Currency Exchange International - Q3 2022

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to the Currency Exchange International 2022 Q3 Financial Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. As a reminder, today's call is being recorded on Wednesday, September 14th, 2022. I would now like to turn the conference over to Mr. Bill Mitoulas, Investor Relations Manager with CXI. Please go ahead, sir.

Bill Mitoulas (Investor Relations Manager)

Thank you, Michelle. Good morning, everyone. Welcome to the Currency Exchange International conference call to discuss the financial results for the Q3 of the 2022 fiscal year. Thanks for joining us. With us today are President and CEO Randolph Pinna and Interim Chief Financial Officer Alan Stratton. Alan will begin with his brief comments on the Q3's financial results, followed by his latest perspective on the company's operations. Randolph will then comment on CXI and Exchange Bank of Canada, the company's sales initiatives and business activities. After which, we'll open it up for your questions. Today's conference call is open to shareholders, prospective shareholders, members of the investment community, including the media.

For those of you who may happen to leave the call before its conclusion, please be advised that the conference call will be recorded and then uploaded to CXI's investor relations website page, along with the financial statements and MD&A. Please note that this conference call will include forward-looking information which is based on a number of assumptions, and actual results could differ materially. Please refer to our financial statements and MD&A reports for more information about the factors that could cause these different results and the assumptions that we have made. With that, I'll turn the call over to Alan. Alan, please go ahead.

Alan Stratton (Interim CFO)

Thank you, Bill, and thank you everyone for joining us on today's call. I will now present an overview of the results of our most recently completed quarter, Q3 2022. These results are presented in US dollars unless otherwise noted. As we have stated in the past, the currency exchange business has been significantly impacted by the COVID-19 pandemic, which continues to affect international travel in many countries that do maintain restrictions on unvaccinated travelers or have onerous testing requirements that act as a deterrent. Notwithstanding these challenges, CXI had a breakout quarter as demand for foreign currencies increased significantly in Q3 as international travel rebounded strongly on the pent-up demand, in addition to continued growth in both our international banknotes business and payment segments. Now, the travel recovery may have been even stronger had the industry been able to restore capacity to 2019 levels.

This surge in demand is unprecedented, and while welcome, it did present some challenges for us to support operationally. Our vaults in particular struggled to keep pace with the record volumes, resulting in some delays in processing shipments and many employees working overtime through much of our busy season. Revenue in Q3 grew by 137% to $20.7 million from $8.7 million in Q3 2021. The banknote segment represented an 82% share of that revenue, an increase from 75% in the prior year. Total banknote revenue increased by 103% to $17 million in Q3 versus $6.5 million in Q3 2021. The substantial growth was driven primarily by demand for the euro, British pound, Mexican peso, and several other currencies too, including exotics.

Notably, the revenue is also significantly higher than our pre-pandemic peak in July 2019, which was $12.4 million, approximately 95% of which was driven by the banknote segment. The increase reflects the company's ability to increase its market share in the past three years through our omni-channel approach to reaching consumers and supported by the exit of a major competitor from the North American market in 2020. During the quarter, the company onboarded 47 new financial institution clients representing 194 transacting locations. We continue to maintain a strong pipeline of small and medium-sized institutions that find our one provider, one platform strategy quite appealing. In our direct-to-consumer division, our agent network continued to grow with three new airport locations in each of Pittsburgh, Raleigh-Durham, and Minneapolis-Saint Paul opening.

We now have 23 locations at international airports in the United States, which provides tremendous exposure for our brand. Our online FX platform has continued to grow as consumers have become more accustomed to having currency shipped directly to their home. When we launched the platform in 2021, virtually all of the transactions were for exotic currencies. Earlier this year, we began advertising through social media and Google, which has had a dramatic impact on growth for travel currency demand on that platform. Now 65% of the volume done through it is for travel-related demand. Also, during the quarter, North Carolina became the 38th state that we service through the platform, and we intend to add other states in the future.

Turning to our payment segment, its revenue increased 65% in Q3 2022 to $3.6 million from $2.2 million in Q3 2021. That increase was driven primarily by new client acquisition in both the US and Canada over the past year. The company processed over 26,000 payment transactions in this quarter on $1.8 billion of volume. That represents an 80% increase in volume over Q3 of 2021, and this has been partially facilitated by our integration with Fiserv that occurred back in 2019 and earlier this year, the integration of CXI FX, our proprietary software with Jack Henry's SilverLake, another premier core processing platform for the FI industry in the United States.

