Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As used herein, the terms “Ebix,” “the Company,” “we,” “our” and “us” refer to Ebix, Inc., a Delaware corporation, and its consolidated subsidiaries as a combined entity, except where it is clear that the terms mean only Ebix, Inc.
Safe Harbor for Forward-Looking Statements—This Form 10-Q and certain information incorporated herein by reference contains forward-looking statements and information within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. This information includes assumptions made by, and information currently available to management, including statements regarding future economic performance and financial condition, liquidity and capital resources, acceptance of the Company’s products by the market, and management’s plans and objectives. In addition, certain statements included in this and our future filings with the SEC, in press releases, and in oral and written statements made by us or with our approval, which are not statements of historical fact, are forward-looking statements. Words such as “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “seeks,” “plan,” “project,” “continue,” “predict,” “will,” and other words or expressions of similar meaning are intended by the Company to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements are found at various places throughout this report and in the documents incorporated herein by reference. These statements are based on our current expectations about future events or results and information that is currently available to us, involve assumptions, risks, and uncertainties, and speak only as of the date on which such statements are made.
Our actual results may differ materially from those expressed or implied in these forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in Part I, Item 1A, “Risk Factors” in our Form 10-K for the year ended December 31, 2018 which is incorporated by reference herein, and in Part II, Item 1A "Risk Factors" in this Form 10-Q, including but not limited to: the willingness of independent insurance agencies to outsource their computer and other processing needs to third parties; pricing and other competitive pressures and the Company’s ability to gain or maintain share of sales as a result of actions by competitors and others; changes in estimates in critical accounting judgments; changes in or failure to comply with laws and regulations, including accounting standards, taxation requirements (including tax rate changes, new tax laws and revised tax interpretations) in domestic or foreign jurisdictions; exchange rate fluctuations and other risks associated with investments and operations in foreign countries (particularly in India, Australia, Asia, Latin America, and Europe wherein we have significant and/or growing operations); fluctuations in the equity markets, including market disruptions and significant interest rate fluctuations, which may impede our access to, or increase the cost of, external financing; and international conflict, including terrorist acts. The Company undertakes no obligation to update any such factors, or to publicly announce the results of, or changes to any of the forward-looking statements contained herein to reflect future events, developments, changed circumstances, or for any other reason.
Other important factors that could cause actual results to differ materially from those in our specific forward-looking statements included in this Form 10-Q include, but are not limited to, the following:
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Our ability to efficiently and effectively integrate acquired business operations, as discussed in Note 3 of the Condensed Notes to the Condensed Consolidated Financial Statements pertaining to the business acquisitions we have made;
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Note 4 of the Notes to the Condensed Consolidated Financial Statements, "Debt with Commercial Bank" and our future liquidity needs discussed under “Liquidity and Financial Condition” regarding our ability to generate cash from operating activities and any declines in our credit ratings or financial condition which could restrict our access to the capital markets or materially increase our financing costs;
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•
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Note 5 of the Notes to the Condensed Consolidated Financial Statements, “Commitments and Contingencies”, and “Contractual Obligations” in Management's Discussion and Analysis of Financial Condition and Results of Operation ("MD&A") regarding uncertainties pertaining to the actual ultimate cost of our legal contingencies;
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•
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MD&A and the analysis of the nine-month revenue trends regarding actual realized level of demand for our products during the immediately foreseeable future, and fluctuations thereof.
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Readers should carefully review the disclosures and the risk factors described in this and other documents we file from time to time with the SEC, including future reports on Forms 10-Q and 8-K, and any amendments thereto. You may obtain our SEC filings at our website, www.ebix.com under the “Investor Information” section, or over the Internet at the SEC’s website, www.sec.gov.
The following information should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part 1, Item 1 of this Quarterly Report, and the audited consolidated financial statements and notes thereto and MD&A contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Company Overview
Ebix, Inc., and its subsidiaries, (“Ebix” or the “Company”) is a leading international supplier of on-demand infrastructure exchanges to the insurance, financial, and healthcare industries. In the insurance sector, the Company’s main focus is to develop and deploy a wide variety of insurance and reinsurance exchanges on an on-demand basis, while also providing software-as-a-service ("SaaS") enterprise solutions in the area of customer relationship management ("CRM"), front-end and back-end systems, outsourced administrative and risk compliance. The Company's products feature fully customizable and scalable on-demand software designed to streamline the way insurance professionals manage distribution, marketing, sales, customer service, and accounting activities. With a "Phygital” strategy that combines physical distribution outlets in many Association of Southwest Asian Nations ("ASEAN") countries to an Omni-channel online digital platform, the Company’s EbixCash Financial exchange portfolio of services encompasses dominance in the areas of domestic and international money remittance, foreign exchange ("Forex"), travel, pre-paid gift cards, utility payments, lending, and wealth management in India and other Asian markets.
Ebix's goal is to be the leading powerhouse of insurance and financial transactions in the world. The Company’s technology vision is to focus on the convergence of all channels, processes and entities in a manner such that data seamlessly flows once a data entry has initially been made. Ebix strives to work collaboratively with clients to develop innovative technology strategies and solutions that address specific business challenges and requirements. Ebix combines the newest technologies with its capabilities in consulting, systems design and integration, IT and business process outsourcing, applications software, and web and application hosting to meet the individual needs of organizations.
Offices and Geographic Information
The Company’s corporate headquarters, including substantially all of our corporate administration and finance functions, is located in Johns Creek, Georgia where we own a commercial office building. In addition, the Company and its subsidiaries lease office space primarily for sales and operations support in Salt Lake City, Utah, Pittsburgh, Pennsylvania, Pasadena, California, Birmingham, Alabama, Irvine, California and Phoenix, Arizona. Additionally, the Company leases office space in New Zealand, Australia, Singapore, Dubai, Brazil, Canada, and the United Kingdom for support, operations and sales offices. The Company also owns five facilities in India. The Indian facilities provide software development and other technical and business process outsourcing services. In these operating offices, Ebix employs insurance and technology professionals who provide products, services, support and consultancy to thousands of customers across six continents.
Results of Operations — Three Months Ended September 30, 2019 and 2018
Operating Revenue
The Company derives its revenues primarily from subscription and transaction fees pertaining to services delivered over our exchanges or from our application service provider "ASP" platforms, fees for business process outsourcing services, and fees for software development projects including associated fees for consulting, implementation, training, and project management provided to customers with installed systems, e-governance solutions to governmental agencies in the health and education sectors, as well as foreign exchange, remittance (both inward and outward) and related services, including travel, from our new financial exchange. International revenue accounted for 69.4% and 62.4% of the Company’s total revenue for the three months ended September 30, 2019 and 2018, respectively.
Ebix’s revenue streams come from three product/service channels. Presented in the table below is the breakout of our revenues for each of those product/service channels for the three and nine months ended September 30, 2019 and 2018.
