INTERNATIONAL MONEY EXPRESS, INC.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
INTERNATIONAL MONEY EXPRESS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 -– BUSINESS AND ACCOUNTING POLICIES
On July 26, 2018 (the “Closing Date”), International Money Express, Inc. (formerly FinTech Acquisition Corp. II) consummated the previously announced transaction (the “Merger”) by and among FinTech Acquisition Corp. II, a Delaware corporation (“FinTech”), FinTech II Merger Sub Inc., a wholly-owned subsidiary of FinTech (“Merger Sub 1”), FinTech II Merger Sub 2 LLC, a wholly-owned subsidiary of FinTech (“Merger Sub 2”), Intermex Holdings II, Inc. (“Intermex”) and SPC Intermex Representative LLC (“SPC Intermex”)(See Note 2). As a result of the Merger, the separate corporate existence of Intermex ceased and Merger Sub 2 (which changed its name to International Money Express Sub 2, LLC in connection with the closing of the Merger) continued as the surviving entity. In connection with the closing of the Merger, FinTech changed its name to International Money Express, Inc. (the “Company”). Unless the context below otherwise provides, the “Company” refers to the combined company following the Merger and, together with their respective subsidiaries, “FinTech” refers to the registrant prior to the closing of the Merger and “Intermex” refers to Intermex Holdings II, Inc. prior to the closing of Merger.
The Merger was accounted for as a reverse recapitalization where FinTech was treated as the “acquired” company for financial reporting purposes. This determination was primarily based on the facts that following the Merger, the former stockholders of Intermex control the majority of the voting rights in respect of the board of directors of the Company, Intermex comprising the ongoing operations of the Company and Intermex’s senior management comprising the senior management of the Company. Accordingly, the Merger was treated as the equivalent of Intermex issuing stock for the net assets of FinTech, accompanied by a recapitalization. The net assets of FinTech were stated at historical cost, with no goodwill or other intangible assets resulting from the Merger. The consolidated assets, liabilities and results of operations prior to the Closing Date of the Merger are those of Intermex, and FinTech’s assets, liabilities and results of operations are consolidated with Intermex beginning on the Closing Date. The shares and corresponding capital amounts included in common stock and additional paid-in capital, pre-merger, have been retroactively restated as shares reflecting the exchange ratio in the Merger. The historical financial information and operating results of FinTech prior to the Merger have not been separately presented in these condensed consolidated financial statements as they were not significant“us” or meaningful.
The Company“we”) operates as a money transmitter, primarily between the United States of America (“U.S.”) and Mexico, Guatemala and other countries in Latin America and Africa through a network of authorized agents located in various unaffiliated retail establishments throughout the U.SU.S. and 33 Company-ownedcompany-operated stores.
The condensed consolidated financial statements of the Company include Intermex, its wholly-owned indirect subsidiary, Intermex Wire Transfer, LLC (“LLC”), Intermex Wire Transfers de Guatemala, S.A. (“Intermex Guatemala”) - 99.8% owned by LLC, Intermex Wire Transfer de Mexico, S.A. and Intermex Transfers de Mexico, S.A. (“Intermex Mexico”) - 98% owned by LLC, Intermex Wire Transfer Corp. - 100% owned by LLC, Intermex Wire Transfer II, LLC - 100% owned by LLC and Canada International Transfers Corp. - 100% owned by LLC. Non-controlling interest in the results of operations of consolidated subsidiaries represents the minority stockholders’ share of the profit or (loss) of Intermex Mexico and Intermex Guatemala. The non-controlling interest asset and non-controlling interest in the portion of the profit or (loss) from operations of these subsidiaries were not recorded by the Company as they are considered immaterial.
The condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United statementsStates of America (“GAAP”). All significant inter-company balances and transactions have been eliminated from the condensed consolidated financial statements.
The Company’s interim condensed consolidated financial statements and related notes are unaudited. In the opinion of management, all adjustments (including normal recurring adjustments) and disclosures necessary for a fair presentation of these interim financial statements have been included. The results reported in these interim financial statements are not necessarily indicative of the results that may be reported for the entire year. Certain information and footnote disclosures required by GAAP have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.
Risks and Uncertainties
10Although governmental authorities took measures that may restrict the normal course of business of the Company, sending and paying agents as well as consumers and their beneficiaries, which may have a material adverse effect on the operations and financial condition of the Company, these changes had only a limited effect on the Company’s financial condition, results of operations and cash flows for the quarterly period ended March 31, 2020.
The Company and our sending agents are considered essential businesses under current federal guidance; however, the Company’s business is dependent upon the willingness and ability of its employees, network of agents and consumers to conduct money transfer services and the ultimate effects of the economic disruption caused by the pandemic and responses thereto. Although the Company’s operations continued effectively despite social distancing and other measures taken in response to the pandemic, the ultimate impact of the COVID-19 pandemic on our results of operations and financial condition is dependent on future developments, including the duration of the pandemic and the related extent of its severity, as well as its impact on the economic conditions, particularly the level of unemployment of our customers, which are uncertain and cannot be predicted at this time. If the global response to contain the COVID-19 pandemic escalates further or is unsuccessful, or if governmental decisions to ease pandemic related restrictions are ineffective, premature or counterproductive, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows.INTERNATIONAL MONEY EXPRESS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Accounting Pronouncements
The Financial Accounting Standards Board (“FASB”) issued guidance, Revenue from Contracts with Customers, which amended the existing accounting standards for revenue recognition. Refer to Note 3 for additional discussion on the adoption of this standard on January 1, 2019.
The FASB issued amended guidance, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which clarifies how certain cash receipts and cash payments are presented and classified in the condensed consolidated statements of cash flows. The amendments are aimed at reducing the existing diversity in practice. The Company adopted this guidance in the first quarter of 2019 applying a retrospective approach for each period presented. The adoption of this guidance did not have a material impact on the condensed consolidated financial statements.
The FASB issued guidance, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous accounting rules.GAAP. The guidance requires that a lessee recognizerecognizes a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. This guidance willis currently required to be adopted by the Company on January 1, 2021 and may be applied using either the earliest period adjustment method or the modified
retrospective approach. The Company is currently evaluating the impactadoption of this guidance willis not expected to have a material impact on the condensed consolidated financial statements.
The FASB issued amended guidance, Intangibles – Goodwill and other (Topic 350): Simplifying the Test for Goodwill Impairment. The amended standard simplifies how an entity tests goodwill by eliminating Step 2 of the goodwill impairment test related to measuring an impairment charge. Instead, impairment will be recorded for the amount that the carrying amount of a reporting unit exceeds its fair value. This new guidance is effective for the Company on January 1, 2021. The adoption of this guidance is not expected to have a material impact on the condensed consolidated financial statements.
The FASB issued guidance, Financial Instruments -– Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, regarding the measurement of credit losses for certain financial instruments. The new standard replaces the incurred loss model with a current expected credit loss (“CECL”) model. The CECL model is based on historical experience, adjusted for current conditions and reasonable and supportable forecasts. The Company is currently required to adopt the new standard on January 1, 2023. The Company is currently evaluating the impact this guidance will have on the condensed consolidated financial statements.