By geographic segment, the U.S. represented 77% or $15.8 million of the revenue in Q3 2022, and this was an increase of 158% from the $6.1 million generated in Q3 2021. Canada grew to $4.8 million in Q3 from $2.6 million in the prior year, an increase of 86%. Part of the reason for the growth in the U.S. being higher is due to the direct-to-consumer channel, which has higher margins also than the wholesale channels. However, Exchange Bank of Canada is the predominant wholesaler of choice for money service businesses that operate in airports and high tourist locations in Canada.

This segment rebounded strongly after the federal government in Canada removed the requirement for a negative COVID-19 test on entry into the country on April first, and we saw demand continue to grow throughout the summer. Both Canada and the U.S. still require foreign nationals to be vaccinated in order to enter their respective countries, which is a barrier to achieving pre-pandemic travel volumes. While revenue grew by 137%, total operating expenses rose 74% to $13.3 million in Q3 2022, compared with $7.7 million in Q3 of 2021. Variable expenses accounted for approximately 60% of that increase, led by the higher volumes. Postage and shipping represents the largest component of our variable costs, which grew over just over 300% to $2.8 million from $700,000 in the prior year.

As a share of banknote revenue, they have increased to 16.7% from 10.5% in Q3 2021, and this is due to a few factors. Firstly, the number of shipments from our vaults increased threefold over Q3 2021. To put that into perspective, our vaults processed a combined 170,000 orders in Q3 2022, compared with 43,000 in Q3 2021. Secondly, shipping costs as a proportion of revenue for Exchange Bank of Canada's transactions with the Federal Reserve Bank of New York tend to be higher as these are high-volume, low-margin transactions. However, most of those shipments go direct, reducing our internal processing costs. Lastly, but not least, shipping costs have not been immune to the inflation and high cost of fuel which peaked during the quarter.

Fortunately, fuel costs have since receded and the company has renegotiated a contract with a key logistics provider in July, which provides some additional volume-based rebates. Bank fees increased 45% to $457,000 in Q3 2022 from $404,000 in Q3 2021. However, as a proportion of the payments revenue, they've actually decreased from 18.3% in Q3 2021 to 16.1% in Q3 of this year. This is due in part to the fact the company offers EFT or ACH payment options to its clients that are sending payments to or from the U.S. and Canada. Fees for those transactions are negligible compared to the cost of sending wire transfers.

Lastly, commissions expense and third-party technology fees make up the remainder of the variable expenses as they track closely to the volumes as well. Our fixed and semi-fixed operating expenses grew about 40% to $2.2 million, or $2.2 million over Q3 2021 to $8.1 million in Q3 2022. Salaries and benefits is the biggest component of that, and excluding the sales commissions and incentive compensation grew by approximately $650,000 over the quarter in the prior year. This reflects growth in our employment base to 320 from 272 last year, in addition to the impacts of inflation on wages, payroll taxes, and benefits. For the first time, the company made broad-based adjustments to wages for its employees, notably our retail and hourly-based staff outside of our annual cycle.

Due to the competitive environment, our starting wage has risen to almost $20 an hour in the United States. This has been necessary to retain and attract high-quality talent that has made CXI known for our customer service. Part of the year-over-year increase is also driven by the reinstatement of the company matching contributions on the employee retirement savings plans that had been suspended during the pandemic until late in 2021. Turning to other fees, legal and professional costs experienced growth of 52% to $1.1 million versus $700,000 in the Q3 2021. This includes some short-term spending increases as the company invests in the use of external partners to recruit key positions given the tight labor market, the implementation of Oracle NetSuite that we began in May of 2022, and consulting for certain compliance-related projects.

However, there have also been some general increases in audit and tax fees that are commensurate with the growth of our business and complexity as we operate in more states. Overall, our expenses are in line with our expectations given the increased volume and inflationary environment. As a result of the revenue growth outpacing expense growth, the company generated positive operating leverage of 35%, a significant improvement from the 12% generated in Q3 2021, and 23% in just the prior quarter, Q2 of 2022. Adjusting that for the lease payments that are recognized on our IFRS 16 as capital leases, the operating margin was 33%. This is significantly better than the margins generated just prior to the pandemic, and does reflect the fact that our bank has started to achieve scale and is contributing to the growth in operating income.