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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(In thousands)
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2019
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2018
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2019
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2018
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EbixCash Exchanges
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$
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82,085
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$
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60,341
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$
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238,770
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$
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151,605
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Insurance Exchanges
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47,385
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45,985
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141,993
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142,303
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Risk Compliance Solutions
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17,763
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22,317
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53,669
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67,591
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Totals
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$
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147,233
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$
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128,643
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$
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434,432
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$
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361,499
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In the table above for the three months ending September 30, 2019 and 2018 respectfully, there is $3.8 million, and $2.1 million of Insurance Exchange revenues derived in India that are being reported within the EbixCash Exchange channel only above. Similarly, for the nine months ending September 30, 2019 and 2018 respectfully, there is $13.1 million, and $2.1 million of Insurance Exchange revenues derived in India that are being reported within the EbixCash Exchange channel only above.
During the three months ended September 30, 2019 our total operating revenues increased $18.6 million or 14%, to $147.2 million as compared to $128.6 million during the third quarter of 2018. The year-over-year revenues primarily increased as a result of the growth in the EbixCash segment as well as the acquisitions in the travel, foreign exchange, and software solutions sectors during the last twelve months offset by reductions in revenues from the insurance consulting business, EbixHealth JV, and e-governance service contracts executed within the Ebix Vayam Limited JV for Bharat Sanchar Nigam Limited "BSNL" (a leading public sector undertaking in the telecommunication sector in India). Reported revenues were impacted by the continuing weakening in the foreign currencies in which we conduct operations (particularly in India, Australia, and United Kingdom) as compared to the strengthening of the U.S. dollar. Specifically, the adverse impact from fluctuations of the exchange rates for the foreign currencies in the countries in which we conduct operations, in the aggregate, reduced reported revenues by $1.2 million for the three months ended September 30, 2019.
With respect to business acquisitions completed during the years 2019 and 2018 on a pro forma basis, as disclosed in the pro forma financial information table in Note 3, combined revenues increased 5.2% for the three months ending September 30, 2019 versus the same periods in 2018. The 2019 and 2018 pro forma financial information assumes that all business acquisitions made during this period were made on January 1, 2018, whereas the Company's reported condensed consolidated financial statements for the three months ended September 30, 2019 only includes the revenues from these businesses since the effective date that they were acquired or consolidated by Ebix, being February 2018 for Transcorp, April 2018 for Centrum, April 2018 for Smartclass, July 2018 for Indus, July 2018 for Mercury, July 2018 for Leisure, August 2018 for Miles, October 2018 for Routier, October 2018 for Business Travels, October 2018 for Aha Taxis, December 2018 for Pearl, Weizmann, January 2019 for Zillious, January 2019 for Essel and August 2019 for Wallstreet Canada.
Revenues for the three months ended September 30, 2019 and 2018 actual and proforma include $198 thousand and $2.6 million revenue, respectively, from the e-governance business. The company has consciously decided to disengage in the e-governance business, leading to an actual and pro forma year-over-year decrease of revenue of $2.4 million in this revenue source.
The above referenced pro forma information and the relative comparative change in pro forma and reported revenues are based on the following premises:
•2019 and 2018 pro forma revenue contains actual revenue of the acquired entities before acquisition date, as reported by the sellers, as well as actual revenue of the acquired entities after acquisition, whereas the reported growth in revenues of the acquired entities after acquisition date are only reflected for the period after their acquisition.
•Revenue billed to existing clients from the cross selling of acquired products has been assigned to the acquired section of our business.
•Any existing products sold to new customers obtained through a newly acquired customer base are assigned to the acquired section of our business.
•Pro forma revenues do not include post acquisition revenue reductions as a result of discontinuation of any product lines and/or customer projects by Ebix in line with the Company's initiatives to maximize profitability.
Cost of Services Provided
Costs of services provided, which includes costs associated with customer support, consulting, implementation, and training services, increased $12.2 million or 28%, to $55.2 million in the third quarter of 2019 as compared to $43.0 million in the third quarter of 2018. The increase in the Company's costs of services provided is due primarily to additional personnel, consulting, customer support, and merchant bank service fee costs associated with the Company's India business acquisitions over the last few years in the travel, foreign exchange, and software solutions sectors offset by reductions in our U.S. consulting salary costs, customer support costs in our EbixHealth JV, and a reduction of our e-governance service contracts executed within the Ebix Vayam Limited JV.
Product Development Expenses
The Company’s product development efforts are focused on the development of new technologies for insurance carriers, brokers and agents, and the development of new data exchanges for use in the insurance industry, and across the travel and currency exchange sectors. Product development expenses increased $235 thousand or 2% to $11.2 million during the third quarter of 2019 as compared to $11.0 million during the third quarter of 2018 primarily due to increased employee-related insurance costs in our expanding India operations.
Sales and Marketing Expenses
Sales and marketing expenses decreased $437 thousand or 9%, to $4.3 million in the third quarter of 2019 as compared to $4.7 million in the third quarter of 2018 primarily due to a reduction in new business promotion expenses for our India Operations.
General and Administrative Expenses
General and administrative expenses increased $18.7 million or 66% to $46.9 million in the third quarter of 2019 as compared to $28.2 million in the third quarter of 2018. As a precautionary measure during the recent quarter, management determined the need for and recognized a $12.1 million reserve against the Company’s $34.9 million of receivables that are due from a public sector entity in India and were billed during the 2016 through 2019 operating periods. Payment of these receivables has been delayed due to liquidity issues at BSNL. The Government of India has recently approved funding to BSNL and he Company expects the accounts to be collectible once the Government funding reaches BSNL. During the past quarter the Company also incurred approximately $5.5 million of additional facility costs, commission expense associated with the Company's continued expansion of EbixCash in India, and audit and legal expenses.
Amortization and Depreciation Expenses
Amortization and depreciation expenses increased $1.1 million or 44% to $3.6 million in the third quarter of 2019 as compared to $2.5 million in the third quarter of 2018 primarily due to amortization costs associated with the Company's 2018 India acquisitions.
Interest Income
Interest income decreased $4 thousand or 4% to $99 thousand in the third quarter of 2019 as compared to $103 thousand in the third quarter of 2018, primarily due to decreased balances in interest bearing accounts.
.Interest Expense
Interest expense increased $3.5 million or 47%, to $11.0 million in the third quarter of 2019 as compared to $7.5 million in the third quarter of 2018. Interest expense increased primarily due to the increase in the average outstanding balance on our commercial banking credit facilities, which increased 17% to $721.7 million during Q3 2019 from $618.1 million during Q3 of 2018, as well as an increase in the underlying interest rate which increased to 4.97% for Q3 2019 versus 4.63% for Q3 2018. Additionally, interest expense increased due to increased balances in the working capital facility of our EbixCash operations in India which carry interest rates 9% to 10%.
Foreign Currency Exchange Gain (Loss)
Net foreign currency exchange loss for the three months ended September 30, 2019 in the amount of $641 thousand consists of $401 thousand of losses realized upon the settlement of receivables or payables and re-measurement of cash balances denominated in currencies other than the functional currency of the respective operating division recording the instrument and $240 thousand of unrealized losses pertaining to the re-measurement of outstanding receivables or payables denominated in currencies other than the functional currency of the respective operating division recording the instrument.