Reclassifications
Certain reclassifications have been made to prior-year amounts to conform with current presentation.
INTERNATIONAL MONEY EXPRESS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 – FINTECH MERGERREVENUES
FinTech Merger
As discussed in Note 1, on July 26, 2018 Intermex and FinTech consummated the Merger, which was accounted for as a reverse recapitalization. Immediately prior to the Merger, FinTech’s shareholders exercised their right to redeem certain of their outstanding shares for cash, resulting in the redemption of 4.9 million shares of FinTech for gross redemption payments of $49.8 million. Subsequent to this redemption, there were 18.9 million outstanding shares. The aggregate consideration paid in the Merger by FinTech to the Intermex shareholders consisted of approximately (i) $102.0 million in cash and (ii) 17.2 million shares of FinTech common stock. In accounting for the reverse recapitalization, the net cash proceeds received in the third quarter of 2018 from FinTech amounted to $5.0 thousand as shown in the table below (in thousands):
Cash balance available to Intermex prior to the consummation of the Merger | | $ | 110,726 | |
Less: | | | | |
Intermex Merger costs paid from acquisition proceeds at closing | | | (9,062 | ) |
Cash consideration to Intermex shareholders | | | (101,659 | ) |
Net cash proceeds from reverse recapitalization | | $ | 5 | |
| | | | |
Cash balance available to Intermex prior to the consummation of the Merger | | $ | 110,726 | |
Less: | | | | |
Cash consideration to Intermex shareholders | | | (101,659 | ) |
Other FinTech assets acquired and liabilities assumed in the Merger: | | | | |
Prepaid expenses | | | 76 | |
Accrued liabilities (1) | | | (136 | ) |
Deferred tax assets (1) | | | 982 | |
Net equity infusion from FinTech (1) | | $ | 9,989 | |
(1) During the fourth quarter of 2018, the Company acquired approximately $1 million of deferred tax assets from FinTech, which is reflected in the table above. These deferred tax assets relate to capitalized transaction costs incurred by FinTech prior to the merger, therefore they have been recorded in additional-paid in capital.
Cash consideration to Intermex shareholders included the payout of all vested Incentive Units issued to employees of the Company as discussed in Note 10.
After the completion of the Merger on July 26, 2018, there were 36.2 million shares of International Money Express, Inc. common stock outstanding, warrants to purchase 9 million shares of common stock and 3.4 million shares reserved for issuance under the International Money Express, Inc. 2018 Omnibus Equity Compensation Plan (See Note 10).
Transaction Costs
Direct costs related to the Merger were expensed as incurred and included as “transaction costs” in the condensed consolidated statements of operations and comprehensive income (loss). Transaction costs included all internal and external costs directly related to the Merger, consisting primarily of legal, consulting, accounting, advisory and financing fees and certain incentive bonuses directly related to the Merger. Transaction costs for the three and nine months ended September 30, 2018 amounted to $6.3 million and $10.3 million, respectively.
NOTE 3 – REVENUE RECOGNITION STANDARD
On January 1, 2019, the Company adopted the new accounting standard, Revenue from Contracts with Customers, as amended, which modified the existing accounting standards for revenue recognition. The guidance establishes that an entity should recognize revenue to depict the transfer of promised goods or services, that is, the satisfaction of performance obligations, to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance establishes a five-step model to determine when revenue recognition is appropriate. The Company adopted the guidance using the modified retrospective approach recording the cumulative effect of initially applying the new guidance as an adjustment to the opening balance of accumulated deficit in the condensed consolidated balance sheet, amounting to $1.0 million, net of tax, with a corresponding increase to deferred revenue liability, included within accrued and other liabilities in the condensed consolidated balance sheet. In accordance with the modified retrospective approach, the comparative information has not been restated and continues to be reported under the accounting standards in effect for that period.
INTERNATIONAL MONEY EXPRESS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the three and nine months ended September 30, 2019, the Company recognized in revenues from contracts with customers for the following:three months ended March 31, 2020 and 2019, the following (in thousands):
| | | | Three Months Ended March 31, | |
| | Three Months ended September 30, 2019 | | Nine Months ended September 30, 2019 | | | 2020 | | 2019 |
Wire transfer and money order fees | | $ | 72,710 | | | $ | 202,202 | | Wire transfer and money order fees | $ | 67,316 | | | $ | 58,658 | |
Discounts and promotions | | | (242 | ) | | | (792 | ) | Discounts and promotions | (221) | | | (207) | |
Wire transfer and money order fees, net | | | 72,468 | | | | 201,410 | | Wire transfer and money order fees, net | 67,095 | | | 58,451 | |
Foreign exchange gain | | | 12,272 | | | | 33,297 | | |
Foreign exchange gain, net | | Foreign exchange gain, net | 9,554 | | | 9,402 | |
Other income | | | 594 | | | | 1,652 | | Other income | 602 | | | 496 | |
Total revenues | | $ | 85,334 | | | $ | 236,359 | | Total revenues | $ | 77,251 | | | $ | 68,349 | |
There are no significant initial costs incurred to obtain contracts with customers. However, the Company has a loyalty program that for each wire transfer completed,under which customers earn points. Customers earn 1 point for each wire transfer processed, whichcompleted. Points can be redeemed for a discounted wire transaction fee or foreign exchange rate. The discounts vary by country, and the earned points expire if the customer has not initiated and completed an eligible wire transfer transaction within the immediately preceding 180 day period. In addition, earned points will expire 30 days after the end of the program. Therefore, due tobecause the loyalty program benefits represent a future performance obligation, a portion of the initial consideration is recorded as deferred revenue (See(see Note 6). Prior to the implementation of the standard, the Company used the incremental cost method to account for the loyalty program; therefore, and a liability for the cost associated with the company’s future obligation to its customers was created and the loyalty program expense was recorded within Service charges from agents and banks in the consolidated statements of operations and comprehensive income (loss). Under the new guidance,corresponding loyalty program expense is recorded as contra revenue. The loyalty program reserve balance asRevenue from this performance obligation is recognized upon customers redeeming points or upon expiration of January 1, 2019 of $0.6 million was credited to accumulated deficit as this became part of the beginning balance of the new deferred revenue liability.any points outstanding.
Based on our assessment of the new standard, exceptExcept for the loyalty program discussed above, we have determined that our revenues include only one1 performance obligation, which is to collect the consumer’s money and make funds available for payment, generally on the same day, to a designated recipient in the currency requested.
The Company also offers several other services, including money orders and check cashing, for which revenue is derived byfrom a fee per transaction. For substantially all of the Company’s revenues, the Company acts as the principal in the transactions and reports revenue on a gross basis, asbecause the Company 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.
