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Edited Transcript of CXI.TO earnings conference call or presentation 12-Mar-20 12:30pm GMT

Q1 2020 Currency Exchange International Corp Earnings Call

ORLANDO Mar 28, 2020 (Thomson StreetEvents) -- Edited Transcript of Currency Exchange International Corp earnings conference call or presentation Thursday, March 12, 2020 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bill Mitoulas

Currency Exchange International, Corp. - IR Manager

* Randolph W. Pinna

Currency Exchange International, Corp. - CEO, President & Director

* Stephen Fitzpatrick

Currency Exchange International, Corp. - CFO

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Conference Call Participants

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* Robin Cornwell

Catalyst Equity Research, Inc. - President and Founder

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Currency Exchange International 2020 Q1 Financial Conference Call.

(Operator Instructions)

I would now like to hand the conference over to your speaker today, Bill Mitoulas. Thank you. Please go ahead.

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Bill Mitoulas, Currency Exchange International, Corp. - IR Manager [2]

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Thank you, Stephanie, and good morning, everyone. Welcome to Currency Exchange International's first quarter conference call to discuss the financial results for the 3-month period ending January 31, 2020. Thank you all for joining us. With us today are President and CEO, Randolph Pinna; and Chief Financial Officer, Stephen Fitzpatrick. Stephen will begin with a brief comment on the quarter's financial results, followed by his latest perspective on the company's operations. Randolph will then comment on the bank's performance, sales and business activities. And after which, we'll open it up to 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 our call before its conclusion, please be advised that this 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.

And with that, I'll turn the call over to Stephen.

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Stephen Fitzpatrick, Currency Exchange International, Corp. - CFO [3]

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Thanks, Bill. And thank you, everybody, for joining today's call. I expect many of you have global events on your mind and, in particular, have questions about how that might affect us. And we have those same events on our minds. So, I -- in my portion of this call, I'm going to focus on the results for the first quarter, as Bill said. And then Randolph, in his remarks, will talk about the impact of COVID-19 specifically and what we think -- how we're going to deal with that.

So I'll give you a brief overview of the results of the first quarter of 2020. They're presented in U.S. dollars unless otherwise noted. And as we've stated in the past, our business is typically seasonal, and it typically coincides with the peak spring and summer travel seasons in the U.S. and Canada, which usually means that the first and second quarters are slower and the third and the fourth quarters are usually, and I underline usually, much stronger.

Overall, we're very pleased with our financial performance in the first quarter. It continued the trend of improvement in operating leverage that began in the last quarter of fiscal 2019 and coupled with the strong revenue growth that aided in achieving a net profit in the first quarter of this year versus the net loss in the first quarter of 2019. On a fully diluted basis, this translated into earnings of $0.02 per share versus a loss of $0.03 per share a year ago.

Our core bank note business remains strong, growing 13% overall, but with 26% growth in wholesale revenues as we continue to add new clients and locations. Payments revenue grew 59%, and it increased to 9% of total revenue compared to 6.7% in the first quarter last year, evidence that our strategy to diversify our revenue base is gaining traction.

Also noteworthy in the quarter was that this was the quarter in which we adopted -- the company adopted IFRS 16, which is a new accounting rule. It requires us to record leases differently than we have in the past. And as a result, we have $6.1 million in lease liabilities on the balance sheet and a corresponding, what's called, right-of-use assets of roughly $5.2 million. As we adopted it, using what's called the modified retrospective approach, the prior year comparatives of our financial statements have not been restated. Instead, we have made a onetime negative adjustment to retain earnings, in the amount of $341,000. That was recorded on November 1, so it shows up in the first quarter statements, obviously. But that represents a retroactive adjustment to our financials without having to restate them.

IFRS 16 impacted a number of lines on both the statement of operations and the statement of financial position, and I will highlight a few of those in a few minutes. However, what I would like to do is draw your attention to a table that was included in the MD&A to present select financial data from Q1 2020 as if it had been recorded under the previous standard, IAS 17, to help you in comparing this year to last year. That's on Pages 10 and 11 of the MD&A.

So overall, revenue increased 17% in Q1 -- over Q1 2019 to $9.9 million from $8.5 million. We continued to see an increase in the number of customer transactions, resulting from the addition of 2 new CXI-owned branches since the same quarter last year, which brings our total to 46 and 580 new customer relationships, representing 2,005 new transacting locations, which is 16% -- or resulting in a 16% increase in transactional activity since January of last year.

