CPI CARD GROUP INC., 10-Q filed on 5/6/2020
Quarterly Report
v3.20.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2020
Apr. 23, 2020
Document and Entity Information    
Entity Registrant Name CPI Card Group Inc.  
Entity Central Index Key 0001641614  
Document Type 10-Q  
Document Period End Date Mar. 31, 2020  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Entity Interactive Data Current Yes  
Entity Current Reporting Status Yes  
Entity Filer Category Non-accelerated Filer  
Entity Common Stock, Shares Outstanding   11,229,819
Entity Small Business true  
Entity Emerging Growth Company true  
Entity Ex Transition Period true  
Entity Shell Company false  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q1  
v3.20.1
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Mar. 31, 2020
Dec. 31, 2019
Current assets:    
Cash and cash equivalents $ 46,904 $ 18,682
Accounts receivable, net of allowances of $338 and $395, respectively 43,790 42,832
Inventories 19,146 20,192
Prepaid expenses and other current assets 4,548 6,345
Income taxes receivable 5,590 4,164
Total current assets 119,978 92,215
Plant, equipment, leasehold improvements and operating lease right-of-use assets, net 39,928 42,088
Intangible assets, net 29,653 30,802
Goodwill 47,150 47,150
Other assets 681 1,232
Total assets 237,390 213,487
Current liabilities:    
Accounts payable 13,772 16,482
Accrued expenses 20,973 22,820
Deferred revenue and customer deposits 645 468
Total current liabilities 35,390 39,770
Long-term debt 333,890 307,778
Deferred income taxes 7,495 6,896
Other long-term liabilities 10,598 11,478
Total liabilities 387,373 365,922
Commitments and contingencies (Note 15)
Stockholders’ deficit:    
Common stock; $0.001 par value—100,000,000 shares authorized; 11,229,819 and 11,224,191 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively 11 11
Capital deficiency (111,953) (111,988)
Accumulated loss (38,041) (40,458)
Total stockholders’ deficit (149,983) (152,435)
Total liabilities and stockholders’ deficit $ 237,390 $ 213,487
v3.20.1
Condensed Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Mar. 31, 2020
Dec. 31, 2019
Condensed Consolidated Balance Sheets    
Allowance on accounts receivable $ 338 $ 395
Preferred shares, par value (in dollars per share) $ 0.001 $ 0.001
Preferred shares, authorized shares (in shares) 100,000 100,000
Preferred shares, issued shares (in shares) 0 0
Preferred shares, outstanding shares (in shares) 0 0
Common shares, par value (in dollars per share) $ 0.001 $ 0.001
Common shares, authorized shares (in shares) 100,000,000 100,000,000
Common shares, issued shares (in shares) 11,229,819 11,224,191
Common shares, outstanding shares (in shares) 11,229,819 11,224,191
v3.20.1
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Net sales:    
Net Sales $ 73,969 $ 66,866
Cost of sales:    
Depreciation and amortization 2,693 2,690
Total cost of sales 48,259 45,345
Gross profit 25,710 21,521
Operating expenses:    
Selling, general and administrative (exclusive of depreciation and amortization shown below) 16,542 16,418
Depreciation and amortization 1,485 1,533
Total operating expenses 18,027 17,951
Income from operations 7,683 3,570
Other expense, net:    
Interest, net (6,088) (6,324)
Foreign currency (loss) gain (8) 41
Other (expense) income, net (87) 19
Total other expense, net (6,183) (6,264)
Income (loss) from continuing operations before income taxes 1,500 (2,694)
Income tax benefit (expense) 943 (403)
Net income (loss) from continuing operations 2,443 (3,097)
Net (loss) income from discontinued operation, net of tax (Note 3) (26) 42
Net income (loss) $ 2,417 $ (3,055)
Basic and diluted earnings (loss) per share:    
Basic income (loss) per share - continuing operations (in dollar per share) $ 0.22 $ (0.28)
Diluted income (loss) per share - continuing operations (in dollar per share) 0.22 (0.28)
Basic income (loss) per share (in dollar per share) 0.22 (0.27)
Diluted income (loss) per share (in dollar per share) $ 0.21 $ (0.27)
Basic weighted-average shares outstanding (in dollar per share) 11,224,500 11,160,473
Diluted weighted-average shares outstanding (in dollar per share) 11,262,359 11,160,473
Comprehensive income (loss):    
Net income (loss) $ 2,417 $ (3,055)
Currency translation adjustment   31
Total comprehensive income (loss) 2,417 (3,024)
Products    
Net sales:    
Net Sales 42,501 32,757
Cost of sales:    
Products and Services (exclusive of depreciation and amortization shown below) 26,379 21,489
Services    
Net sales:    