NOTE 43 – OTHER PREPAID EXPENSES AND OTHER CURRENT ASSETS
Other prepaidPrepaid expenses and other current assets consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Prepaid insurance | $ | 347 | | | $ | 404 | |
Prepaid fees | 1,006 | | | 1,211 | |
Notes receivable | 792 | | | 648 | |
Prepaid taxes | — | | | 1,025 | |
Other prepaid expenses and current assets | 763 | | | 867 | |
| $ | 2,908 | | | $ | 4,155 | |
| | September 30, 2019 | | | December 31, 2018 | |
Prepaid insurance | | $ | 377 | | | $ | 300 | |
Prepaid fees | | | 733 | | | | 719 | |
Notes receivable | | | 507 | | | | 451 | |
Other prepaid expenses and current assets | | | 650 | | | | 1,701 | |
| | $ | 2,267 | | | $ | 3,171 | |
INTERNATIONAL MONEY EXPRESS, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 54 – GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets on the condensed consolidated balance sheets of the Company consist of goodwill, agent relationships, trade name, developed technology and other intangible assets. Agent relationships, trade name and developed technology are all amortized over 15 years using an accelerated method that correlates with the projected realization of the benefit. The agent relationships intangible represents the network of independent sending agents; trade name refers to the Intermex name, branded on all agent locations and well recognized in the market; and developed technology includes the state-of-the-art system that the Company has continued to develop and improve upon over the past 20 years. Other intangiblesintangible assets primarily relate to the acquisition of certain agent locations or company-ownedcompany-operated stores, which are amortized on a straight line basis over 10 years. The determination of our other intangible fair values includes several assumptions that are subject to various risks and uncertainties. Management believes it has made reasonable estimates and judgments concerning these risks and uncertainties. A change in the conditions, circumstances or strategy of the Company may result in a need to recognize an impairment charge.
See below for further discussion on impairment.
The following table presents the changes in goodwill and other intangible assets (in thousands):
| | | | | | | | | | | |
| Goodwill | | Intangibles |
Balance at December 31, 2019 | $ | 36,260 | | | $ | 27,381 | |
Amortization expense | — | | | (1,739) | |
Balance at March 31, 2020 | $ | 36,260 | | | $ | 25,642 | |
| | Goodwill | | | Other Intangibles | |
Balance at December 31, 2018 | | $ | 36,260 | | | $ | 36,395 | |
Acquisition of agent locations | | | - | | | | 335 | |
Amortization expense | | | - | | | | (7,010 | ) |
Balance at September 30, 2019 | | $ | 36,260 | | | $ | 29,720 | |
Due to the COVID-19 pandemic that has resulted in a deterioration in macro-economic conditions and stock market volatility, the Company performed a qualitative assessment on goodwill to determine whether a quantitative test was necessary. Although our fair value measurements include some significant inputs, such as the Company’s forecasted revenues and assumed turnover of agent locations, that may have or will be affected by the pandemic, we believe that as of March 31, 2020, the effects of the pandemic have not had a negative impact on the Company’s financial condition, results of operations and cash flows. As a result, there are currently no indicators that the fair value of the Company’s goodwill is below its carrying amount based on our qualitative assessment. Therefore, at March 31, 2020, we determined that a quantitative test was not necessary.
For our finite-lived intangibles, we also assessed whether there were events or changes in circumstances that indicated that the carrying amounts of our intangible assets may not be recoverable. Similar to our goodwill assessment above, we believe that as of March 31, 2020, the effects of the COVID-19 pandemic have not had a negative impact on the company’s financial condition, results of operations and cash flows. As a result, there are currently no indicators that could require an impairment test. Therefore, the carrying amounts of our intangibles are recoverable at this time.
We will continue to monitor this evolving pandemic to determine the need, if any, to further evaluate for impairment our goodwill and intangible assets.
NOTE 5 – WIRE TRANSFERS AND MONEY ORDERS PAYABLE
Wire transfers and money orders payable consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Wire transfers payable | $ | 13,719 | | | $ | 16,058 | |
Customer voided wires payable | 12,542 | | | 10,937 | |
Money orders payable | 13,617 | | | 13,202 | |
| $ | 39,878 | | | $ | 40,197 | |
Customer voided wires payable consist of wire transfers that were not completed because the recipient did not collect the funds within 30 days and the sender has not claimed the funds, and therefore are considered unclaimed property. Unclaimed property laws of each state in the United States in which we operate, the District of Columbia, and Puerto Rico require us to track certain information for all of our money remittances and payment instruments and, if the funds underlying such remittances and instruments are unclaimed at the end of an applicable statutory abandonment period, require us to remit the proceeds of the unclaimed property to the appropriate jurisdiction. Applicable statutory abandonment periods range from three to seven years.
NOTE 6 – ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Commissions payable to sending agents | $ | 10,632 | | | $ | 10,124 | |
Accrued legal settlement (see Note 12) | 2,925 | | | 3,250 | |
Accrued salaries and benefits | 1,616 | | | 2,374 | |
Accrued bank charges | 1,168 | | | 976 | |
Accrued interest | 15 | | | 17 | |
Accrued legal fees | — | | | 120 | |
Accrued other professional fees | 540 | | | 655 | |
Accrued taxes | 2,102 | | | 2,345 | |
Deferred revenue loyalty program | 2,491 | | | 2,495 | |
Other | 718 | | | 718 | |
| $ | 22,207 | | | $ | 23,074 | |
| | September 30, 2019 | | | December 31, 2018 | |
Payables to agents | | $ | 10,118 | | | $ | 8,972 | |
Accrued legal settlement (see Note 13) | | | 3,250 | | | | - | |
Accrued compensation | | | 1,998 | | | | 2,344 | |
Accrued bank charges | | | 955 | | | | 983 | |
Accrued loyalty program reserve | | | - | | | | 621 | |
Accrued interest | | | 1,185 | | | | 1,009 | |
Accrued legal fees | | | 400 | | | | 920 | |
Accrued taxes | | | 2,330 | | | | 745 | |
Deferred revenue loyalty program | | | 2,483 | | | | - | |
Other | | | 1,342 | | | | 761 | |
| | $ | 24,061 | | | $ | 16,355 | |
The following table shows the changes in the deferred revenue loyalty program liability (in thousands):
Balance, December 31, 2018 | | $ | - | |
Adoption of ASC 606 | | | 1,976 | |
Revenue deferred during the period | | | 2,104 | |
Revenue recognized during the period | | | (1,597 | ) |
Balance, September 30, 2019 | | $ | 2,483 | |
| | | | | |
Balance, December 31, 2019 | $ | 2,495 | |
Revenue deferred during the period | 438 | |
Revenue recognized during the period | (442) | |
Balance, March 31, 2020 | $ | 2,491 | |
INTERNATIONAL MONEY EXPRESS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 – DEBT
Debt consisted of the following (in thousands):
| | September 30, 2019 | | December 31, 2018 | | | | | | | | | | | |
Revolving credit facility | | $ | - | | | $ | 30,000 | | |
| | | March 31, 2020 | | December 31, 2019 |
| Term loan | | | 98,321 | | | | 90,000 | | Term loan | $ | 95,129 | | | $ | 97,044 | |
| | | 98,321 | | | | 120,000 | | |
Less: Current portion of long-term debt (1) | | | (6,405 | ) | | | (3,936 | ) | Less: Current portion of long-term debt (1) | (7,044) | | | (7,044) | |
Less: Debt origination costs | | | (2,533 | ) | | | (2,738 | ) | Less: Debt origination costs | (2,223) | | | (2,377) | |
| | $ | 89,383 | | | $ | 113,326 | | | $ | 85,862 | | | $ | 87,623 | |
(1)Current portion of long-term debt is net of debt origination costs of approximately $0.6 million both at March 31, 2020 and December 31, 2019. (1) | Current portion of long-term debt is net of debt origination costs of $0.6 million both at September 30, 2019The Company and December 31, 2018.