Income Taxes
The Company recorded net income tax benefit of $217 thousand (1.46%) during the third quarter of 2019 which included gross tax benefit of $1.16 million from certain discrete items. The income tax expense exclusive of discrete items was $947 thousand (6.38%). Our tax expense and effective tax rate has decreased year over year due to recording of one time Transition tax liability last year resulting from the enactment of the Tax Cuts and Jobs Act (“TCJA”). The Company expects its full year effective tax rate to be in the range of 6% to 7%.
Results of Operations — Nine Months Ended September 30, 2019 and 2018
Operating Revenue
During the nine months ended September 30, 2019 our total operating revenues increased $72.9 million or 20%, to $434.4 million as compared to $361.5 million during the same period in 2018. The year-over-year revenues primarily increased as a result of the growth in the EbixCash segment as well as the acquisitions made bu Ebix in the last twelve months, partially offset by reductions in revenues from our insurance consulting business, our EbixHealth JV and our e-governance service contracts executed within the Ebix Vayam Limited JV for BSNL. Reported revenues were impacted by the continuing weakening in the foreign currencies in which we conduct operations (particularly in India, Australia, and United Kingdom) as compared to the strengthening of the U.S. dollar. Specifically, the adverse impact from fluctuations of the exchange rates for the foreign currencies in the countries in which we conduct operations, in the aggregate reduced reported revenues by $9.4 million for the nine months ended September 30, 2019. International revenue accounted for 68.7% and 59.4% of the Company’s total revenue for the nine months ended September 30, 2019 and 2018, respectively.
With respect to business acquisitions completed during the years 2019 and 2018 on a pro forma basis, as disclosed in the pro forma financial information table in Note 3, combined revenues decreased (0.8)% for the nine months ending September 30, 2019 versus the same periods in 2018. The 2019 and 2018 pro forma financial information assumes that all business acquisitions made during this period were made on January 1, 2018, whereas the Company's reported condensed consolidated financial statements for the nine months ended September 30, 2019 only includes the revenues from these businesses since the effective date that they were acquired or consolidated by Ebix, being February 2018 for Transcorp, April 2018 for Centrum, April 2018 for Smartclass, July 2018 for Indus, July 2018 for Mercury, July 2018 for Leisure, August 2018 for Miles, October 2018 for Routier, October 2018 for Business Travels, October 2018 for Wahh Taxis, December 2018 for Pearl, Weizmann, January 2019 for Zillious, January 2019 for Essel and August 2019 for Wallstreet Canada.
Revenues for the nine months ended September 30, 2019 and 2018 actual and proforma include $444 thousand and $12.8 million revenue, respectively, from the e-governance business. The company has consciously decided to disengage in the e-governance business, leading to an actual and proforma year over year decrease of revenue of $12.4 million this revenue outlet.
The above referenced pro forma information and the relative comparative change in pro forma and reported revenues are based on the following premises:
•2019 and 2018 pro forma revenue contains actual revenue of the acquired entities before acquisition date, as reported by the sellers, as well as actual revenue of the acquired entities after acquisition, whereas the reported growth in revenues of the acquired entities after acquisition date are only reflected for the period after their acquisition.
•Revenue billed to existing clients from the cross selling of acquired products has been assigned to the acquired section of our business.
•Any existing products sold to new customers obtained through a newly acquired customer base are assigned to the acquired section of our business.
•Pro forma revenue does not include post acquisition revenue reductions as a result of discontinuation of any product lines and/or customer projects by Ebix in line with the Company's initiatives to maximize profitability.
Cost of Services Provided
Costs of services provided, which includes costs associated with maintenance, customer support, call center, consulting, implementation and training services increased $25.9 million or 21%, to $152.1 million during the nine months ended September 30, 2019 as compared to $126.1 million during the same period in 2018. The increase in the Company's costs of services provided is due primarily to additional personnel, consulting, customer support, and merchant bank service fee costs associated with the Company's India business acquisitions in the travel, foreign exchange, and software solutions sectors partially offset by reductions in our U.S. consulting salary costs, costs in our EbixHealth JV, and a reduction of our e-governance service contracts executed within the Ebix Vayam Limited JV.
Product Development Expenses
The Company’s product development efforts are focused on the development of new technologies for insurance carriers, brokers and agents, and the development of new data exchanges for use in the insurance industry, and across the travel and currency exchange sectors. Product development expenses increased $5.8 million or 21%, to $33.9 million during the nine months ended September 30, 2019 as compared to $28.1 million during the same period in 2018. This increase is primarily due to costs associated with the operations of the recent acquisition of Indus and Miles.
Sales and Marketing Expenses
Sales and marketing expenses increased $1.4 million or 10%, to $14.9 million during the nine months ended September 30, 2019 as compared to $13.5 million during the same period in 2018 primarily due to promotional activities in support of our rapidly growing businesses in India.
General and Administrative Expenses
Reported general and administrative expenses increased $26.8 million or 36% to $101.2 million during the nine months ended September 30, 2019 as compared to $74.4 million during the same period in 2018. In Q3 2019, the Company booked a $12.1 million bad debt reserve as a precautionary measure, against the receivables due from a public sector entity, BSNL in India. Payment of these receivables has been delayed due to liquidity issues at BSNL. The Government of India has recently approved funding to BSNL and the Company expects the accounts to be collectible once the Government funding reaches BSNL. During the past nine months the Company also incurred approximately $27 million of additional personnel, commissions and facility costs associated with the India business acquisitions during the recent few years in the foreign exchange, travel and e-learning and software solutions sectors. These costs increases were partially offset by a $(16.5) million reduction of acquisition earn-out accruals year over year for ItzCash, Indus and Wdev.
Amortization and Depreciation Expenses
Amortization and depreciation expenses increased $3.1 million or 39% to $11.0 million during the nine months ended September 30, 2019 as compared to $7.9 million during the same period in 2018 primarily due to amortization costs associated with the Company's 2018 India acquisitions.
Interest Income
Interest income increased $269 thousand or 87% to $578 thousand during the nine months ended September 30, 2019 as compared to $309 thousand during the same period in 2018 primarily due to increased balances in interest bearing accounts.
Interest Expense
Interest expense increased $14.5 million or 80% to $32.6 million during the nine months ended September 30, 2019 as compared to $18.1 million during the same period in 2018. Interest expense increased primarily due to the increase in the average outstanding balance on our commercial banking credit facilities, which increased 41% to $724.2 million during the nine months ended September 30, 2019, from $514.0 million during the nine months ending September 30 2018, as well as an increase in the underlying average interest rate which increased to an average of 5.03% during the nine months ending September 30, 2019 versus 4.4% for the same nine month period in 2018. Additionally, interest expense increased due to increased balances in the working capital facility of our EbixCash operations in India which carry interest rates 9% to 10%.