Turning to the other expenses, the most notable change versus the prior year was the growth in interest expense, which increased $269,000 to $430,000 in the quarter from $161,000 in Q3 2021. That growth reflects the increase in borrowings to fund growth in working capital, primarily the banknote inventories, given the higher volumes. Average outstanding borrowing in the quarter was about $30 million, compared to $17 million in the prior year. In addition to the increased borrowings, the interest rate on the company's primary lending facility has increased as the Federal Reserve has increased rates during the year. During the quarter, the company renewed its credit facility with its primary lender under favorable terms.

Most importantly, as we secured an increase to our credit line by $10 million, raising it to $30 million from $20 million, with an additional accordion feature for a further $10 million to support working capital needs in the future. We still maintain a credit facility with a private lender totaling $20 million to provide additional capacity for both CXI and Exchange Bank of Canada. This private lending facility carries an interest rate of 6%, which is quite reasonable in the current environment. The net income for Q3 2022 was $4.6 million, compared to a net loss of $120,000 in Q3 2021, and this performance translates into earnings per share of $0.70 on a fully diluted basis.

I don't believe the company is ever generating earnings per share of this high in any given quarter, at this point. Turning to the performance for the nine months ended July 31st, 2022, revenue grew 127% to $46 and a half million from $20.4 million in the comparative period in the prior year. That improvement reflects the impact of the recovery in international travel, coupled with the success in driving our various strategic growth initiatives. Banknotes accounted for an 81% share of revenue in the nine months ended July 31st, 2022, an increase from 73% in nine months ended July 31, 2021. Now that revenue increase of 140% to $37 and a half million from only $15 million in the prior year.

Almost half of that growth was driven by the strong performance in Q3, which represented 55% of the year-to-date banknote revenue. This is disproportionately high relative to historical norms. For example, going back to Q3 of 2019, it represented about 41% of revenue in the nine months ended July 31, 2019. The 2022 performance reflects the impact of the Omicron variant and related COVID-19 restrictions on demand in the first half of 2022. Relative to the nine-month period ending July 31, 2019, banknote revenue has increased approximately 25%, and that's an indication of the company's growth and market share since the pandemic began. The payment segment has generated revenue of $9 million in the first nine months of the year, an increase of 65% from the $5.5 million generated in the first nine months of 2021.

This reflects our ability to consistently add new clients in both the U.S. and Canada. Despite the tremendous growth in banknotes, payments represent 19% share of revenue on a year-to-date basis. We are very pleased with the growth in this segment since we developed a clear strategy around payments. We believe there's a lot of opportunity to increase our market share in this space moving forward. By geography, the U.S. accounted for $34.9 million of our revenue in the first nine months of the year, an increase of $19.5 million from the same period in the prior year. At 75%, its share of revenue was consistent with last year.

That reflects our ability to grow at the same rate in Canada, where the bank's revenue increased by 128% to $11.6 million, compared to $5.1 million in the prior year. We are very pleased with the bank's revenue growth and overall financial performance this year, which has been driven by both the payment and banknote segments. Exchange Bank of Canada began operating under the Federal Reserve Bank of New York's Foreign Bank International Cash Services program, or FBICS for short, in Q4 of last year. This has been one of the catalysts driving trade in the U.S. dollar banknote segment with foreign institutions. Operating expenses grew by 56% in the nine months ended July 31, 2022 to $33.2 million from $21.3 million in the prior year.

Variable expenses comprised $7.1 million or 59% of that increase. Postage and shipping represented about $4 million of that increase for the same reasons that I mentioned previously. Sales commissions accounted for approximately $1.7 million of it, and that is generally around the revenue growth and also new client acquisition. Other incentive compensation increased by approximately 0.9 million. There's the bank fees that increased by about $0.5 million or 43%, again, lower than the actual growth rate for the payments revenue. Other fixed and semi-fixed operating costs accounted for the remaining $4.8 million in expense growth, with $2.9 million of that attributable to salaries and benefits, $600,000 of that driven by higher taxes, benefits, and so forth, including that company matching benefit that I spoke about on the retirement plans.

The $2.3 million balance of the variance in these costs relates to that incremental growth in the headcount and the inflationary increases, which as I mentioned in previous calls, the company had maintained a wage freeze during 2020 and 2021 in response to the impact of the pandemic on our business. Outside of salaries and benefits, most of our other operating expense categories have increased due to a combination of inflation and the higher business volume. The legal and professional fees, as I previously mentioned, have increased by about $800,000 in the nine-month period ending July 31, 2022 for much of the same reasons. Also noteworthy is that travel and entertainment spending increased by 143% or $218,000 as the company has embraced a return to in-person meetings and events.