|
On November 7, 2018 and further amended on December 7, 2018, the Company entered into a new financing agreement (the “Credit Agreement”) with, among others, certain of its domestic subsidiaries as borrowers and(the “Loan Parties”) have a financing agreement (as amended, the “Credit Agreement”) with a group of banking institutions. The Credit Agreement provides for a $35 million revolving credit facility, a $90 million term loan facility and an up to $30 million incremental facility.facility of which $12 million was utilized in the second quarter of 2019. The Credit Agreement also provides for the issuance of letters of credit, which would reduce availability under the revolving credit facility. The proceeds of the Credit Agreement were used to repay existing indebtedness, for working capital purposes and to pay fees and expenses in connection with the transaction. The maturity date of the Credit Agreement is November 7, 2023.
On As of March 25,31, 2020 and December 31, 2019, there were 0 outstanding amounts drawn on the Company entered into an Increase Joinder No. 1 to the Credit Agreement (the “Increase Joinder”), which was accounted for as a debt modification, under which the Company received $12 million from the incremental facility on April 29, 2019. The proceeds of the Increase Joinder were primarily used to pay for the cash portion of the Tender Offer (the “Offer”) to purchase warrants (See Note 10) during the second quarter of 2019.
revolving credit facility.
Interest on the term loan facility and revolving credit facility under the Credit Agreement is determined by reference to either LIBOR or a “base rate”, in each case plus an applicable margin of 4.50% per annum for LIBOR loans or 3.50% per annum for base rate loans. The Company is also required to pay a fee on the unused portion of the revolving credit facility equal to 0.35% per annum. The effective interest rates for the period ended September 30, 2019March 31, 2020 for the term loan and revolving credit facility were 7.73%6.80% and 8.48%2.27%, respectively.
The principal amount of the term loan facility includingunder the Increase Joinder,Credit Agreement must be repaid in consecutive quarterly installments of 5.0% in year 1, 7.5% in years 2 and 3, 10.0% in years 4 and 5, in each case on the last day of each quarter, commencingwhich commenced in March 2019 with a final payment at maturity. The loans under the Credit Agreement may be prepaid at any time without premium or penalty.
The Credit Agreement contains covenants that limit the Company’s and its subsidiaries’ ability to, among other things, grant liens, incur additional indebtedness, make acquisitions or investments, dispose of certain assets, make dividends and distributions, change the nature of their businesses, enter into certain transactions with affiliates or amend the terms of material indebtedness.
The Credit Agreement also contains financial covenants whichthat require the Company to maintain a quarterly minimum fixed charge coverage ratio of 1.25:1.00 and a quarterly maximum consolidated leverage ratio of 3.25:1.00.
INTERNATIONAL MONEY EXPRESS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The obligations under the Credit Agreement are guaranteed by the Company and certain domestic subsidiaries of the Company and secured by liens on substantially all of the assets of the loan parties,Loan Parties, subject to certain exclusions and limitations.
NOTE 8 – FAIR VALUE MEASUREMENTS
The Company determines fair value in accordance with the provisions of FASB guidance, Fair Value Measurements and Disclosures, which defines fair value as an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-level fair value hierarchy that prioritizes the inputs used to measure fair value was established. There are three levels of inputs used to measure fair value. Level 1 relates to quoted market prices for identical assets or liabilities. Level 2 relates to observable inputs other than quoted prices included in Level 1. Level 3 relates to unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company’s non-financial assets measured at fair value on a nonrecurring basis include the goodwill and other intangibles.intangibles assets (see Note 4 for further discussion). The Company’s cash is representative of fair value as these balances are comprised of deposits available on demand. Accounts receivable, prepaid wires, accounts payable and wire transfers and money orders payable are representative of their fair values because of the short turnover of these items.
The Company’s financial instruments that are not measured at fair value on a recurring basis include its revolving credit facility and term loan. The fair value of the term loan, which approximates book value, is estimated by discounting the future cash flows using a current market interest rate. The estimated fair value of the revolving credit facility would approximate face value given the payment schedule and interest rate structure, which approximates current market interest rates.
NOTE 9 – RELATED PARTY TRANSACTIONS
Prior to the Merger, Intermex paid a monthly management fee of $65.0 thousand, plus reimbursement of expenses, to a related party for management services, which was included in other selling, general and administrative expenses on the Company’s condensed consolidated statements of operations and comprehensive income (loss). There were no amounts payable to or receivable from related parties included in the condensed consolidated balance sheets at September 30, 2019 and December 31, 2018. Upon closing of the Merger on July 26, 2018 (See Note 2), the management fee agreement with the related party was terminated.
NOTE 10 – STOCKHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION
On the Closing Date of the Merger, there were 36.2 million shares of the Company’s common stock outstanding and outstanding warrants to purchase approximately 9 million shares of common stock. As of the Closing Date, the former stockholders of Intermex owned approximately 48.3% and the former stockholders of FinTech owned approximately 51.7% of the combined company’s outstanding common stock. At September 30, 2019, the Company was authorized to issue 230 million shares of common stock and had approximately 38.0 million shares of common stock issued and outstanding at $0.0001 par value per common share.
On September 11, 2019, the Company entered into an underwriting agreement with certain selling stockholders and several underwriters relating to the underwritten public offering of 5.2 million shares of the Company’s common stock, at a price to the public of $12.75 per share. The selling stockholders also granted the underwriters a 30-day option to purchase up to 782,608 additional shares of Common Stock at the same price as the initial shares sold to the underwriters. The closing of the offering occurred on September 16, 2019. The Company did not receive any of the proceeds from the offering. However, it did incur approximately $0.8 million in certain costs, which are included in other selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss).
INTERNATIONAL MONEY EXPRESS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Equity Warrants
Prior to the Merger, FinTech issued 8.8 million public warrants (“Public Warrants”) and 0.2 million private placement warrants (“Placement Warrants”)(combined are referred to as the “Warrants”). The Company assumed the Warrants upon the change of control event. As a result of the Merger, the Warrants issued by FinTech were no longer exercisable for shares of FinTech common stock but instead were exercisable for common stock of the Company. All other features of the Warrants remained unchanged. There were no cash obligations for the Company pertaining to these Warrants.