Foreign Currency Exchange Gain (Loss)
Net foreign currency exchange losses for the nine months ended September 30, 2019 in the amount of $495 thousand consists of $174 thousand of losses realized upon the settlement of receivables or payables and re-measurement of cash balances denominated in currencies other than the functional currency of the respective operating division recording the instrument, and $321 thousand of unrealized losses pertaining to the re-measurement of outstanding receivables or payables denominated in currencies other than the functional currency of the respective operating division recording the instrument.
Income Taxes
The Company recorded net income tax benefit of $297 thousand (.44%) during the nine months ended September 30, 2019 which included a gross tax benefit of $5.3 million from certain discrete items related to deferred tax true-ups pertaining to to tax the carrying value of assets versus the carrying value as per the accounting books. The income tax expense exclusive of discrete items was $5.03 million (7.38%) during the nine months ended September 30, 2019. Our tax expense and effective tax rate has decreased year-over-year due to recording of one time Transition tax liability last year resulting from the enactment of the TCJA. The Company expects its full year effective tax rate to be in the range of 6% to 7%.
Liquidity and Capital Resources
The Company's ability to generate significant cash flows from ongoing operating activities is one of its fundamental financial strengths. Our principal sources of liquidity are the cash flows provided by the Company's operating activities, the Company's commercial banking credit facility, and cash and cash equivalents on hand. Due to the effect of temporary or timing
differences resulting from the differing treatment of items for tax and accounting purposes (including the treatment of net operating loss carry-forwards and minimum alternative tax obligations in the U.S., United Kingdom, and India), future cash outlays for income taxes are expected to exceed income tax expense. We intend to utilize cash flows generated by our operations, in combination with our commercial bank credit facility, and the possible issuance of additional equity or debt securities, to fund capital expenditures and organic growth initiatives, to make strategically accretive business acquisitions, and to re-purchase shares of our common stock as market conditions warrant.
We believe that anticipated cash flows provided by our operating activities, together with current cash and cash equivalent balances, access to our credit facilities, and access to the capital markets, if required and available, will be sufficient to meet our projected cash requirements for the foreseeable future, although any projections of future cash needs, cash flows, and the condition of the capital markets in general, as to the availability of debt and equity financing, are subject to substantial uncertainty.
Our cash and cash equivalents were $124.2 million and $147.8 million at September 30, 2019 and December 31, 2018, respectively. The $4.2 million of restricted fiduciary funds is associated with the EbixHealth JV and pertains to un-remitted insurance premiums and claim funds established for the benefit of various carriers which are held in a fiduciary capacity until disbursed.
The free flow of cash from certain countries where we hold significant cash balances may be subject to repatriation tax effects and other restrictions. Specifically the repatriation of earnings from some of our foreign subsidiaries could result in the application of withholding taxes at that foreign source. The approximate cash, cash equivalents, short-term investments, and restricted cash balances held in our domestic U.S. operations and each of our foreign subsidiaries as of November 11, 2019 are presented in the table below (figures denominated in thousands):
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Country/Region
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Cash, Restricted Cash and ST investments
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India
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$
|
87,682
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Philippines
|
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7,880
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|
United States
|
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6,352
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|
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Australia
|
|
4,815
|
|
|
Indonesia
|
|
3,128
|
|
|
Europe
|
|
2,213
|
|
|
Singapore
|
|
1,842
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|
|
Latin America
|
|
949
|
|
|
United Arab Emirates
|
|
687
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|
|
New Zealand
|
|
392
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|
|
Canada
|
|
246
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|
|
Mauritius
|
|
39
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|
|
Total
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$
|
116,225
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Our current ratio increased to 1.50 at September 30, 2019 from 1.35 at December 31, 2018 and our working capital position increased to $126.7 million at September 30, 2019 from $110.0 million at the end of 2018.
Business Combinations
The Company seeks to execute accretive business acquisitions in combination with organic growth initiatives as part of its comprehensive business growth and expansion strategy. The Company looks to acquire businesses that are complementary to Ebix's existing products and services.
During the nine months ended September 30, 2019, the Company completed three business acquisitions, as follows:
Effective August 23, 2019, Ebix acquired Canada based WallStreet Canada foreign exchange and outward remittance markets for approximately $2.1 million of upfront consideration plus net working capital.
Effective January 1, 2019, Ebix acquired the assets of India based Essel Forex for approximately $8.7 million, of which $721 thousand remains unpaid, plus possible future contingent earn-out payments of up to $721 thousand based on earned revenues. Ebix funded the entire transaction in cash, using its internal cash reserves. Essel Forex has been one of the five largest foreign exchange providers in India with a wide spectrum of related products including sales of all major currencies, travelers’ checks, demand drafts, remittances, money transfers and prepaid cards primarily for the corporate clients. Besides being a foreign exchange business partner to leading banks such as ICICI, Axis, Indus Ind, Yes and HDFC Bank, Essel Forex has been associated with Western Union and MoneyGram for inward money transfers.
Effective January 1, 2019, Ebix acquired an 80% controlling stake in India based Zillious for $10.1 million plus possible future contingent earn-out payments of up to $2.2 million based on earned revenues. Zillious is an on-demand SaaS travel technology solution, with market leadership in the corporate travel segment in India.
During the twelve months ended December 31, 2018, the Company completed thirteen business acquisitions, as follows:
Effective December 1, 2018, Ebix acquired 74.84% controlling stake in India based Weizmann for $63.1 million and also made a time bound public offer to Weizmann's public shareholders acquire the remaining 25.16% shares for approximately $21.1 million. The $77.35 million reported on the cash flows used for investing activities includes a decrease in previously reported cash acquired of $1.5 million and $12.7 million for an additional 15.1% of the publicly-held Weizmann Forex shares in the second quarter of 2019. As of September 30, 2019, Ebix has approximately 89.94% of the controlling stake in India based Weizmann.
Effective December 1, 2018, Ebix acquired the assets of India based Pearl, a provider of a comprehensive range of B2B and B2C travel services, under the brand name Sastiticket, ranging from domestic and international ticketing, incentives travel, leisure products, luxury holidays, and travel documentation for $3.4 million and it has been integrated with Ebix Travels’ operations, realizing operational synergies and eliminating certain redundancies.
Effective December 1, 2018, Ebix acquired India based Lawson, a B2B provider of travel services and international ticketing, for $2.7 million and has been integrated with Ebix Travels’ operations to realize operational synergies and a wider country wide footprint.
Effective October 1, 2018, Ebix acquired a 70% stake in India based AHA Taxis, a platform for on-demand inter-city cabs in India for $382 thousand. Consideration of $71 thousand was paid during the fourth quarter of 2018 and $214 thousand during the first quarter of 2019, and $72 thousand remains to be paid. AHA focuses its attention on corporate and consumer inter-city travel primarily with a network of thousands of registered AHA Taxis.
Effective October 1, 2018, Ebix acquired a 67% stake in India based Routier, a marketplace for trucking logistics for $413 thousand.
