratio of 3.25:1.00.
As of March 31, 2019, we were in compliance with the covenants of the Credit Agreement.
As of March 31, 2019, we had total indebtedness of $103.9 million, including $88.9 million of borrowings under the term loan facility and $15.0 million in borrowings under the revolving facility and excluding debt origination costs of $2.6 million. There were $20.0 million of additional borrowings available under these facilities as of March 31, 2019.
Our indebtedness could adversely affect our ability to raise additional capital, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk and prevent us from meeting our obligations. See “Risk Factors—Risks Relating to Our Indebtedness—We have a substantial amount of indebtedness, which may limit our operating flexibility and could adversely affect our business, financial condition and results of operations” included in our Annual Report on Form 10-K for the year ended December 31, 2018.
Cash Flows
The following table summarizes the changes to our cash flows for the periods presented:
| | | Three Months Ended March 31, | |
| (in thousands) | | 2019 | | | 2018 | |
| Statement of Cash Flows Data: | | | | | | |
| Net cash provided by operating activities | | $ | 29,215 | | | $ | 18,045 | |
| Net cash used in investing activities | | | (1,443 | ) | | | (1,510 | ) |
| Net cash used in financing activities | | | (16,125 | ) | | | (1,213 | ) |
| Effect of exchange rate changes on cash | | | 63 | | | | 307 | |
| Net increase in cash and restricted cash | | | 11,710 | | | | 15,629 | |
| | | | | | | | | |
| Cash and restricted cash, beginning of the period | | | 73,029 | | | | 59,795 | |
| Cash and restricted cash, end of the period | | $ | 84,739 | | | $ | 75,424 | |
Operating Activities
Net cash provided by operating activities was $29.2 million for the three months ended March 31, 2019, an increase of $11.2 million from net cash provided by operating activities of $18.0 million for the three months ended March 31, 2018. The increase included $7.4 million related to changes in working capital. Additionally, there was more cash being provided from our operating results for the three months ended March 31, 2019, which were positively impacted by the further growth of the business.
Investing Activities
Net cash used in investing activities was $1.4 million for the three months ended March 31, 2019, a decrease of $0.1 million from cash used in investing activities of $1.5 million for the three months ended March 31, 2018. This decrease in cash used was primarily due to lower purchases of property and equipment during the three months ended March 31, 2019.
Financing Activities
Net cash used in financing activities was $16.1 million for the three months ended March 31, 2019, which related to the quarterly payment due on the term loan, as well as repayments, net under the revolving credit facility. Net cash used in financing activities was $1.2 million for the three months ended March 31, 2018, which related to the quarterly payment due on the term loan.
Contractual Obligations
The following table includes aggregated information about contractual obligations that affect our liquidity and capital needs. At March 31, 2019, our contractual obligations over the next several periods were as follows:
| (in thousands) |
| Total |
|
| Less than 1 year |
|
| 1 to 3 years |
|
| 3 to 5 years |
|
| More than 5 years |
|
|
| Debt, principal payments | | $ | 103,875 | | | $ | 5,063 | | | $ | 14,062 | | | $ | 84,750 | | | $ | - | |
| Interest payments | | | 33,044 | | | | 8,033 | | | | 14,689 | | | | 10,322 | | | | - | |
| Non-cancelable operating leases | | | 6,280 | | | | 1,043 | | | | 2,175 | | | | 1,624 | | | | 1,438 | |
| Total | | $ | 143,199 | | | $ | 14,139 | | | $ | 30,926 | | | $ | 96,696 | | | | 1,438 | |
Our condensed consolidated balance sheet reflects $101.3 million of debt as of March 31, 2019, as the principal payment obligations of $103.9 million are gross of unamortized debt origination costs. The above table reflects the principal and interest of the revolver and term loan under the Credit Agreement that will be paid through the maturity of the debt using the rates in effect on March 31, 2019 and assuming no voluntary prepayments of principal.
Non-cancelable operating leases include various office leases, including our office headquarters.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements, including guarantee contracts, retained or contingent interests, certain derivative instruments and variable interest entities that either have, or are reasonably likely to have, a current or future material effect on our condensed consolidated financial statements.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions about future events that affect amounts reported in our condensed consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates its accounting policies, estimates and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions.
Critical accounting policies are those policies that management believes are very important to the portrayal of our financial position and results of operations, and that require management to make estimates that are difficult, subjective or otherwise complex. Our Critical Accounting Policies and Estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2018, for which there were no material changes, except as described below, included:
| • | Accounts Receivable and Allowance for Doubtful Accounts |
| • | Goodwill and Intangible Assets |
On January 1, 2019, the Company adopted the new accounting standard, Revenue from Contracts with Customers, as amended, which modified the existing accounting standards for revenue recognition. Refer to Note 3 of our condensed consolidated financial statements included in this filing for further information about the impact of the adoption of this new accounting standard.
Recent Accounting Pronouncements
Refer to Note 1 of our condensed consolidated financial statements included in this filing for further information on recent accounting pronouncements.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Foreign Currency Risk
We manage foreign currency risk through the structure of the business and an active risk management process. We currently settle with our payers in Latin America primarily by entering into foreign exchange spot transactions with local and foreign currency providers (“counterparties”). The foreign currency exposure on our foreign exchange spot transactions is limited by the fact that all transactions are settled within two business days from trade date. However, foreign currency fluctuations may negatively impact our average exchange gain per transaction.