Each whole Warrant entitled the holder to purchase one share of the Company’s common stock at a price of $11.50 per share. The Warrants became exercisable 30 days after the completion of the Merger and were to expire 5 years after that date, or earlier upon redemption or liquidation.
On March 28, 2019, the Company commenced a Tender Offer (the “Offer”) to purchase the Warrants. In connection with the Offer, the Company offered the holders of the Warrants a combination of 0.201 shares of its common stock and $1.12 in cash (the “Exchange Consideration”) for each Warrant tendered and exchanged pursuant to the Offer. Concurrently with the Offer, the Company solicited consents from holders of the Warrants to amend the Warrant Agreement dated January 19, 2017 (the “Warrant Agreement”), to permit the Company to require that each outstanding Warrant be converted into a combination of 0.181 shares of our Common Stock and $1.00 in cash, without interest (the “Conversion Consideration”), which Conversion Consideration was approximately 10% less than the Exchange Consideration applicable to the Offer. Approximately 99.51% of the outstanding Warrants were validly tendered and not withdrawn in the Offer. On April 29, 2019, the Company entered into Amendment No. 1 to the Warrant Agreement and, on or about May 20, 2019, exchanged all remaining untendered Warrants for the Conversion Consideration.
Between April and May of 2019, the Company issued an aggregate of approximately 1.8 million shares of common stock and paid approximately $10.0 million in cash in exchange for the Warrants tendered in the Offer as well as the Warrants converted at the Conversion Consideration, resulting in a total of approximately 38.0 million shares of common stock outstanding following the issuance. For the nine months ended September 30, 2019, the Company incurred approximately $0.9 million in professional and legal fees related to the Offer, which are included in other selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss). There were no expenses related to the Offer for the three months ended September 30, 2019.
International Money Express, Inc. 2018 Omnibus Equity Compensation Plan
In connection with the Merger, the stockholders of FinTech approved the International Money Express, Inc.Company's 2018 Omnibus Equity Compensation Plan (the “2018 Plan”). There are 3.4 provides for the granting of stock options and restricted stock units (“RSUs”) to employees and independent directors of the Company. As of March 31, 2020, there were 3.3 million shares reserved for issuance under the 2018 Plan, of which stock options to purchase 2.8 million shares of common stock and restricted stock units in respect of 21.2 thousand shares of common stock were granted to employees and independent directors of the Company in connection with the completion of the transactions at the Closing Date.
Plan.
The value of each option grant is estimated on the grant date using the Black-Scholes option pricing model.model (“BSM”). The option pricing model requires the input of highly subjective assumptions, including the grant date fair value of our common stock, expected volatility, expected forfeitures and risk-free interest rates.rates, expected term and expected dividend yield. To determine the grant date fair value of the Company’s common stock, we use the closing market price of our common stock at the grant date. We also use an expected volatility based on the historical volatilitiesvolatility of a group of guideline companiesthe Company's common stock and the “simplified” method for calculating the expected life of our stock options.options as the options are “plain vanilla” and we do not have any significant historical post-vesting activity. We have elected to account for forfeitures as they occur. The risk-free interest rates are obtained from publicly available U.S. Treasury yield curve rates.
INTERNATIONAL MONEY EXPRESS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Share-based compensation is recognized as an expense on a straight-line basis over the requisite service period, which is generally the vesting period. The stock options issued under the 2018 Plan have 10-year terms and vest in four4 equal annual installments beginning one year after the date of the grant. During both the three and nine months ended September 30, 2019, 0.7 millionMarch 31, 2020, 11.3 thousand of stock options vested. NaN stock options vested during the three months ended March 31, 2019. The Company recognized compensation expense for stock options of approximately $0.6 million for both the three months ended March 31, 2020 and $1.82019, which is included in salaries and benefits in the condensed consolidated statements of operations and comprehensive income. As of March 31, 2020, there were 3.0 million outstanding stock options and unrecognized compensation expense of $6.9 million is expected to be recognized over a weighted-average period of 2.6 years.
A summary of the stock option activity during the three months ended March 31, 2020 is presented below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Options | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (Years) | | Weighted-Average Grant Date Fair Value |
Outstanding at December 31, 2019 | 2,905,219 | | | $ | 10.51 | | | 8.74 | | $ | 3.58 | |
Granted | 160,000 | | | $ | 9.51 | | | | | $ | 3.34 | |
Exercised | (11,250) | | | $ | 9.91 | | | | | $ | 3.43 | |
Forfeited | (54,875) | | | $ | 12.80 | | | | | $ | 4.19 | |
Outstanding at March 31, 2020 | 2,999,094 | | | $ | 10.42 | | | 8.55 | | $ | 3.56 | |
| | | | | | | |
Exercisable at March 31, 2020 | 628,055 | | | $ | 9.97 | | | | 8.35 | | | $ | 3.45 | |
The RSUs issued under the 2018 Plan to the Company’s independent directors vest on the one-year anniversary from the grant date. The Company recognized compensation expense for restricted stock units of $96.2 thousand and $52.5 thousand for the three and nine months ended September 30,March 31, 2020 and 2019, respectively, which is included in salaries and benefits in the condensed consolidated statements of operations and comprehensive income (loss). As of September 30, 2019, there were 3.0 million outstanding stock options and unrecognized compensation expense of $7.9 million is expected to be recognized over a weighted-average period of 2.93 years.
A summary of the stock option activity during the nine months ended September 30, 2019 is presented below:
| | Number of Options | | | Weighted-Average Exercise Price | | | Weighted-Average Remaining Contractual Term (Years) | | | Weighted-Average Grant Date Fair Value | |
Outstanding at December 31, 2018 | | | 2,881,219 | | | $ | 10.00 | | | | 9.60 | | | $ | 3.47 | |
Granted | | | 375,000 | | | | 13.77 | | | | | | | | 4.37 | |
Exercised | | | (6,250 | ) | | | 9.91 | | | | | | | | 3.43 | |
Forfeited | | | (267,750 | ) | | | 10.28 | | | | | | | | 3.56 | |
Outstanding at September 30, 2019 | | | 2,982,219 | | | $ | 10.45 | | | | 8.97 | | | $ | 3.57 | |
| | | | | | | | | | | | | | | | |
Exercisable at September 30, 2019 | | | 658,430 | | | | | | | | | | | | | |
The restricted stock units issued under the 2018 Plan to the Company’s independent directors vest on the one-year anniversary from the grant date. The Company recognized compensation expense for restricted stock units of $17.5 thousand and $122.5 thousand for the three and nine months ended September 30, 2019, respectively, which is included in salaries and benefits in the condensed consolidated statements of operations and comprehensive income (loss). During the three and nine months ended September 30, 2019, 21.2 thousand restricted stock units were vested for both periods.income. There were no granted, forfeited restricted stock unitsor vested RSUs during the three and nine months ended September 30,March 31, 2020 and 2019. As of September 30, 2019,March 31, 2020, there was no$113.8 thousand of unrecognized compensation expense for the restricted stock units.