While we have adopted a flexible approach to working remotely, we are creating more opportunities for our employees to spend time together as we feel that is important to building relationships and creating a distinctive culture. On the IT side of the house, those costs have grown by about 33% or $338,000 from the prior year as we continue to invest in our infrastructure, including our proprietary platforms and cybersecurity protection. Overall, our operating expense growth has been consistent with our expectations. As revenue has outpaced growth this year, our operating leverage has increased to 29% in the nine months ended July 31, 2022 from -4% in the prior year. Outside of the growth in interest expense for the same reasons that drove our quarterly increase, the other income and expense have been consistent with the prior year.

The income tax expense has grown in line with the taxable income, and then our effective tax rate is closely matching the statutory tax rates, where various permanent and timing differences largely offset the benefit of applying unrecognized tax loss carryforwards to the bank's taxable income. The company generated net income of $7.4 million in the nine months ended July 31, 2022, compared to a net loss of $2.8 million in the prior year. This translated into earnings per share of $1.13 on a fully diluted basis, a significant improvement from the 43-cent per share loss in the prior year. This also represents an annualized return on our equity of about 15%, which is quite respectable.

Turning to the balance sheet, there has been a significant increase in cash holdings to $114 million from $67 million at October 31st, 2021. Approximately $81 million of those cash holdings represents our banknote inventories up from $44 million at year-end and $65 million at April 30th, 2022. Given the unpredictable nature of demand and the significant increase in volumes, we held higher inventory balances of certain currencies during the quarter to mitigate the risk of running out. We have been investing in additional resources and will be undertaking expansion in one of our vaults to accommodate the higher volumes. We are also reviewing inventory at consignment locations relative to demand and reducing those levels that don't meet turnover thresholds.

Thus, we anticipate that our average inventory levels may decline, although we are susceptible to high peaks, especially as our trade in international banknotes continues to grow. As a result of the growth in inventory, the company had almost $31 million in outstanding lines of credit at the end of Q3, with an additional $20 million in available capacity. The remainder of our working capital balances at July 31st were in line with norms. There has been growth in holding account balances as a result of growth in the business volumes, and those are offset by funds in bank accounts. Embedded in other current assets resides $3.2 million in outstanding receivables related to our Employee Retention Credit claim from 2021. We did receive $140,000 in July that related to our 2020 claim.

This is encouraging as we know that the IRS is taking 6-9 months to process these refunds. We are therefore hopeful that the balance will be forthcoming before we close out our fiscal year. It's worth noting that the company's net equity position at July 31st, 2022 was $65.6 million, up from $58 million at October 31st. It's also approaching the $66.3 million in net equity that we had at January 31st, 2020, the last reporting period prior to the pandemic. The significant revenue and earnings growth in 2022 provides us with confidence that our business model is sound and the company is financially sustainable once again. Our strategy has been a key factor in the turnaround and we will continue to focus on its execution.

While there are various risks that may impact future results, such as the high energy prices, inflation, Russia-Ukraine conflict, and potential for future COVID-19 variants, we believe that CXI is well positioned to weather fluctuations in demand and to continue its growth. At this time, I will turn the call over to Randolph Pinna, our CEO, to provide his perspective.

Randolph Pinna (President, CEO, and Director)

Thank you, Alan. Good morning, everybody. I appreciate everybody's time today to getting on the call, especially those out west. I know it's quite early there. As usual, I'd like to start with Exchange Bank of Canada. The most noticeable thing here is that the bank is now consistently generating profitable monthly results. I attribute that to the team primarily. We have a strong leader with sales team and as well as a strong team on our second line of defense of oversight in compliance and risk. This profitable growth is driven by the three main areas of the business, which is first, of course, banknotes. The domestic banknote activity in Canada has really rebound in all provinces, especially Quebec and Ontario. The banknote business continues to grow because of the surge in demand and as well as that we are continuing to add new customers.

Our pipeline is full with domestic potential clients, and we continue to plan on expanding domestically in Canada. Internationally, the banknote business has also grown, as Alan pointed out, strongly driven because of the Federal Reserve Bank of New York's relationship and the demand for U.S. dollars to buy or sell. This business is gonna continue to grow as we selectively look at new countries in which this bank can safely expand and grow its international banknote business. Also domestically in Canada is the payment business. Our primary business is with small to medium-sized corporations, and that business is continuing to grow as we expand our outlook as well as the team both in Quebec and in Ontario with future plans to expand out west.