Effective October 1, 2018, Ebix acquired the assets of India based Business Travels for $1.1 million and it has been integrated with Ebix Travels’ operations to expand the wholesale travel and consolidation business. Consideration of $414 thousand was paid during the fourth quarter of 2018 and $689 thousand during the first quarter of 2019.
Effective August 1, 2018, Ebix acquired India based Miles, a provider of on-demand software on wealth and asset management to banks, asset managers and wealth management firms, for approximately $18.3 million, plus possible future contingent earn-out payments of up to $8.3 million based on earned revenues over the subsequent twenty-four month period following the effective date of the acquisition. The Company has determined that the fair value of the contingent earn-out consideration is $5.5 million as of September 30, 2019.
Effective July 1, 2018, Ebix acquired India based Leisure for approximately $2.1 million, with the goal of creating a new travel division to focus on a niche segment of the travel market.
Effective July 1, 2018, Ebix acquired India based Mercury Travels for approximately $13.2 million, with the goal of creating a new travel division to focus on a niche segment of the travel market. Mercury’s Forex business was integrated into EbixCash’s existing CDL Forex exchange business.
Effective July 1, 2018, Ebix acquired Indus, a global provider of enterprise lending software solutions to financial institutions, captive auto finance and telecom companies, for approximately $22.9 million plus possible future contingent earn-out payments of up to $5.0 million based on earned revenues over the subsequent twenty-four month period following the effective
date of the acquisition. The Company has determined that the fair value of the contingent earn-out consideration is $1.7 million as of September 30, 2019.
Effective April 1, 2018, Ebix acquired India based Centrum, a leader in India’s foreign exchange and outward remittance markets for approximately $179.5 million. This acquisition was funded June 2018. Centrum was integrated into Ebix’s Financial Exchange EbixCash offering in India and abroad, with key Centrum business executives becoming an integral part of the combined EbixCash senior leadership.
Effective April 1, 2018, Ebix acquired a 60% stake in India based Smartclass , a leading e-learning Company engaged in the business of education services, development of education products, and implementation of education solutions for K-12 Schools. Under the terms of the agreement Ebix paid $8.6 million in cash for its stake in Smartclass.
Effective February 1, 2018, Ebix acquired Transcorp for upfront cash consideration in the amount of $7.25 million, of which $6.55 million was funded with cash and $700 thousand assumed in liabilities.
A significant component of the purchase price consideration for many of the Company's business acquisitions is a potential subsequent cash earn-out payment based on reaching certain specified future revenue targets. The terms for the contingent earn-out payments in most of the Company's business acquisitions typically address the GAAP recognizable revenues achieved by the acquired entity over a one, two, and/or three year period subsequent to the effective date of their acquisition by Ebix. These terms typically establish a minimum threshold revenue target with achievement of revenues recognized over that target being awarded in the form of a specified cash earn-out payment. The Company applies these terms in its calculation and determination of the fair value of contingent earn-out liabilities for purchased businesses as part of the related valuation and purchase price allocation exercise for the corresponding acquired assets and liabilities. The Company recognizes these potential obligations as contingent liabilities and are reported as such on its Condensed Consolidated Balance Sheets. As discussed in more detail in Note 1, to the Notes to Condensed Consolidated Financial Statements, these contingent consideration liabilities are recorded at fair value on the acquisition date and are re-measured quarterly based on the then assessed fair value and adjusted if necessary. As of September 30, 2019, the total of these contingent liabilities was $10.5 million, of which $9.3 million is reported in long-term liabilities, and $1.3 million is included in current liabilities in the Company's Condensed Consolidated Balance Sheet. As of December 31, 2018 the total of these contingent liabilities was $25.0 million, of which $11.2 million was reported in long-term liabilities, and $13.8 million was included in current liabilities in the Company's Condensed Consolidated Balance Sheet.
Yatra Merger Agreement
As previously disclosed, on July 16 2019, the Company entered into a Merger Agreement with Yatra Online, Inc., a Cayman Islands exempted company limited by shares (“Yatra”), and EbixCash Travels Inc., a Cayman Islands exempted company limited by shares and wholly-owned subsidiary of Ebix (“Merger Sub”). The Merger Agreement provides, among other things, that, upon the terms and subject to the conditions set forth therein, Merger Sub will merge with and into Yatra, with Yatra surviving as a wholly-owned subsidiary of Ebix.
Completion of the Merger is subject to customary closing conditions, including (i) the adoption of the Merger Agreement by the affirmative vote of a majority of at least two-thirds of the Yatra shareholders entitled to vote at an extraordinary general meeting duly called for the purpose of voting on the Special Resolution to approve the Merger and Merger Agreement (the “Yatra Stockholder Approval”), (ii) the Series Y Preferred Stock to be issued in the Merger being authorized for listing on Nasdaq, (iii) there being in effect no Cayman Islands law, United States, federal, state or local, or any foreign, law, constitution, treaty, convention, ordinance, code, rule, statute or regulation enacted, issued, adopted, promulgated, entered into or applied by a relevant governmental entity, that following the signing of the Merger Agreement or order prohibits, renders illegal or enjoins the consummation of the Merger, (iv) the expiration or termination of the waiting period applicable to the Merger under any applicable federal, state, foreign or supranational antitrust laws, and (v) the declaration of the effectiveness by the U.S. Securities and Exchange Commission (the “SEC”) of the Registration Statement on Form S-4 to be filed with the SEC by Ebix in connection with the registration of the Series Y Preferred Stock to be issued in the Merger. The obligations of each party to consummate the Merger are also conditioned upon (i) the accuracy of the representations and warranties of the other party as of the closing (subject to customary materiality qualifiers), (ii) the absence of any material breach by the other party of any of its covenants or agreements under the Merger Agreement, and (iii) the absence of a material adverse effect with respect to the other party. The Company expects to file the Registration Statement during the fourth quarter of 2019, and anticipates that the Merger will close late in the first quarter or early the second quarter of 2020.
Operating Activities
Net cash provided by our operating activities was $79.0 million for the nine months ended September 30, 2019. The primary components of the cash provided by our operating activities during the nine-month period consisted of net income of $75.1 million, net of $(17.1) million of non-cash gains recognized when reducing certain earn-out contingent liabilities, $321 thousand of unrealized foreign currency exchange loss, $11.0 million of depreciation and amortization, $(6.6) million of net loss attributable to a non-controlling interest, $2.5 million of non-cash share-based compensation, $5.2 million of right-of-use assets amortization, $1.9 million of amortization of capitalized software development costs and $6.9 million of net funding provided from working capital requirements primarily associated with the increases in other current liabilities and other assets, offset by decreases in deferred revenue, lease liabilities and provision for deferred taxes. During the nine months ended September 30, 2019, the Company made $7.4 million of tax payments.