We are exposed to changes in currency rates as a result of our investments in foreign operations and revenues generated in currencies other than the U.S. dollar. Revenues and profits generated by international operations will increase or decrease because of changes in foreign currency exchange rates. This foreign currency risk is related primarily to our operations in Mexico and Guatemala. Revenues from these operations represent less than 3% of our consolidated revenues for the three months ended March 31, 2019 and 2018. Therefore, a 10% increase or decrease in these currency rates against the U.S. Dollar would result in a minimal change to our overall operating results.
The spot exchange rates as of March 31, 2019 and December 31, 2018 were 19.30 and 19.65 for the Mexico Peso/Dollar and 7.67 and 7.73 for the Guatemala Quetzal/Dollar, respectively. The average exchange rates for the three months ended March 31, 2019 and 2018 were 19.19 and 18.73 for the Mexico Peso/Dollar and 7.71 and 7.37 for the Guatemala Quetzal/Dollar, respectively. Long-term sustained devaluation of the Mexican peso or Guatemalan Quetzal as compared to the U.S. dollar could negatively affect our margins.
Interest Rate Risk
Interest on the term loan facility and revolving credit facility under the Credit Agreement is determined by reference to either LIBOR or a “base rate”, in each case, plus an applicable margin of 4.50% per annum for LIBOR loans or 3.50% per annum for base rate loans. The Company is also required to pay a fee on the unused portion of the revolving credit facility equal to 0.35% per annum. Since interest expense is subject to fluctuation, if interest rates increase, our debt service obligations on such variable rate indebtedness would increase even though the amount borrowed remained the same. Accordingly, an increase in interest rates would adversely affect our profitability.
As of March 31, 2019, we had $88.9 million in outstanding borrowings under the term loan. A hypothetical 1% increase or decrease in the interest rate on our indebtedness as of March 31, 2019 would have increased or decreased cash interest expense on our term loan by approximately $0.9 million per annum.
As of March 31, 2019, we had $15.0 million in outstanding borrowings under our revolving credit facility. A hypothetical 1% increase or decrease in the interest rate on our indebtedness as of March 31, 2019 would have increased or decreased cash interest expense on our revolving credit facility by approximately $0.2 million per annum.
Credit Risk
We maintain certain cash balances in various U.S. banks, which at times, may exceed federally insured limits. We have not incurred any losses on these accounts. In addition, we maintain various bank accounts in Mexico and Guatemala, which are not insured. We have not incurred any losses on these uninsured accounts. To manage our exposures to credit risk with respect to cash balances and other credit risk exposures resulting from our relationships with banks and financial institutions, we regularly review cash concentrations, and we attempt to diversify our cash balances among global financial institutions.
We are also exposed to credit risk related to receivable balances from sending agents. We perform a credit review before each agent signing and conduct ongoing analyses of sending agents and certain other parties we transact with directly. As of March 31, 2019, we also had $1.7 million outstanding of notes receivable from sending agents. Most of the notes are collateralized by personal guarantees from the sending agents and by assets from their businesses.
Our provision for bad debt was approximately $400 thousand for the three months ended March 31, 2019 (0.6% of total revenues) and $43 thousand for the three months ended March 31, 2018 (0.1% of total revenues) as recoveries were higher last year.
| ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules, regulations and related forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within an organization have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met.
As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of our disclosure controls and procedures as of March 31, 2019. Based on their evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective and operating to provide reasonable assurance that material information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such material information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure, as of March 31, 2019.
Changes in Internal Control Over Financial Reporting
During the most recently completed fiscal quarter, there have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Reference is made to Note 13–Commitments and Contingencies in the Notes to the Unaudited Condensed Consolidated Financial Statements of International Money Express, Inc. contained elsewhere in this Quarterly Report on Form 10–Q for information regarding certain legal proceedings to which we are a party.
There have been no material changes to our principal risks that we believe are material to our business, results of operations and financial condition, from the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
Not applicable.
None.
| Amendment No. 1 to Warrant Agreement, dated April 29, 2019, by and between the International Money Express, Inc. and Continental Stock Transfer & Trust Company (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 30, 2019). |
| | |
| Increase Joinder No. 1 to Credit Agreement, dated March 25, 2019, by and among International Money Express, Inc., as Holdings, International Money Express Sub 2, LLC, as Intermediate Holdings, Intermex Holdings, Inc., as the Term Borrower, Intermex Wire Transfer, LLC, as the Revolver Borrower, the other guarantors from time to time party thereto, the lenders from time to time party thereto and KeyBank National Association, as the Administrative Agent (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on April 30, 2019). |
| | |
| Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002- Chief Executive Officer. |
| | |
| Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002- Chief Financial Officer. |
| | |
| Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: May 15, 2019 |
| |
| International Money Express, Inc. |
| |
| By: | /s/ Robert Lisy | |
| | Robert Lisy |
| | Chief Executive Officer and President |
| | |
| Date: May 15, 2019 |
| International Money Express, Inc. |
| |
| By: | /s/ Tony Lauro II | |
| | Tony Lauro II |
| | Chief Financial Officer |