Moving over to CXI, the first thing I'd like to announce is that we have finally identified and agreed to employment of a new chief financial officer. Alan Stratton is very strong and based in Toronto, and we're very happy with his work so far. This new chief financial officer is for the group, and he will be based in Orlando, Florida, starting in October. We will be making a separate announcement of that at the appropriate time. CXI, as you saw, had record volumes. This is driven, as Alan pointed out, because of our strategic plan. As you may recall from previous calls, I've outlined that is not only just a consumer expansion, but it's also our core business of financial institutions. Before I skip over, I wanna make sure that we understand the consumer division is made up of three major areas. First, our company-owned stores.

We've grown that store. We had our most recent store open in Boca Raton, Florida, and we're now over 36 stores. That is down from pre-pandemic levels because we did have to shutter some stores as we reevaluated our total strategy and looked at minimum thresholds in which we would operate our own brick-and-mortar locations. That retail business did exceed our expectations, both from travel demand as well as continued demand for exotic currencies. Additionally, in the consumer division, we have our agent locations. The most notable expansion there is where we struck a deal with the local retail operator as well as the airport authority in which a very favorable arrangement has been made where CXI operates as the wholesaler, providing its inventory, its brand, its software, and its oversight, whereas the local retailer maximizes the flows of the airport.

This business continues to grow for us, and we are excited to see our brand available in many popular U.S. airports. Lastly, our online store. As Alan pointed out, we're now available to sell to 38 different states representing over 70% of the United States population where we have a home delivery network in which we can deliver usually by FedEx to people's residences. The online store not only has a direct-to-consumer aspect, it also works with banks where in which the banks can have on their website the opportunity to have their clients order and not have to go to the bank branches and have us ship on behalf of the bank to the client's home.

The online store is a strong part of our consumer division, and we have secured an experienced digital online manager who's based currently in Texas, and he has experience in growing the online store through relationships such as travel sites where in which they will be online referrals to our store to complete any international transaction, ensuring that the client gets currency. The core bit of the CXI, as you know, is with financial institutions. Our OPOP strategy, one provider, one platform, is successful, and it's continuing to grow. One of the key elements of the OPOP strategy is the integration with banking core systems such as Fiserv and Jack Henry, as Alan pointed out. We do anticipate we're underway already with additional integrations as the integrations allow for a straight-through process of international payments.

Our focus, as you know, is to diversify our revenues to include not only the growth in banknote, but to diversify so we have an increase in payment activity. Of course, CXI also operates internationally. This is mostly banknote services, although there is some payment demand as well. The CXI will continue to focus on its international expansion, since there's a lot of new customers available to the company in markets such as the Caribbean and South and Central America. Overall, I'm really just very pleased with the results of the organization. I want to give a big thanks to our vendors who've helped us through this, and most importantly, our employees who've worked long hours, especially over July. The summer we've had, as Alan pointed out, over time as the volume did exceed our expectations.

I want to give a big thank you to the entire team for rolling up the sleeves, working long hours even on weekends to ensure that we were able to best maximize the flow that occurred this high season. With that, I would just wanna go ahead and open up the floor. If you could please respect the fact that there are other people that may wanna ask questions. If you could just keep your questions to one or two at the most, and if you do have more than that, please reach out to ask additional questions. With that, I'll turn it back to Michelle to open up the floor for any questions you may have. Thank you.

Operator (participant)

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press the star followed by the number two. Please stand by for your first question. Your first question will come from Jim Byrne of Acumen Capital. Please go ahead, sir.

Jim Byrne (Equity Research Analyst)

Yeah, good morning, guys. Congrats on the great quarter. Just a few questions from me. Alan, you mentioned some shipping delays and overtime. Could you quantify any of those impacts on Q3 results? Were there timing impacts that potentially pushed some of that into Q4? And have you been able to deal with those now? Like, are they still ongoing, you know, for the issues with the operations?

Alan Stratton (Interim CFO)

Good question, Jim. So from a timing perspective, it didn't push any revenue into Q4. It just really created some bottlenecks with inventory levels in the vaults. That's the primary one. There were some small additional vault losses, but it wasn't really anything material around that, just around the currency. But generally speaking, it's more of an operational concern. It hasn't had a large impact on our financial results.

Jim Byrne (Equity Research Analyst)

Okay, thanks. I see you're now up to 23 airport locations through the agency model. Is there an end goal in mind? You know, are you hoping to get to 50, 60, 70? What, where do you think that number can go in the future?

Alan Stratton (Interim CFO)

Randolph, would you like to take that?