Incentive Units
Interwire LLC, the former parent company of Intermex, issued Class B, C and D incentive units to employees of the Company (collectively “incentive units”). As these units were issued as compensation to the Company’s employees, the expense was recorded by the Company. In connection with the Merger, on the Closing Date, all unvested incentive units for Class B, C and D became fully vested and were immediately recognized as share-based compensation expense in the third quarter of 2018. Share-based compensation expense recognized related to these incentive units and included in salaries and benefits in the condensed consolidated statements of operations and comprehensive income (loss), amounted to $4.0 million and $4.7 million for the three and nine months ended September 30, 2018, respectively. Subsequent to the Merger, all incentive units ceased to exist.
INTERNATIONAL MONEY EXPRESS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1110 – INCOME (LOSS)EARNINGS PER SHARE
Basic income (loss)earnings per share is calculated by dividing net income (loss) for the period by the weighted average number of common shares outstanding for the period. In computing dilutive income (loss)earnings per share, basic income (loss)earnings per share is adjusted for the assumed issuance of all applicable potentially dilutive share-based awards, including common stock options restricted stock units and warrants.
RSUs.
Below are basic and diluted net income (loss)earnings per share for the periods indicated (in thousands, except for share data):
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2019 | | | 2018 | | | 2019 | | | 2018 | |
| | | |
Net income (loss) for basic and diluted income (loss) per common share | | $ | 4,038 | | | $ | (13,413 | ) | | $ | 14,268 | | | $ | (12,109 | ) |
| | | | | | | | | | | | | | | | |
Shares: | | | | | | | | | | | | | | | | |
Weighted-average common shares outstanding – basic | | | 37,984,316 | | | | 30,975,338 | | | | 37,230,831 | | | | 21,827,082 | |
Effect of dilutive securities: | | | | | | | | | | | | | | | | |
Restricted stock units | | | 19,222 | | | | - | | | | 16,555 | | | | - | |
Stock Options | | | 283,164 | | | | - | | | | 100,975 | | | | - | |
Warrants | | | - | | | | - | | | | 17,010 | | | | - | |
Weighted-average common shares outstanding – diluted | | | 38,286,702 | | | | 30,975,338 | | | | 37,365,371 | | | | 21,827,082 | |
| | | | | | | | | | | | | | | | |
Net income (loss) per common share – basic and diluted | | $ | 0.11 | | | $ | (0.43 | ) | | $ | 0.38 | | | $ | (0.55 | ) |
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2020 | | 2019 |
Net income for basic and diluted earnings per common share | $ | 5,688 | | | $ | 3,156 | |
Shares: | | | |
Weighted-average common shares outstanding – basic | 38,035,014 | | | 36,182,783 | |
Effect of dilutive securities: | | | |
RSUs | 3,477 | | | 12,680 | |
Stock options | 183 | | | — | |
Weighted-average common shares outstanding – diluted | 38,038,674 | | | 36,195,463 | |
| | | |
Earnings per common share – basic and diluted | $ | 0.15 | | | $ | 0.09 | |
The computationAs of March 31, 2020, there were 3.0 million options excluded from the diluted weighted-average common shares outstanding above excludes 447,500 options to purchase shares of the Company’s common stockearnings per share calculation because, under the treasury stock method, the inclusion of these would be anti-dilutive.
As of March 31, 2019, there were 2.8 million options and 9.0 million warrants underlying shares of Company stock excluded from the diluted earnings per share calculation because, under the treasury stock method, the inclusion of these would be anti-dilutive. In April 2019, the Company executed a tender offer for all warrants, subsequent to which all warrants ceased to exist.
NOTE 12 -11 – INCOME TAXES
A reconciliation between the income tax provision at the US statutory tax rate and the Company’s income tax provision on the condensed consolidated statements of operations and comprehensive income (loss) is below (in thousands, except for tax rates):
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2019 | | | 2018 | | | 2019 | | | 2018 | |
| | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 6,291 | | | $ | (5,844 | ) | | $ | 20,204 | | | $ | (3,923 | ) |
US statutory tax rate | | | 21 | % | | | 21 | % | | | 21 | % | | | 21 | % |
Income tax expense (benefit) at statutory rate | | | 1,321 | | | | (1,227 | ) | | | 4,243 | | | | (824 | ) |
| | | | | | | | | | | | | | | | |
State tax expense, net of federal | | | 345 | | | | 1,355 | | | | 1,140 | | | | 1,471 | |
Foreign tax rates different from U.S. statutory rate | | | 26 | | | | 114 | | | | 41 | | | | 147 | |
Non-deductible expenses | | | 218 | | | | 7,411 | | | | 246 | | | | 7,484 | |
Credits | | | 8 | | | | (86 | ) | | | (1 | ) | | | (95 | ) |
Other | | | 335 | | | | 2 | | | | 267 | | | | 3 | |
Total tax provision | | $ | 2,253 | | | $ | 7,569 | | | $ | 5,936 | | | $ | 8,186 | |
INTERNATIONAL MONEY EXPRESS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2020 | | 2019 |
Income before income taxes | $ | 7,768 | | | $ | 4,237 | |
US statutory tax rate | 21 | % | | 21 | % |
Income tax expense at statutory rate | 1,631 | | | 890 | |
| | | |
State tax expense, net of federal | 400 | | | 250 | |
Foreign tax rates different from U.S. statutory rate | 32 | | | 4 | |
Non-deductible expenses | 11 | | | 9 | |
Other | 6 | | | (72) | |
Total tax provision | $ | 2,080 | | | $ | 1,081 | |
Effective income tax rates for interim periods are based upon our current estimated annual rate. The Company’s effective income tax rate varies based upon an estimate of taxable earnings as well as on the mix of taxable earnings in the various states and countries in which we operate. Changes in the annual allocation and apportionment of the Company’s activity among these jurisdictions results in changes to the effective rate utilized to measure the Company’s deferred tax assets and liabilities.
As presented in the income tax reconciliation above, the tax provision recognized on the condensed consolidated statements of operations and comprehensive income (loss) was impacted by state taxes, non-deductible expenses, such as share-based compensation expense, transaction costsexpenses and foreign tax rates applicable to the Company’s foreign subsidiaries that are higher or lower than the U.S. statutory rate.
On December 22, 2017,In January 2020, Intermex Holdings II, Inc., the U.S. enacted tax reform legislation known as H.R. 1, commonly referred to as the “Tax Cuts and Jobs Act” (the “Act”), resulting in significant modifications to existing law. All changesCompany's parent company prior to the tax code that were effective as of January 1, 2018 have been applied by the Company in computing its income tax expense for the three and nine months ended September 30, 2019 and 2018. Additional guidance issued by the U.S. Treasury Department, the IRS and other standard-setting bodies may materially impact the provision for income taxes and effective tax rate in the period in which the guidance is issued.