Total transaction volume or dollar values increased by nearly 57% over the first quarter last year. And that's attributable to growth in wholesale volumes for high-volume existing clients, particularly in the bank, growth in payments volumes and growth in check volumes. Meeting our expectations. Q1 revenue growth was partially attributable, about 1/3 of the wholesale revenue growth to the acquisition of eZforex on September 6, 2019. And that business has been integrated now largely into our platform.

Core revenues in the retail business remained stable with modest growth in volumes year-over-year in the major and minor currencies, and much less volatility in exotic currencies than we've seen in recent quarters.

As we've indicated in our last few calls, the company's strategy is to diversify its revenue streams, so our investment priorities are directed towards the high-growth potential on payments and wholesale businesses over new retail stores.

Turning now to operating expenses, which has been the focal point of our conversations with many of you through the past year. We continue to see a moderation in expense growth as we're nearing the end of the building phase for the platform to support the bank in Canada. Operating expenses increased by 6% in the first quarter over the same quarter last year. However, that's a bit misleading. IFRS 16 replaced approximately $600,000 in rent expense. And so on a pretax basis, net income before tax is largely neutral. But adjusting for the impact of IFRS 16 on operating expenses, they actually would have increased 14% to $9.3 million in the first quarter of 2020 compared to Q1 2019.

Providing context, in Q1 of 2019, expenses increased by 23% over the prior year, and it's 14% in this quarter. So what I'm trying to say is that we are getting the expense growth under control. The 14% growth is still relatively high, but the effect of adding capabilities throughout 2019 is still working its way through our numbers.

Salaries and wages grew 7% over the prior year, accounting for a number of new roles hired after Q1 2019 in operations, compliance, risk management and other functions that are support roles in CXI and EBC. Pace of hiring has now slowed considerably, and we expect new roles to -- in the future to primarily be in support of growth that we're realizing.

Of note, with regard to posting and shipping expenses, we continue to focus on that line. And for Q1 2020, shipping costs were 11% higher than Q1 2019, supporting a 16% increase in transaction volumes, contributing to positive operating leverage.

Bank fees increased a little over $100,000, primarily in relation to the growing payments business and -- because those -- these are transaction-based. The other G&A category was up about $300,000 over last year, mainly due to foreign exchange losses on the balance sheet, not hedging losses, and an increase in sundry losses that were driven by a onetime accrual adjustment.

On a positive note, I'd like to highlight that many of our expense areas were within a marginal variance over last year, areas such as legal and professional fees, travel and entertainment, software, insurance. These -- this reflects the vigilance that we've been applying in managing our cost structure while still investing for growth in key areas.

Ratio of operating expenses to total revenue for the 3-month period was 88%. But if -- again, if you adjust for IFRS 16, that ratio would have been 94% compared to 97% for the 3 months period ending January 31, 2019, reflecting gradual and continuing improvement in operating leverage. This ratio was traditionally higher -- typically higher during the winter months, and it decreases typically as the fiscal year progresses.

So overall, net operating income EBITDA in Q1 2020 improved by $0.9 million to $1.2 million from $271,000, but $0.6 million of that was driven by the adoption of IFRS 16, as I mentioned a few minutes ago. The IFRS change actually makes EBITDA a less meaningful measure of our business. And internally, we're now using net income before tax as our performance measure since it includes all the costs of running the business and it neutralizes the effect of IFRS 16.

In terms of our balance sheet, we continue to remain financially strong and well capitalized, with over $71 million in cash as of quarter end, up from $63 million a year ago. Total assets at $108 million versus $83 million a year ago, a 30% increase. $5 million of that increase is attributable to the initial recognition of right-of-use assets under IFRS 16. $13 million is related to accounts receivable, which is the other large working capital asset besides cash. It was at $22 million. These balances do fluctuate significantly depending on settlement timing for customer transactions. And I can tell you that all significant items in accounts receivable at January 31, 2020 were subsequently received in February.

As I mentioned a few times, the biggest change to our balance sheet in the fourth quarter was the previously discussed adoption of IFRS 16. Total liabilities increased by approximately $25 million because of 3 factors: the increase in the line of credit by approximately $10 million, the write-off of lease liabilities in the amount of $6 million and an increase in accounts payable that's associated with transaction settlement and related to -- in some ways, it's related to the increase in accounts receivable.

Despite that increase, the company -- in liabilities, we have the ability to add debt to our balance sheet to take advantage of leverage, if necessary. We have -- given that strong capital base, we're in a strong position to finance transactions and to weather any adverse events that could be coming.

At this time, that concludes my remarks. And I'll turn it over to Randolph.