Randolph Pinna (President, CEO, and Director)

I can answer that. Yeah. Thank you, Alan. Yeah, Jim, we don't have a specific goal. Airports have always been a retail area that we had shied away from due to the regulatory requirements to be a retailer in an airport. We have two solid partners that have developed a strong relationship with us, and we support their growth. They are bidding on other airport locations. If you're asking if that business line will continue to grow, we do anticipate that. So you have significant airports like San Francisco that still to this day don't have currency exchange. We support them, but we are not actively ourselves pursuing additional retail stores in airports.

We are leaving that to our several operators that we have to expand that. We're pleased with what they've done so far, and I do confirm they are working on additional airport locations, but that is not the centerpiece of our consumer expansion. Our OnlineFX, our own company stores, and the agents, of course, all make up our overall consumer division, which is being led by one of our most experienced executives in the organization. Did that answer your question, Jim?

Jim Byrne (Equity Research Analyst)

Yeah. No, that's helpful, Randolph. Thank you. Maybe just last one for me. You know, we're kinda six weeks into the quarter here for Q4. How are things shaping up from a demand perspective, and any commentary on margins and kind of expenses here so far in the quarter or if you have any guidance or qualitative.

Randolph Pinna (President, CEO, and Director)

Yeah.

Jim Byrne (Equity Research Analyst)

Guides would be helpful.

Randolph Pinna (President, CEO, and Director)

Yeah. Well, Jim, we don't provide any specific guidance per se. I can confirm that the summer has been very busy. As you probably can imagine, if you have kids, you know that August, which is the start of our Q4, still had kids on vacation. The flow that we saw during our Q3 definitely has been continuing. You know, now kids are back in school, so it is expected that it would go back to the normal slow period after the busy summer. As far as an efficiency ratio, we could have been even more efficient in the Q3. Again, volumes, you know, were double what we expected originally when we started the planning session of the year.

We are focused on improving our efficiency. We could have done a little better. In the Q4, that same focus remains. I would like to think that we can. You know, there are a lot of costs, this inflationary environment, everything from insurance to payroll to gas, everything's been going up. We've been adjusting it quarterly. We strive to keep that type of efficiency ratio.

Jim Byrne (Equity Research Analyst)

Okay. I'll pass the line. Thanks, guys.

Randolph Pinna (President, CEO, and Director)

Thank you very much, Jim.

Operator (participant)

Your next question comes from Robin Cornwell of Catalyst Equity Research. Please go ahead, sir.

Robin Cornwell (President and CEO)

Good morning, congratulations again on just an outstanding quarter. I see your leverage has finally come through in major quantities. That's terrific. My question is on the calculations on the banknote business. According to what I can calculate, if you exclude the global banknotes, it looks like your overall volumes are about 20% or so above peak levels than over the last few years. My curiosity is really that. Can you expand on that? Was it the wholesale side or the direct to consumer that has driven that business to this record level?

Alan Stratton (Interim CFO)

It's both, Robin, and it's really the end consumer that's driving it. Our wholesale clients are all dealing with end consumers, and so it's just been that strength and demand coming through from all channels. There hasn't been any one in particular. We've been adept at growing our market share in all channels. As I indicated, we had a major competitor left in 2020, that also had wholesale and retail presence. Everything we've done seems to have translated into stronger results across the channels, but I think it was just lifted by the overall final strength of the recovery around international travel, this season.

Robin Cornwell (President and CEO)

Randolph, the follow-up question is the duty-free stores. Duty Free Americas. Is that still part of your agency plan or has that changed?

Randolph Pinna (President, CEO, and Director)

No, no, of course. We appreciate our relationship with DFA. As you probably know, they're a Florida-based organization with strong owners and leaders. We value that relationship. That's been one of it. I mean, to the question Alan was answering, the overall fact is we've got more and more customer locations. Of course, the consumer demand is what drives everything in the banknote side, and that is growing. So, Duty Free continues to be a good customer of ours. We continue to hope to expand with them. But unfortunately, because of the pandemic and their needs to really cut costs during the lockdowns over the last two years, we were not able to add the southern border.

We do service all of the northern border locations between U.S. and Canada, and we're now striving this year to get a pilot going with their Mexican border locations. We're starting with just about four or five, but that's still underway. They are focused on their core business at Duty Free. This add-on service of currency exchange is part of our relationship, and we hope to continue to grow that as an additional agent location expansion opportunity.

Robin Cornwell (President and CEO)

Okay. Terrific. Thank you. Exotic currencies, was it significant in the past? It has been sometimes significant. Was it this quarter relative to your total revenue?