In 2018, FinTech Acquisition Corp IImerger, was notified by the IRS that its 2017 federal income tax return was selected for examination. The Company has complied with all information requestsrequested to date. As of September 30,March 31, 2020 and December 31, 2019, no0 amounts for tax, interest, or penalties have been paid or accrued as a result of this examination or any other uncertainexamination.
On March 27, 2020, the United States enacted the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The Cares Act is an emergency economic stimulus package that includes spending and tax positions.breaks to strengthen the United States economy and fund a nationwide effort to curtail the effects of COVID-19. The CARES Act provides various tax law changes in response to the COVID-19 pandemic, including increasing the ability to deduct interest expense, providing for deferral on tax deposits, and amending certain provisions of the previously enacted Tax Cuts and Jobs Act. After considering the provisions of the CARES Act, the Company does not expect the CARES Act will have a material effect on its annual effective tax rate for the year ending December 31, 2020.
NOTE 13 -12 – COMMITMENTS AND CONTINGENCIES
Leases
The Company is a party to leases for office space, warehouses and company-operated stores.store locations. Rent expense under all operating leases, included in other selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income, (loss), amounted to approximately $0.5 million for both the three monthsmonth periods ended September 30, 2019March 31, 2020 and 2018, and $1.5 million and $1.4 million for the nine months ended September 30, 2019 and 2018, respectively.2019.
In April 2018, the Company renegotiated its corporate lease to extend the term through November 2025. At September 30, 2019,March 31, 2020, future minimum rental payments required under operating leases for the remainder of 20192020 and thereafter are as follows (in thousands):
2019 | | $ | 381 | | |
| 2020 | | | 1,409 | | 2020 | $ | 1,149 | |
2021 | | | 1,202 | | 2021 | 1,316 | |
2022 | | | 983 | | 2022 | 1,096 | |
2023 | | | 869 | | 2023 | 882 | |
2024 | | 2024 | 776 | |
Thereafter | | | 1,439 | | Thereafter | 662 | |
| | $ | 6,283 | | | $ | 5,881 | |
INTERNATIONAL MONEY EXPRESS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Contingencies and Legal Proceedings
The Company is subject to legal proceedings and claims that have arisen in the ordinary course of its business and have not been finally adjudicated. Although there can be no assurance as to the ultimate disposition of these matters, it is the opinion of the Company’s management, based upon the information available at this time and the stage of the proceedings, that it is not possible to determine the probability of loss or estimate of damages, and therefore, the Company has not established a reserve for any of these proceedings, except for the matter related to a complaint filed under the Telephone Consumer Protection Act of 1991 (the “TCPA claim”) described below.
On May 30, 2019, Stuart Sawyer filed a putative class action complaint in the United States District Court for the Southern District of Florida asserting a claim under the Telephone Consumer Protection Act,TCPA, 47 U.S.C. § 227, et seq., based on allegations that since May 30, 2015, the Company had sent text messages to class members’ wireless telephones without their consent. AtFollowing a mediation held on October 7, 2019, the Company and the plaintiff entered into a term sheet providing the general terms for the settlement of the action, which is subject to memorializationwas memorialized in a definitive agreement, andSettlement Agreement on March 16, 2020 subject to subsequent Court approval. The terms of the settlement provideSettlement Agreement provides for resolution of Mr. Sawyer's TCPA claims and the claims of a class of similarly situated individuals, as defined in the complaint, who received text messages from the Company during the period May 30, 2015 through October 7, 2019, and for the creation of a $3.25 million settlement fund that will be used to pay all class member claims, class counsel's fees and the costs of administering the settlement.
The Settlement Agreement also established procedures for the notification of claimants and the processing of claims. The settlement fund will be managed by a duly-appointed settlement administrator which will be authorized to communicate with class members, process claims and make payments from the fund in accordance with the terms of the Settlement Agreement and the final judgment in the case. No amount of the settlement fund will revert to the Company; instead, any unclaimed funds will be sent to a consumer advocacy organization approved by the Court.
The settlementremaining balance of the amount payable under the Settlement Agreement of approximately $3.3$2.9 million and related legal expenses of $0.1 million areis included in accrued and other liabilities in the condensed consolidated balance sheet as of September 30, 2019 and other selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss) for both the three and nine month periods ended September 30, 2019.
Contingencies
March 31, 2020.
The Company operates in 50all U.S. states, two2 U.S. territories and three3 other countries. Money transmitters and their agents are under regulation by Statestate and Federalfederal laws. Violations may result in civil or criminal penalties or a prohibition from providing money transfer services in a particular jurisdiction. It is the opinion of the Company’s management, based on information available at this time, that the expected outcome of regulatory examinations will not have a material adverse effect on either the results of operations or financial condition of the Company.
Regulatory Requirements
CertainPursuant to applicable licensing laws, certain domestic subsidiaries of the Company are subjectrequired to maintainingmaintain minimum tangible net worth and liquid assets (eligible securities) to cover the amount outstanding of wire transfers and money orders payable. As of September 30, 2019,March 31, 2020, the Company’s subsidiaries were in compliance with these two requirements.
NOTE 1413 – SUBSEQUENT EVENTS
The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date the condensed consolidated financial statements are issued. Except for the matter discussed in Note 13,below, there were no other subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements.
On April 20, 2020, the Company received funds under the Paycheck Protection Program (the “Program”) in the amount of $3.5 million. Although the Company believes that it met all eligibility criteria for a loan under the Program at the time of its application, subsequent to receiving the funds, the Small Business Administration (“SBA”), in consultation with the Department of the Treasury (“Treasury”), provided additional guidance to address public, borrower and lender questions concerning the eligibility criteria under the Program. Based on this subsequent guidance provided by the SBA and Treasury, the Company returned the funds received under the Program on April 29, 2020.
ITEM 2.
| ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements and related Notes included in this Quarterly Report on Form 10-Q, andas well as our Audited Consolidated Financial Statements and related Notes and MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2018.2019. This MD&AQuarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in other sections of this Quarterly Report on Form 10-Q.10-Q, including risks related to the COVID-19 pandemic described in Pt. II, Item 1A, “Risk Factors” below which is incorporated in the MD&A by reference. See “Special Note Regarding Forward-Looking Statements” for additional factors relating to such statements, and see “Risk Factors” in ourthe documents that we have filed with or furnished withto the SEC for a discussion of certain risk factors applicable to our business, financial condition and results of operations. Past operating results are not necessarily indicative of operating results in any future periods.
Recent Developments
During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (“COVID-19”). The pandemic has significantly affected economic conditions in the U.S., accelerating during the first half of March and continuing into April, as federal, state, local and foreign governments reacted to the public health crisis with mitigation measures, creating significant uncertainties in the U.S. and global economy. The extent to which the coronavirus pandemic affects our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict. Due to heightened uncertainty relating to the effects of the COVID-19 pandemic on our business operations, including the duration and impact on overall customer demand, we withdrew our 2020 guidance.