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Randolph W. Pinna, Currency Exchange International, Corp. - CEO, President & Director [4]

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Thank you, Stephen. Good morning, everyone, and especially to those out West. I appreciate you getting up early for us. As usual, I'd like to start discussing the discussion with Exchange Bank of Canada. If you've noticed, it was probably one of the strongest quarters the bank had had. We're very pleased with the progress of Exchange Bank of Canada. The #1 focus of Exchange Bank is to continue to expand its wholesale banking relationships. It's what we call our long-term strategic partnerships. And with that in mind, I'm happy to report that our work with the New York Federal Reserve Bank is progressing very well and on time, and we are keenly looking forward to getting a direct relationship with the New York Fed since the bank's #1 currency exchange is U.S. dollars, not euros. And this last few quarters, including up to recently, we have been seeing a very strong U.S.-Canadian exchange.

The other focus is to continue to diversify our revenue streams. We are very focused on growing our payments business. You're seeing the results in the continued growth in payments revenue. With that in mind, we are very close to taking on a very strong Senior Vice President of Sales strictly for Exchange Bank of Canada's continued growth. I'm anxious to announce that appointment, and we're in the final stages of that.

We also are making good progress with our proposed acquisition in Montreal. I'll be there tomorrow with customers. And we are very pleased overall with the Exchange Bank of Canada's performance.

Moving on to CXI. It also had a very strong quarter. We now have a very large customer base, and it's continuing to grow. The CXI group has a very strong foundation with, as Stephen pointed out, our balance sheet being very strong. But more importantly, we have the entire team in place. We are not needing to hire any senior people at the CXI. We are just going to continue to focus on our pipeline. And that pipeline, in my entire 30-year career, is the fullest I've ever seen it. Due to recent events with competitors and the changes in the overall industry, we -- CXI is now shining, with its good reputation, as the best provider in the United States for foreign currency. So this recent slowdown that this virus is scaring the world, is actually allowing us the capability to maximize and bring in that pipeline faster than usual because we do have capacity within our existing group to use these people to ensure that we get the pipeline -- out of the pipeline into the company's customer base. And this is a top focus for our group. Those customers are not just banknote customers, they are also quite a lot of payment customers. Payments are, again, checks, processing, wire transfers and forward contracts on foreign exchange.

We continue to focus on our strategy of diversifying our payment revenues. So banknotes, of course, is still a key part of that. With international expansion, the Miami office has been taking a few more customers from the islands and down South. And that is, again, banknotes or could be payment processing. Our strategy is to continue to grow our customer base and continue to diversify our revenue streams from banknotes and payments.

In retail, as I've said in previous quarters, we are not focused on adding more retail stores. We do have one that's been in the pipeline. It's going to be opening very soon in Downtown Manhattan. And another initiative that was a very positive attribute of the eZforex acquisition was they had, for 10 years, been using a program called Currency Price Protection. Now more than ever, this Currency Price Protection is in high demand due to the uncertainty of future travel, and it's called CPP. CPP has an income line on itself for the fee of $10 that we charge for locking in your exchange rate. In case of adverse travel, you can return. This is something that's been in the final stages and trying to be worked into the retail network.

I do want to point also that the U.S. President has made a surprise announcement yesterday. The European traveler is not the only key customers we have. As you know, we announced the Duty Free America relationship, and as of just the other day, this continues to be very strong. The Canadians currently are still driving south, and Americans are still driving north over the borders. And so these relationships will continue to provide revenues, should the market continue to react or overreact in the situation.

So with that being said, I would like to take a second to talk about the events. First of all, and most importantly, the management team and I, in our 30 years of running this business, have been through the 9/11, where virtually all travel stopped after 9/11. We've been through SARS. We've been through other virus events like the...

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Stephen Fitzpatrick, Currency Exchange International, Corp. - CFO [5]

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H1N1.

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Randolph W. Pinna, Currency Exchange International, Corp. - CEO, President & Director [6]

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H1N1. We've been through quite a lot. And so our management team is knowing how to respond to this. Of course, it's changing every day. So we have created a COVID-19 committee, a subcommittee of the Executive Committee. And we are monitoring this daily and we are making changes. So we have already reduced retail store hours to tighten down the cost in the operating hours. We have looked at overtime situations. We've made adjustments to help minimize the negative impact in the drop of revenues that is happening due to the decisions by companies around the world to stop travel. Our company is in a strong position to continue to weather the storm and continue to grow. While we cannot forecast if this is 3 months or 6 months or what the overall impact will be to the business, what we can do is continue to focus on closing large contracts. We have many in the pipeline. And again, we are using this slowdown as an opportunity to really maximize our business and set the stage for a great years ahead once this virus storm blows over.