Randolph Pinna (President, CEO, and Director)

I'll let Alan be if he has. Yeah, go ahead, Alan. I was gonna say the travel demand is the number one reason for our increased banknote revenues on a groupwide basis. Go ahead, Alan. Sorry.

Alan Stratton (Interim CFO)

Yeah, no, I think the exotics always represent sort of I call it the cherry on top. It's nice extra business, but we can't plan for it. What we have noticed is despite the volatility in markets and crypto assets and so forth, we've continued to see strength in underlying core exotic currencies being primarily Iraqi dinar and Vietnamese dong. And that is one of the benefits of our retail network as being the channel, especially OnlineFX, that we can reach more consumers through that. So we haven't noticed a precipitous decline in that. It's continued to be strong this year, and we continue to service that market. As Randolph indicated, the growth is primarily all really related around the travel-related demand.

Robin Cornwell (President and CEO)

Okay. Finally, Randolph, can direct to consumer be introduced in Canada, or is there something limiting that?

Randolph Pinna (President, CEO, and Director)

We have made a choice, and we have not considered yet to venture into consumer direct transactions. Exchange Bank of Canada's business license was predicated on being a B2B, a bank to bank or bank to business, bank. The consumer expansion would either require CXI to expand side by side with EBC in Canada, or EBC to update its business plan to show that the consumer activity is now part of now a much more mature bank of its plan. At the moment, we have chosen not to venture into the retail or consumer direct space because all of our customers, which are financial institutions as well as money service businesses, operate in that space.

Unlike America, where there's not a lot of retail consumer locations in Canada, it's quite full. The licensing requirements to become a currency exchange in Canada is a bit easier. As a result, there's a lot of what we would call mom and pops, some of which are our customers that do that space. We at this time are focused on Exchange Bank of Canada being what it is, which is a wholesale B2B bank specialized in foreign currency exchange and foreign exchange payments for corporations and financial institutions both in Canada and international.

Robin Cornwell (President and CEO)

Okay, great. Thank you. It's all for me.

Randolph Pinna (President, CEO, and Director)

No problem.

Alan Stratton (Interim CFO)

Thanks, Robin.

Operator (participant)

Your next question comes from Stephen Ranzini of University Bank. Please go ahead, sir.

Stephen Ranzini (President and CEO)

Good morning, Randolph and Alan. Fantastic quarter. Congratulations. I've got two questions.

Randolph Pinna (President, CEO, and Director)

Thank you.

Stephen Ranzini (President and CEO)

The number of states in which you're currently licensed is 38. How many open applications do you have for licenses in additional states at this time?

Randolph Pinna (President, CEO, and Director)

There are two or three that are active right now. I wanna just clarify to make sure that there's no misinformation given to the public. Certain states we don't have a license in. We have an exemption from the state regulator. We typically try to not get a license if our business model, which is shipping currency over the state lines, which in many states is considered money transmission. Luckily, there are several states that don't consider that money transmission and don't require a money transmission license. That's our first approach as we expand. We do, you know, have the goal of hopefully getting in to be able to service almost every state.

We do have some national contracts with big brand names that I can't say right now. We do want to expand. To the question, we have, I think, 2, maybe 3 new state applications for money transmission license underway.

Stephen Ranzini (President and CEO)

Thank you. My second question is about your payments business, which includes, you mentioned ACH and wire activity. Do you also handle merchant card type business processing, under Visa, Mastercard, other payment brands? If so, which licenses do you have and which kind of license?

Randolph Pinna (President, CEO, and Director)

We do not currently do any of, you know, a Visa, Mastercard or network like that. We're also not doing DCC, which is called Dynamic Currency Conversion, which is typically around point of sale machines or ATM machines. Our foreign exchange focus is directly with executing on payments for financial institutions or corporations, as well as forward contracts on foreign exchange. We are not yet expanded into getting into the digital online marketplace in terms of processing some network exchange like that.

Stephen Ranzini (President and CEO)

Do you see that as a potential business opportunity with your current customer base? Or would that have to be a complete de novo effort?

Randolph Pinna (President, CEO, and Director)

Well, there are opportunities like DCC comes to mind, the Dynamic Currency Conversion, that's an add-on that we could offer to select financial institutions. As far as targeting a Discover card or a Mastercard type of network integration, that's not at the top of the list. Our current integration needs are focused with existing payment flows, which is typically a financial institution core operating systems as well as some other unique integration opportunities. Right now, we don't have a network integration such as a Mastercard or a Discover card.