Net cash provided by our operating activities was $74.2 million for the nine months ended September 30, 2018. The primary components of the cash provided by our operating activities during that nine-month period consisted of net income of $84.6 million, net of $1.3 million of unrealized foreign currency exchange gains, $7.9 million of depreciation and amortization, $178 thousand of net income attributable to a non-controlling interest, $2.2 million of non-cash share-based compensation, and $1.6 million of amortization of capitalized software development costs. Partially offsetting this net cash inflow was $(23.0) million of working capital requirements primarily due to increased outstanding trade accounts receivable and other assets and a decrease in deferred revenues. During the nine months ended September 30, 2018, the Company made $9.3 million of tax payments including $2.5 million of minimum alternative tax payments in India, which is a component of net deferred tax assets on the Company's Condensed Consolidated Balance Sheets.
Investing Activities
Net cash used for investing activities during the nine months ended September 30, 2019 was $93.3 million, and consisted of $77.4 million (net of $11.3 million cash acquired) used for the acquisition of Weizmann (acquired December 2018), $8.0 million used for other Q4 2018 acquisition in India not previously funded, $9.8 million used for the acquisition of Zillious (net of $279 thousand cash acquired), $7.9 million (net of cash acquired) used for the acquisition of Essel, $942 thousand (net of $1.2 million cash acquired) used for the acquisition of Wallstreet Canada, $4.9 million to reacquire Paul Merchant's 10% equity interest in Ebix’s combined international remittance business in India, $5.9 million primarily for capital expenditures in India and $4.1 million for software development costs that were capitalized. Partially offsetting these outflows was $25.7 million from the net maturities of marketable securities (specifically bank certificates of deposit).
Net cash used for investing activities during the nine months ended September 30, 2018 was $230.4 million, and consisted of $176.1 million (net of cash acquired) used for the acquisition of Centrum, $7.6 million (net of cash acquired) used for the acquisition of SmartClass, $6.6 million used for the acquisition of Transcorp, $24.3 million (net of cash acquired) used for the acquisition of Indus, $11.4 million (net of cash acquired) used for the acquisition of Mercury, $1.3 million (net of cash acquired) used for the acquisition of Leisure, $3.8 million used for the additional investment in ItzCash, $5.8 million primarily for capital expenditures in India , and $3.6 million for software development costs that were capitalized. Partially offsetting these outflows was $5.0 million received from Paul Merchants for a 10% equity interest in Ebix’s combined international remittance business in India and, $4.4 million from the net maturities of marketable securities (specifically bank certificates of deposit).
Financing Activities
During the nine months ended September 30, 2019, net cash provided by financing activities was $6.1 million which consisted of $13.5 million provided by the Company's revolving credit facility with Regions Bank, $6.0 million of net proceeds from short term third party loans funding part of EbixCash operations, and $18.9 million net funds provided by the EbixCash working capital facility in India. Partially offsetting the cash inflows were $6.9 million to pay quarterly dividends to our common stockholders, $13.0 million used to repurchase shares of our common stock, $11.3 million was used to make the scheduled payments against the existing term loan with Regions Bank and $962 thousand was used for payments of long term debt.
During the nine months ended September 30, 2018, net cash provided by financing activities was $234.3 million which consisted of $249.5 million provided by the refinancing and borrowing from the amended and expanded syndicated credit facility with Regions Bank, and a net $609 thousand provided by the EbixCash overdraft facility in India. Partially offsetting this cash inflow were $7.1 million was used to pay quarterly dividends to our common stockholder, $2.2 million used to repurchase shares of our common stock and $6.5 million was used to make the scheduled payments against the existing term loan with Regions.
Commercial Bank Financing Facility
On September 27, 2019, the Company and certain of its subsidiaries entered into the Ninth Amendment (the “Ninth Amendment”) to the Credit Agreement which amended the definition of “Consolidated EBITDA" to add back the derivative legal
settlement, “Indebtedness” to disqualify equity interests to be issued regarding the Yatra Online acquisition, and modified the maximum consolidated debt leverage ratios allowed.
On November 27, 2018, Ebix entered into the Eighth Amendment to the Regions Secured Credit Facility, dated August 5, 2014, among the Company, Regions Bank (“Regions”) and certain other lenders party thereto (as amended, the "Credit Agreement") to exercise $101.25 million of its aggregate $150 million accordion option, increasing the then total Term Loan Commitment to $301.25 million from $250 million, with initial repayments starting December 31, 2018 due in the amount of $3.77 million for the first six quarters and increasing thereafter. The revolving credit facility increased from $400 million to $450 million. The Credit Agreement carries a leverage-based LIBOR related interest rate, which currently stands at approximately 4.8%. The expanded credit facility will continue to be used to fund the Company's future growth and share repurchase initiatives
On April 9, 2018, the Company and certain of its subsidiaries entered into the Seventh Amendment (the “Seventh Amendment”) to the Credit Agreement increasing the permitted indebtedness in the form of unsecured convertible notes from $250 million to $300 million.
On February 21, 2018, Ebix, Inc. and certain of its subsidiaries entered into the Sixth Amendment (the “Sixth Amendment”) to the Credit Agreement. The Sixth Amendment amended the Credit Agreement by increasing its existing credit facility from $450 million to $650 million, to assist the Company in funding its growth. The increase in the bank line was the result of many members of the existing bank group expanding their share of the credit facility and the addition of BBVA Compass and Bank of the West to the Banking Syndicate, which diversifies Ebix’s lending group under the credit facility to ten participants. The then amended credit facility included: A five-year term loan for $250 million, with initial repayments starting June 30, 2018 due in the amount of $3.13 million for the first eight quarters and increasing thereafter and a five-year revolving credit facility for $400 million. The new credit facility also allowed for up to $150 million of incremental facilities.
At September 30, 2019, the outstanding balance on the revolving line of credit under the Credit Agreement was $438.0 million and the facility carried an interest rate of 4.81%. During the nine months ended September 30, 2019, the Company drew$13.5 million from its revolving credit facility. The revolving line of credit balance is included in the long-term liabilities section of the Condensed Consolidated Balance Sheets. During the nine months ended September 30, 2019, the average and maximum outstanding balances of the revolving line of credit component of the credit facility were $436.9 million and $438.0 million, respectively.
At September 30, 2019, the outstanding balance on the term loan was $279.9 million of which $18.8 million is due within the next twelve months, with $11.3 million in payments having been made during the nine months ended September 30, 2019. This term loan also carried an interest rate of 4.81% . The current and long-term portions of the term loan are included in the respective current and long-term sections of the Condensed Consolidated Balance Sheets, the amounts of which were $18.8 million and $261.1 million, respectively, at September 30, 2019.
Contractual Obligations
For a presentation regarding material changes outside the ordinary course of business to the Company's contractual obligations please refer to Notes 4 and 5 of the Notes to Condensed Consolidated Financial Statements.
Off-Balance Sheet Arrangements
We do not engage in off balance sheet financing arrangements.
Recent Accounting Pronouncements
For information about new accounting pronouncements and the potential impact on our Consolidated Financial Statements, see Note 1 of the condensed notes to the Condensed Consolidated Financial Statements in this Form 10-Q and Note 1 of the notes to consolidated financial statements in our 2018 Form 10-K.