Our top priority has been to take appropriate actions to protect the health and safety of our employees. We have adjusted standard operating procedures within our business operations to ensure continued worker safety, and are continually monitoring evolving health guidelines and responding to changes as appropriate. These procedures include reconfiguring facilities to reduce employee density, expanded and more frequent cleaning within facilities, implementation of appropriate and mandated distancing programs, employee temperature monitoring and requiring use of certain personal protective equipment at our call centers in Mexico and Guatemala. We have also implemented a mandatory work-at-home program for the foreseeable future for all of our administrative offices and employees in all countries where we operate. We have also significantly limited the addition of new employees, eliminated all travel, acted to limit discretionary spending and temporarily closed our 33 company-operated stores (which represented only 2.3% of our total revenue in 2019). Notwithstanding the operational challenges created by these measures, our business continues to function and, to date, our customer service has not been adversely affected in any material respect. To the extent the business disruption continues for an extended period, additional cost management actions may be considered. Despite these efforts, the COVID-19 pandemic continues to pose the risk that we or our employees, sending and paying agents, as well as consumers and their beneficiaries, may be prevented from conducting business activities, partially or completely, for an indefinite period of time, including due to shutdowns that may be requested or mandated by governmental authorities or imposed by our management, or that the pandemic may otherwise interrupt or impair business activities.
These changes had only a limited effect on the Company’s financial results for the quarterly period ended March 31, 2020. We have seen a slight year over year decrease in our volume of transactions since the beginning of the pandemic, which we continue to monitor. The economic effects of the pandemic also caused increased foreign exchange volatility particularly with respect to the Mexican peso, which has created additional operational challenges, although the overall effect on our results of operations has been positive.
The Company and our sending agents are considered essential businesses under current federal guidance. However, the Company’s business is dependent upon the willingness and ability of its employees, network of agents and consumers to conduct money transfer services and the ultimate effects of the economic disruption caused by the pandemic and responses thereto. Although the Company’s operations continued effectively despite social distancing and other measures taken in response to the pandemic, the ultimate impact of the COVID-19 pandemic on our financial condition, results of operations and cash flows is dependent on future developments, including the duration of the pandemic and the related extent of its severity, as well as its impact on the economic conditions, particularly the level of unemployment of our customers, which are uncertain and cannot be predicted at this time. If the global response to contain the COVID-19 pandemic escalates further or is unsuccessful, or if governmental decisions to ease pandemic related restrictions are ineffective, premature or counterproductive, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows.
Overview
We are a rapidly growing and leading money remittance services company focused primarily on the U.S.United States to the Latin America and the Caribbean (“LAC”) corridor, which includes Mexico, Central and South America and the Caribbean. We utilize our proprietary technology to deliver convenient, reliable and value-added services to our customers through a broad network of sending and paying agents. Our remittance services, which include a comprehensive suite of ancillary financial processing solutions and payment services, are available in all 50 states in the U.S., Washington D.C., Puerto Rico and licensed in 13 provinces in Canada, where customers can send money to beneficiaries in 17 LAC countries, and four countries in Africa.Africa and one country in Asia. Our services are accessible in person through over 100,000 sending and paying agents and company-operated stores, as well as online and via Internet-enabled mobile devices.
In 2019, we expanded our services to allow remittances to Africa from the United States and also began offering sending services from Canada to Latin America and Africa. Additionally, we have expanded our product and service portfolio to include online payment options, pre-paid debit cards and direct deposit payroll cards, which may present different cost, demand, regulatory and risk profiles relative to our core remittance business.
Money remittance services to Latin America,LAC countries, primarily Mexico and Guatemala, are the primary source of our revenue. These services involve the movement of funds on behalf of an originating customer for receipt by a designated beneficiary at a designated receiving location. Our remittances to Latin AmericaLAC countries are primarily generated in the United States by customers with roots in Latin American and Caribbean countries, many of whom do not have an existing relationship with a traditional full-service financial institution capable of providing the services we offer. We provide these customers with flexibility and convenience to help them meet their financial needs. Other customers who use our services may have access to traditional banking services, but prefer to use our services based on reliability, convenience and value. We generate money remittance revenue from fees paid by our customers (i.e., the senders of funds), which we share with our sending agents in the originating country and our paying agents in the destination country. Remittances paid in local currencies that are not pegged to the U.S. dollar also earn revenue through our daily management of currency exchange spreads.
Our money remittance services enable our customers to send and receive funds through our extensivebroad network of locations in the United States and Canada that are primarily operated by third-party businesses, which weas well as 33 company-operated stores (currently closed as noted above). Transactions are processed and payment is collected by our agent (“sending agent(s)”) and those funds become available for pickup by the beneficiary at the designated destination, usually within minutes, at any Intermex payer location (“paying agent(s)”). We refer to asour sending agents and 33 company-operated stores.our paying agents collectively as agents. In addition, our services are offered digitally through Intermexonline.com and via Internet-enabled mobile devices. We currently operate in the United States, Mexico, Guatemala, Canada and 1915 additional countries.countries in LAC corridor, four countries in Africa and one in Asia. Since January 20172019 through September 30, 2019,March 31, 2020, we have grown our sending agent network by more than 77%10% and increased our remittance transactions volume by approximately 49%17%. In the three and nine months ended September 30, 2019,March 31, 2020, we processed approximately 7.6 million and 21.17.0 million remittances, respectively, representing approximately 19% and 21%14% growth in transactions, respectively, as compared to the same periodsperiod in 2018.
2019.
As a non-bank financial institution in the United States, we are regulated by the Department of Treasury, the Internal Revenue Service, FinCEN, the CFPB,Consumer Financial Protection Bureau (“CFPB”), the Department of Banking and Finance of the State of Florida and additionally by the various regulatory institutions of those states wherein which we hold an operating license. We are duly registered as an MSBa Money Service Business (“MSB”) with FinCEN, the financial intelligence unit of the U.S. Department of the Treasury. We are also subject to a wide range of regulations in the United States and other countries, including anti-money laundering laws and regulations;regulations; financial services regulations;regulations; currency control regulations;regulations; anti-bribery law;laws; money transfer and payment instrument licensing laws;laws; escheatment laws;laws; privacy, data protection and information security laws;laws, such as the Graham-Leach-Bliley Act (“GLBA”); and consumer disclosure and consumer protection laws.laws, such as the California Consumer Privacy Act (“CCPA”).
Key Factors and Trends Affecting our Business
Various trends and other factors have affected and may continue to affect our business, financial condition and operating results, including:including, but not limited to:
•the COVID-19 pandemic, responses thereto and the economic and market effects thereof, including unemployment levels and increased capital market volatility;
•competition in the markets in which we operate;
•volatility in foreign exchange rates that could affect the volume of consumer remittance activity and/or affect our foreign exchange related gains and losses;
•cyber-attacks or disruptions to our information technology, computer network systems and data centers;
•our ability to maintain agent relationships on terms consistent with those currently in place;
•our ability to maintain banking relationships necessary for us to conduct our business;
•credit risks from our agents and the financial institutions with which we do business;