So with that being said, I would like to open up the lines to your questions. And Stephen and I will be happy to answer them if we can. Thank you. Thank you, Stephanie.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Robin Cornwell with Catalyst Research.

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Robin Cornwell, Catalyst Equity Research, Inc. - President and Founder [2]

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Thanks for your comments, Ran, and also very interesting. I have a couple of questions on that. First of all, just, Stephen, the onetime adjustment in the expense that you mentioned, was that a very big number?

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Stephen Fitzpatrick, Currency Exchange International, Corp. - CFO [3]

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It was about $57,000.

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Robin Cornwell, Catalyst Equity Research, Inc. - President and Founder [4]

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Sorry, how much?

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Stephen Fitzpatrick, Currency Exchange International, Corp. - CFO [5]

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$57,000. It's not...

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Robin Cornwell, Catalyst Equity Research, Inc. - President and Founder [6]

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$57,000. Okay. I saw that. Okay. And exotic currencies, I didn't quite hear what the effect was this quarter. Was it kind of neutral?

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Stephen Fitzpatrick, Currency Exchange International, Corp. - CFO [7]

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Yes. Yes, it was really a non-event. There's not -- we saw a major -- larger declines last year. So it didn't have much of -- in terms of dampening or increasing, it was really more neutral.

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Robin Cornwell, Catalyst Equity Research, Inc. - President and Founder [8]

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Okay. Okay. And finally, you changed the number of transacting locations, that little table that you had on it. And they didn't say what the actual total number was that you used to publish for the quarter. I understand your transparency if those are the actual locations that are that transacted during the quarter. But I didn't see the total for -- that you used to publish.

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Stephen Fitzpatrick, Currency Exchange International, Corp. - CFO [9]

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I'm not sure we put that in.

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Robin Cornwell, Catalyst Equity Research, Inc. - President and Founder [10]

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No. I don't think you did. That's okay. I can catch over to you later.

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Randolph W. Pinna, Currency Exchange International, Corp. - CEO, President & Director [11]

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And Robin, just so you're aware, that number is focused on banknote transactions. We are reviewing whether this should be a statistic to continue to put out or -- and/or we put out more clarity around corporate payment customer locations. So those exact locations are banknote locations. And we'll take that away because we should continue to provide the data so you could have quarter-to-quarter comparisons, but it is something now we are very focused on adding more and more corporate relationships or payments. And payments, just so you're aware, don't just come from corporate. They also come from financial institutions. But again, that statistic has always been about the banknote transacting locations. But it is definitely over 20,000, and we can try to look at that.

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Stephen Fitzpatrick, Currency Exchange International, Corp. - CFO [12]

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Yes. Yes. I mean, what we -- all we're trying to convey was -- and if you look at the Q1 this year compared to Q1 last year, there's some significantly higher volume of transacting locations. So that's what we were trying to convey as opposed to total number from quarter-to-quarter. The total number of locations, we're trying to convey the actual numbers that are active, doing transactions and have grown significantly compared to a year ago. If what we're providing isn't useful or helpful, then -- or if we need to add to it, we can do that.

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Robin Cornwell, Catalyst Equity Research, Inc. - President and Founder [13]

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No. That is quite useful, actually very useful. It was just kind of -- like to track the total number because that's what has been tracking. And it is an interesting number, especially what the next question I have for Randolph is, I was very interested in your comments about the issues going on in your industry and that you are potentially the best of class. And what -- how you're being approached? Why you're being approached by more potential clients? What's going on in the industry that's made you kind of make this comment?

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Randolph W. Pinna, Currency Exchange International, Corp. - CEO, President & Director [14]

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Well, I don't want to use any names in this answer. So if you Google who our competitors are and recent events that they've had, and they've had quite a few challenges. And because they also service some financial institutions, the financial institutions are now looking to do business with a U.S.-based company that is well-structured, that has a bank group focus. And as a result, it's well prepared to handle events like the current one we're in or the one that troubled our competitor. And so we -- plus, I would like to say our sales people are doing a good job, continuing to get the word out. But to why it's -- the pipeline is extremely full, is there have been events in the industry with competitors that have opened the eyes of other future prospective customers. And again -- and then once their eyes are open, they look and we do stand out. We are now -- I'm confident to say we are the leading U.S. banknote provider to financial institutions across the United States and also here in Canada for Exchange Bank. But there's been situations that have accelerated and assisted our sale team's efforts. And so we are truly at a very good position with continued growth in the United States in our core business of providing financial institutions, foreign exchange solutions.

