International Money Express, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The company provides money-transfer services, primarily from the U.S. to Latin America and the Caribbean, through agent locations and digital channels. On July 26, 2018, FinTech Acquisition Corp. II completed its merger with Intermex; the transaction was accounted for as a reverse recapitalization. Comparisons with 2017 nine-month results combine successor and predecessor periods and are not fully comparable.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 |
|---|---|---|
| Revenue | $72.5 million | $56.4 million |
| Operating income (loss) | ($2.4 million) | $3.8 million |
| Net income (loss) | ($13.4 million) | ($0.6 million) |
| Diluted loss per share | ($0.43) | ($0.03) |
| Adjusted EBITDA (non-GAAP) | $13.4 million | $8.9 million |
- Q3 revenue increased 29%, with transaction volume up 28%; management attributed growth largely to agent-network expansion. Wire and money-order fees were $61.3 million and foreign-exchange revenue was $10.7 million.
- Q3 operating expenses were $74.9 million, or 104% of revenue, versus $52.5 million, or 93%, a year earlier. Agent and bank charges remained 67% of revenue. Q3 operating margin was approximately negative 3.3%.
- Q3 net loss included a $7.6 million income-tax provision despite a pretax loss of $5.8 million, principally reflecting nondeductible share-based compensation and transaction costs. Merger-related transaction costs were $6.3 million; accelerated vesting of incentive units also contributed to compensation expense.
- For the nine months, revenue was $198.8 million, net loss was $12.1 million, and Adjusted EBITDA was $35.6 million. Management reported Adjusted EBITDA growth of 44% against combined 2017 successor and predecessor periods.
- At September 30, cash was $82.5 million; current assets were $172.0 million and current liabilities $110.3 million. Gross debt was $112.2 million, including $20.0 million drawn on the revolving facility; no additional borrowing capacity was available under that facility at quarter-end.
- Nine-month operating cash flow was $30.5 million, capital expenditures were $3.6 million, and financing cash outflow was $3.6 million. Cash and restricted cash totaled $83.1 million at period-end.
Material changes and subsequent financing
- Revenue growth reflected higher transaction volume: management reported agent-network growth of 26% year over year at quarter-end. Service charges rose with transaction volume, while their proportion of revenue was unchanged.
- Q3 salaries and benefits rose to $11.0 million, including approximately $4.2 million of merger-related share-based compensation and costs associated with becoming a public company. Other SG&A also increased with public-company and warrant-registration expenses.
- On November 7, 2018, after quarter-end, the company refinanced its existing debt with a credit agreement comprising a $90 million term loan, a $35 million revolver and up to $30 million of incremental capacity, maturing in 2023. LIBOR margins declined to 4.50% for term and revolving loans. The refinancing triggered an approximately $2.0 million prepayment penalty and a $3.7 million write-off of old debt costs, to be recorded as Q4 interest expense.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management said operating cash flow and revolver availability were expected to cover obligations and anticipated capital spending over the next 12 months; that statement preceded the November refinancing.
- Management cited competition, agent and banking relationships, regulatory compliance, cybersecurity and fraud, economic and political instability, migration patterns, currency devaluation, and potential changes to remittance rules as risks. Sustained peso or quetzal devaluation could weigh on revenue and profitability.
- The new credit agreement includes financial covenants, including a minimum fixed-charge coverage ratio of 1.25:1.00 and maximum consolidated leverage ratio of 3.25x, as well as restrictions on additional debt, liens, distributions and other actions.
- Management did not expect ordinary-course litigation or regulatory matters to have a material adverse effect. The company reported a TCPA lawsuit settlement and related costs in the nine-month period.
- Nasdaq confirmed the common stock would remain listed, but the company’s warrants were delisted effective October 31, 2018 for failure to meet warrant listing requirements. Management reported that previously identified material weaknesses in intangible amortization and deferred-tax analysis had been remediated and that disclosure controls were effective at a reasonable level of assurance.
Investor verification priorities
- Assess the recurring earnings picture apart from merger costs, accelerated incentive-unit vesting, and the unusually large tax provision; review the company’s Adjusted EBITDA reconciliation and its limitations.
- Verify the terms, debt balances, covenant calculations and borrowing availability under the November 7 refinancing, including the Q4 penalty and debt-cost write-off.
- Monitor transaction-volume and agent-network growth, foreign-exchange revenue per transfer, and the ability to maintain agent and banking relationships.
- Review the continuing impact of public-company costs, share-based compensation, and potential dilution from warrants and equity awards.
- Track Nasdaq warrant delisting, regulatory and litigation developments, and management’s remediation of prior control weaknesses.