Application of Critical Accounting Policies
The preparation of financial statements in conformity with GAAP, as promulgated in the United States, requires our management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures in our Condensed Consolidated Financial Statements and accompanying notes. We believe the most complex and sensitive judgments, because of their significance to the Condensed Consolidated Financial Statements, result primarily from the need to make estimates and assumptions about the effects of matters that are inherently uncertain. The following accounting policies involve the use of “critical accounting estimates” because they are particularly dependent on estimates and
assumptions made by management about matters that are uncertain at the time the accounting estimates are made. In addition, while we have used our best estimates based on facts and circumstances available to us at the time, different estimates reasonably could have been used in the current period, and changes in the accounting estimates that we used are reasonably likely to occur from period to period both of which may have a material impact on our financial condition and results of operations. For additional information about these policies, see Note 1 of the Condensed Notes to the Condensed Consolidated Financial Statements in this Form 10-Q. Although we believe that our estimates, assumptions and judgments are reasonable, they are limited based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.
Revenue Recognition
The Company derives its revenues primarily from software subscription and transaction fees, software license fees, financial transaction fees, risk compliance solution services fees, and professional service fees including associated fees for consulting, implementation, training, and project management provided to customers with installed systems and applications.
The Company determines revenue recognition by applying the following steps:
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identification of the contract, or contracts, with a customer;
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identification of the performance obligations in the contract;
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determination of the transaction price;
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allocation of the transaction price to the performance obligations in the contract; and
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recognition of revenue when, or as, we satisfy a performance obligation.
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The Company analyzes its different services individually to determine the appropriate basis for revenue recognition, as further described below. Additionally, certain services exist in multiple channels. As Ebix derives revenues from three product/service channels—EbixCash Exchanges, Insurance Exchanges, and Risk Compliance Solutions—for policy disclosure purposes, contracts are discussed in conjunction with the channel to which they are most significant.
EbixCash Exchanges ("EbixCash")
EbixCash revenues are primarily derived from consideration paid by customers to transfer or exchange money. The significant majority of EbixCash revenue is for a single performance obligation and is recognized at a point in time. These revenues vary by transaction based upon channel, send and receive locations, the principal amount sent, whether the money transfer involves different send and receive currencies, and speed of service, as applicable.
EbixCash also offers several other services, primarily including payment services and ticketing and travel services for which revenue is impacted by varying factors. EbixCash acts as the principal in transactions and reports revenue on a gross basis, as EbixCash controls the service at all times prior to transfer to the customer, is primarily responsible for fulfilling the customer contracts, has the risk of loss, and has the ability to establish transaction prices.
EbixCash Money Transfer
For the EbixCash money transfer business, EbixCash has one performance obligation whereupon the customer engages EbixCash to perform one integrated service. This typically occurs instantaneously when the beneficiary entitled to receive the money transferred by the sender visits the EbixCash outlet and collects the money. Accordingly, EbixCash recognizes revenue upon completion of the following: 1) the customer’s acknowledgment of EbixCash’s terms and conditions and the receipt of payment information, 2) the money transfer has been processed, 3) the customer has received a unique transaction identification number, and 4) funds are available to be picked up by the beneficiary. The transaction price is comprised of a transaction fee and the difference between the exchange rate set by EbixCash to the customer and the rate available in the wholesale foreign exchange market, as applicable, both of which are readily determinable at the time the transaction is initiated.
Foreign Exchange and Outward Remittance Services
For EbixCash’s foreign exchange and payment services, customers agree to terms and conditions for all transactions, either at the time of initiating a transaction or signing a contract with EbixCash to provide payment services on the customer’s behalf. In the majority of EbixCash’s foreign exchange and payment services, EbixCash makes payments to the recipient to satisfy its performance obligation to the customer, and therefore, EbixCash recognizes revenue on foreign exchange and payment services when this performance obligation has been fulfilled.
Consumer Payment Services
EbixCash offers several different bill payment services that vary by considerations such as: 1) who pays the fee to EbixCash (consumer or biller), 2) whether the service is offered to all potential consumers, or only to those for which EbixCash has a relationship with the biller, and 3) whether the service utilizes a physical agent network offered for consumers’ convenience, among other factors. The determination of which party is EbixCash’s customer for revenue recognition purposes is based on these considerations for each of EbixCash’s bill payment services. For all transactions, EbixCash’s customers agree to EbixCash’s terms and conditions, either at the time of initiating a transaction (where the consumer is determined to be the customer for revenue recognition purposes) or upon signing a contract with EbixCash to provide services on the biller’s behalf (where the biller is determined to be the customer for revenue recognition purposes). As with consumer money transfers, customers engage EbixCash to perform one integrated service—collect money from the consumer and process the bill payment transaction, thereby providing the billers real-time or near real-time information regarding their customers’ payments and simplifying the billers’ collection efforts. EbixCash’s revenues from bill payment services are generated from contracts to process transactions at any time during the duration of the contract. The transaction price on bill payment services is contractual and determinable. Certain biller agreements may include per-transaction or fixed periodic rebates, which EbixCash records as a reduction to revenue.
EbixCash Travel Exchanges
EbixCash Travel revenues are primarily derived from commissions and transaction fees received from various travel providers and international exchanges involved in the sale of travel to the consumer. EbixCash travel revenue is for a single performance obligation and is recognized at a point in time. Travel revenues include reservation commissions and transaction net revenues (i.e., the amount charged to travelers less the amount owed to travel service providers) in connection with our reservation services; ancillary fees, including travel insurance-related revenues and certain reservation booking fees; and credit card processing rebates and customer processing fees. EbixCash Travel services include the sale of hotel rooms, airline tickets, bus tickets and train tickets. EbixCash’s Travel revenue is derived from ticket sales, wherein the commissions payable to EbixCash Travel, along with any transaction fees paid by travel providers and travel exchanges, is recognized as revenue after completion of the service. The transaction price on such services is agreed upon at the time of the purchase.
EbixCash Travel revenue for the corporate MICE (Meetings, Incentives, Conferences, and Exhibitions) packages is recognized at full purchase value at the completion of the obligation with the corresponding costs recorded under direct expenses. For MICE revenues, EbixCash Travel acts as the principal in transactions, and accordingly reports revenue on a gross basis. EbixCash Travel controls the service at all times prior to transfer to the customer, is responsible for fulfilling the customer contracts, has the risk of loss, and has the ability to establish transaction prices.
Gift Cards
EbixCash resells gift cards to consumers that can be later redeemed at various merchants. Gift cards are recorded as inventory until sold to the consumer. Gift card revenue is recognized at full purchase value at time of sale with the corresponding cost of vouchers recorded under direct expenses.
Insurance Exchanges
Insurance Exchanges revenues are primarily derived from consideration paid by customers for the licensing of software and related services. A typical contract includes a software license and may also include services for setup, customization, transaction processing, maintenance, and/or hosting. Determining whether products and services are considered distinct performance obligations that should be accounted for separately may require significant judgement. Certain services, primarily related to SaaS platforms, depend on significant level of integration and interdependency between the licensed software and additional services (e.g., setup, customization), and are accounted for as a single performance obligation. These services are recognized over their expected useful life, which may exceed the currently contracted term. Additionally, the Company may also enter into contracts with customers for subscription services, transaction processing or professional services.