Stephen Ranzini (President and CEO)

All right.

Randolph Pinna (President, CEO, and Director)

We continue to grow in that market, and we do have a very strong product manager that has been with us now almost a year, and he's continuing to identify opportunities to profitably add new product or service.

Stephen Ranzini (President and CEO)

Thanks so much, and good luck on the next quarter.

Randolph Pinna (President, CEO, and Director)

Thank you, Steve. Appreciate it.

Operator (participant)

Your next question comes from James Smith, a private investor. Please go ahead, sir.

James Smith (Shareholder)

Hey, good morning, everyone. Thanks for taking the question. Two quick questions. One is now that you've got the debt refinance done, and it sounds like you've got the new CFO joining shortly, can you please give an update on capital allocation priorities? Obviously, the bank's profitable, which is great to see. How are you thinking about surplus capital? The second question is around have you hired or got dedicated headcount on the FBICS program within EBC, which I know was an item that came up on a prior call? Thank you.

Randolph Pinna (President, CEO, and Director)

I'll let Alan answer the first, and I'll address the international expansion, second. Go ahead, Alan, please.

Alan Stratton (Interim CFO)

Sure. Thank you. So to your first question around capital, I say, I wouldn't call debt financing done. We've achieved, I think, a major step forward in being able to expand our existing primary facility with CXI. We still need to get a dedicated facility, long-term facility for the bank, and that will be dependent on the bank closing out this fiscal year with solid earnings that will enable it to get a new line of credit probably early next year. Secondly is the most important thing for our business is managing liquidity and ensuring we have enough liquidity. The peaks that we see with inventory and settlement transactions require that we have enough capacity to manage those. What we're looking for is to make sure we have enough capacity plus a cushion for all of our peaks.

That will probably mean we'll need some additional debt capacity before we would be in a position to repatriate capital or do anything other with capital. Because at July thirty-first, all $65 million of our equity was being used in the business. Every dollar of cash was in the process of being used, even though a lot of it is settlement related or high quality liquid assets that could be deposited in a bank account, but they are needed to fund the business. What we know is that we have, I think, the ability to lever our balance sheet, and that will eventually allow us to be more flexible with our capital in the future. One of the key things that we are focused on is identifying potential M&A targets.

We think our capital position is well suited to be able to do more transactions. That's where we're at today with it. We don't have clarity for you on anything specific around capital at this time, though.

Randolph Pinna (President, CEO, and Director)

Thank you, Alan. Yes, there is a strong focus on the capital. It's return on capital deployed and analyzing, as Alan said in his startup call, part of the call was around looking at our inventory on consignment to ensure that the inventory turnover ratio is ideal and so forth. Capital is a focus of ours and the return on equity is a key driver. As far as your question for international expansion, currently the international expansion is broken up into two businesses. First, I know you asked about Fiserv. I'll get to that next. CXI has been successfully operating with clients, financial institutions in the Caribbean and has started to expand that business with other select countries.

The leader of CXI is Chris Johnson, who's been with the company, I think, at least 15 years, about 15 years. He's a strong leader, and he is continuing to invest into his sales team with a focus as well on international expansion. Exchange Bank of Canada is led by James Devenish. He's a strong, experienced sales leader, and he too is focused on the international expansion and is recruiting for a dedicated person to really maximize the CXIFX relationship. The CXIFX relationship is not the only piece of our international expansion. We also, of course, sell other foreign currencies to institutions out of the country, as well as we look to expand our capability to sell Canadian dollars in bulk, just like we can sell US dollars.

The international expansion plan for both businesses is definitely underway, and we are still recruiting to hire people, not just for international sales, but also domestically. International is definitely a part of our key strategy. Did that answer your question?

James Smith (Shareholder)

Thanks very much, both. Best of luck.

Randolph Pinna (President, CEO, and Director)

Cheers. Thank you.

Operator (participant)

Mr. Pinna, there are no further questions. I will turn the conference back to you, sir, for closing remarks.

Randolph Pinna (President, CEO, and Director)

Okay, great. Well, we finished up on time, so I appreciate everybody's time today. Again, a big thank you to all of our team, the employees, the directors, our vendors, and all of you shareholders on the line. We really appreciate your support, your understanding as we went through the toughest time our business has ever endeavored, but we've come out on the other end now stronger, leaner and ready for significant growth in the years ahead. Again, I give a big thank you to everybody involved, all of our stakeholders. Thank you.

Operator (participant)

Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating and ask you to please disconnect your lines.