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Robin Cornwell, Catalyst Equity Research, Inc. - President and Founder [15]

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Also, the payments for Exchange Bank. What is the potential acquisition in Québec? It's been going on for quite a while. And some investors are quizzing what -- why would that be delayed so much or whatever they're doing? I know it's a difficult question for you to answer, but I'm just reflecting what some people are asking.

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Randolph W. Pinna, Currency Exchange International, Corp. - CEO, President & Director [16]

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And it's a fair question and it's a fair concern that they could have as to what is the problem. But our bank and our Board is very focused to ensure that we are well structured with both people and technology to add on the additional 400 corporate clients that we hope to acquire. And this involves things like forward contracts, where we can -- to evidence we're operationally ready to mark-to-market the forwards. Because if you're familiar with the forward product, there is a deposit, if you want to use that word, there's a portion that's prepaid. And if the contract goes out of the money, you have to have a margin call. And so we've invested heavily in 2019 both in system and people to ensure that we are fully operationally ready. And so as we look at 2020, we feel now we are. And so I'm happy to say that we've made great progress, and I would like to think we're getting closer to the good news. And most importantly, our company and our bank is very well-structured now. The forwards product is officially available, and so we are ready. And therefore, this -- while it's been a lot of cost and a lot of delay in time, the bank is in the best position it's ever been. And we're very comfortable with where we are, and we will continue to focus on this. Now more than ever, we are keen to make this happen because payments are not as directly -- are not nearly as directly affected by things like what Trump did last night. And so the payment revenues is a key focus for the bank and our group, and so we will continue to stay on top of this and try to move this forward as quickly as possible.

So I don't know if that was the answer you wanted, Robin. But that's like the status update of where we're at.

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Robin Cornwell, Catalyst Equity Research, Inc. - President and Founder [17]

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That was excellent. So basically, you're in the forwards business now as you -- but you weren't a quarter or so ago?

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Randolph W. Pinna, Currency Exchange International, Corp. - CEO, President & Director [18]

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The bank was not. CXI was the first to launch the forward product. We follow our Board. It's quite clear about everything important we do, follows what's called the change management initiative process. And so CXI did a change management initiative to start forwards about a year or maybe a little more ago. At CXI, we did a pilot run on it. And it was successful. And we graduated that pilot into a full product offering at CXI. We then adopted those processes and some of the systems to EBC. EBC did launch a forward pilot. And just as very recent, we're graduating that product, piloting to a full blown service for Exchange Bank. And this was a key part of some of the delay because the acquisition that's proposed, about 20% to 25% of their book, their customers were using forwards. And so we needed -- our Board wanted our company, the bank to ensure that it was truly operationally ready with both the people and the systems to do that. And we're now feeling we are. And again, we're looking forward to having revenues from this acquisition that are not related to banknotes, that are related to payments. And so the bank is now in a good spot, I believe.

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Robin Cornwell, Catalyst Equity Research, Inc. - President and Founder [19]

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Got it. Excellent. And one last quick question, maybe it was the Duty Free America, how is that progressing?

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Randolph W. Pinna, Currency Exchange International, Corp. - CEO, President & Director [20]

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It's good. We are in the early stages of Phase 2. The Phase 1 has finally been completed. So all of their Northern border locations are there. And as of just the other day, I looked, and they are still on track of where we thought they would be. So the travels north and south with cars luckily has not been affected. And so we are now looking at Phase 2, which involves their possible airport locations and/or Phase 3, which is the Southern border locations. And so we have a dedicated account manager to this relationship as well as it's receiving support from our retail network because we do consider these retail locations for us because they're an agent relationship. And so they are under CXI's operating licenses in each of the states. And so we are focused on continuing that. That's what I was saying. While, even though there's a slowdown because of this virus, it's freeing up more time to really close all the deals that are in the pipeline. And again, this is already signed contracts. So it's just a matter of working with that management team, training the new locations and getting them up and running. And so we are -- that is progressing. And there are other opportunities as well.

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Operator [21]

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(Operator Instructions)

There are no questions at this time.

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Randolph W. Pinna, Currency Exchange International, Corp. - CEO, President & Director [22]

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Okay. Thank you. Thank you, Stephanie. Thank you, everybody, for listening. We appreciate your support, and we will continue to provide updates as the business progresses. If there's any big news, of course, we will be sending out a press release. Thank you, and have a good day.

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Operator [23]

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Thank you. This concludes today's conference. You may now disconnect.