Contracts generally do not contain a right of return or refund provisions. Our contracts often do contain overage fees, contingent fees, or service level penalties which are accounted for as variable consideration. Revenue accounted for as variable consideration is immaterial and is recognized using the “right to invoice” practical expedient when the invoiced amount equals the value provided to the customer.
Software-as-a-Service ("SaaS")
The Company allocates the transaction price to each distinct performance obligation using the relative stand-alone selling price. Determining the stand-alone selling price may require significant judgement. The stand-alone selling price is the price at which an entity has sold or would sell a promised good or service separately to a customer. The Company determines the stand-alone selling price based on observable price of products or service sold separately in comparable circumstances, when such observable prices are available. When standalone selling price is not directly observable, the Company estimates the stand-alone selling price using the market assessment approach by considering historical pricing and other market factors.
Subscription Services
Subscription services revenues are associated with performance obligations that are satisfied over specific time periods and primarily consist of fees that provide customers access to our SaaS platforms. Revenue is generally recognized ratably over the contract term. Our subscription contracts are generally for an initial three-year period with subsequent one-year automatic renewals.
Transaction Fees
Transaction revenue is comprised of fees applied to the volume of transactions that are processed through our SaaS platforms. These are typically based on a per-transaction rate and are invoiced for the same period in which the transactions were processed and as the performance obligation is satisfied. The amount invoiced generally equals the value provided to the customer, and revenue is typically recognized when invoiced using the as-invoiced practical expedient.
Professional Services
Professional service revenue primarily consists of fees for setup, customization, training, or consulting. Professional service fees are generally on a time and materials basis or a fixed fee. Revenues for time and materials are recognized as such services are rendered while fixed fee revenues are recognized based on the input method driven by the expected hours to complete the project measured against the actual hours completed to date. Professional services, particularly related to SaaS platforms, may have significant dependencies on the related licensed software and may not be considered a distinct performance obligation.
Risk Compliance Services ("RCS")
RCS revenues consist of two revenue streams—Certificates of Insurance (COI) and Consulting Services. COI revenues are derived from consideration paid by customers for the creation and tracking of certificates of insurance. These are transactional-based revenues. Consulting Services revenues are driven by distinct consulting service engagements rendered to customers for which revenues are recognized using the output method on a time and material basis as the services are performed.
COI Creation and Tracking
The Company provides services to issue and track certificates of insurance in the United States and Australian markets. Revenue is derived from transaction fees for each certificate issued or tracked. The Company recognizes revenue at the issuance of each certificate or over the period the certificate is being tracked.
Consulting Services
The Company provides consulting services to clients around the world for project management and development. Consulting services fees are generally on a time and materials basis or a fixed fee. Revenues for time and materials are recognized as the services are rendered while fixed fee revenues are recognized based on the input method driven by the expected hours to complete the project measured against the actual hours completed to date.
Allowance for Doubtful Accounts Receivable
Management specifically analyzes accounts receivable and historical bad debts, write-offs, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.
Valuation of Goodwill and Other Indefinite-Lived Intangible Assets
Goodwill represents the cost in excess of the fair value of the net assets of acquired businesses. Indefinite-lived intangible assets represent the fair value of acquired contractual customer relationships for which future cash flows are expected to continue
indefinitely. In accordance with the relevant FASB accounting guidance, goodwill and indefinite-lived intangible assets are not amortized but are tested for impairment at the reporting unit level on an annual basis or on an interim basis if an event occurs or circumstances change that would likely have reduced the fair value of a reporting unit below its carrying value. Potential impairment indicators include a significant change in the business climate, legal factors, operating performance indicators, competition, and the sale or disposition of a significant portion of the business. The impairment evaluation process first involves an assessment of certain qualitative factors to determine whether the existence of events or circumstances would indicate that it is more likely than not that the fair value of any of our reporting units was less than its carrying amount. If, after assessing the totality of events or circumstances, we were to determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then we would not perform the quantitative impairment testing described further below.
The aforementioned quantitative testing process involves comparing the reporting unit carrying values to their respective fair values. We determine the fair value of our reporting units by applying the discounted cash flow method using the present value of future estimated net cash flows. If the fair value of a reporting unit exceeds its carrying value, then no further testing is required. However, if a reporting unit's fair value were to be less than its carrying value, we would then determine the amount of the impairment charge, if any, which would be the amount that the carrying value of the reporting unit's goodwill exceeded its implied value. Projections of cash flows are based on our views of growth rates, operating costs, anticipated future economic conditions and the appropriate discount rates relative to risk and estimates of residual values. We believe that our estimates are consistent with assumptions that marketplace participants would use in their estimates of fair value. The use of different estimates or assumptions for our projected discounted cash flows (e.g., growth rates, future economic conditions, discount rates and estimates of terminal values) when determining the fair value of our reporting units could result in different values and may result in a goodwill impairment charge. We perform our annual goodwill impairment evaluation and testing as of October 1st of each year. This evaluation is done during the fourth quarter each year. During the years ended December 31, 2018 and 2017 we had no impairment of our reporting unit goodwill balances.
Income Taxes
Deferred income taxes are recorded to reflect the estimated future tax effects of differences between financial statement and tax basis of assets, liabilities, operating losses, and tax credit carry forwards using the tax rates expected to be in effect when the temporary differences reverse. Valuation allowances, if any, are recorded to reduce deferred tax assets to the amount management considers more likely than not to be realized. Such valuation allowances are recorded for the portion of the deferred tax assets that are not expected to be realized based on the levels of historical taxable income and projections for future taxable income over the periods in which the temporary differences will be deductible.
The Company also applies FASB accounting guidance on accounting for uncertainty in income taxes positions. This guidance clarifies the accounting for uncertainty in income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.
Foreign Currency Matters
The functional currency is the U.S. Dollar for the Company's foreign subsidiaries in Dubai and Singapore, and its product development and information technology enabled services activities for the insurance industry provided by its India subsidiary, because both the intellectual property research and development activities provided by its Dubai and Singapore subsidiaries, and the product development and information technology enabled services activities for the insurance industry provided by its India subsidiary, are in support of the Company's operating divisions across the world, which are primarily transacted in U.S. Dollars.
The functional currency of the Company's other foreign subsidiaries is the local currency of the country in which the subsidiary operates. The assets and liabilities of these foreign subsidiaries are translated into U.S. dollars at the rates of exchange at the balance sheet dates. Income and expense accounts are translated at the average exchange rates in effect during the period. Gains and losses resulting from translation adjustments are included as a component of other comprehensive income in the accompanying Condensed Consolidated Balance Sheets. Foreign exchange transaction gains and losses that are derived from transactions denominated in a currency other than the subsidiary's functional currency are included in the determination of net income.