Net Sales 31,468 34,109
Cost of sales:    
Products and Services (exclusive of depreciation and amortization shown below) $ 19,187 $ 21,166
v3.20.1
Condensed Consolidated Statements of Stockholders' Deficit - USD ($)
$ in Thousands
Common Stock
Capital deficiency
Accumulated earnings (loss)
Accumulated other comprehensive loss
Total
Beginning balance at Dec. 31, 2018 $ 11 $ (112,223) $ (36,004) $ (1,360) $ (149,576)
Beginning balance (in shares) at Dec. 31, 2018 11,160,377        
Shares issued under stock-based compensation plans (in shares) 160        
Stock-based compensation   132     132
Components of comprehensive (loss) income:          
Net income (loss)     (3,055)   (3,055)
Currency translation adjustment       31 31
Ending balance at Mar. 31, 2019 $ 11 (112,091) (39,059) $ (1,329) (152,468)
Ending balance (in shares) at Mar. 31, 2019 11,160,537        
Beginning balance at Dec. 31, 2019 $ 11 (111,988) (40,458)   $ (152,435)
Beginning balance (in shares) at Dec. 31, 2019 11,224,191       11,224,191
Shares issued under stock-based compensation plans (in shares) 5,628        
Stock-based compensation   35     $ 35
Components of comprehensive (loss) income:          
Net income (loss)     2,417   2,417
Ending balance at Mar. 31, 2020 $ 11 $ (111,953) $ (38,041)   $ (149,983)
Ending balance (in shares) at Mar. 31, 2020 11,229,819       11,229,819
v3.20.1
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Operating activities    
Net income (loss) $ 2,417 $ (3,055)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:    
Loss (income) from discontinued operation 26 (42)
Depreciation and amortization expense 4,178 4,223
Stock-based compensation expense 41 147
Amortization of debt issuance costs and debt discount 634 489
Deferred income taxes 599 250
Other, net 582 (45)
Changes in operating assets and liabilities:    
Accounts receivable (911) (1,420)
Inventories 521 (4,382)
Prepaid expenses and other assets 1,138 309
Income taxes receivable, net (1,384) 114
Accounts payable (2,747) 403
Accrued expenses (1,981) (6,716)
Deferred revenue and customer deposits 177 (551)
Other liabilities (86) 80
Cash provided by (used in) operating activities - continuing operations 3,204 (10,196)
Cash provided by (used in) operating activities - discontinued operation (26) 42
Investing activities    
Acquisitions of plant, equipment and leasehold improvements (938) (2,146)
Cash used in investing activities (938) (2,146)
Financing activities    
Proceeds from Senior Credit Facility, net of discount 29,100  
Debt issuance costs (2,507)  
Proceeds from Revolving Credit Facility   5,000
Payments on Revolving Credit Facility   (5,000)
Payments on finance lease obligations (593) (143)
Cash provided by (used in) financing activities 26,000 (143)
Effect of exchange rates on cash (18) 34
Net increase (decrease) in cash and cash equivalents 28,222 (12,409)
Cash and cash equivalents, beginning of period 18,682 20,291
Cash and cash equivalents, end of period 46,904 7,882
Supplemental disclosures of cash flow information    
Interest 5,538 5,736
Income taxes, net refunds (232) (41)
Right-of-use assets obtained in exchange for lease obligations- Operating leases 141  
Right-of-use assets obtained in exchange for lease obligations- Financing leases 251  
Accounts payable, and accrued expenses for acquisitions of plant, equipment and leasehold improvements $ 345 $ 1,238
v3.20.1
Business Overview and Summary of Significant Accounting Policies
3 Months Ended
Mar. 31, 2020
Business Overview and Summary of Significant Accounting Policies  
Business Overview and Summary of Significant Accounting Policies

1. Business Overview and Summary of Significant Accounting Policies

 

Business Overview

 

CPI Card Group Inc., (which, together with its subsidiary companies, is referred to herein as “CPI” or the “Company”) is a payment technology company and leading provider of comprehensive Financial Payment Card solutions in the United States. The Company defines “Financial Payment Cards” as credit, debit and Prepaid Debit Cards issued on the networks of the “Payment Card Brands” (Visa, Mastercard®, American Express® and Discover® in the United States) and Interac (in Canada). We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. The Company also offers an instant card issuance solution, which provide card issuing bank customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders.

As a producer and provider of services for Financial Payment Cards, each of the Company’s secure facilities must be compliant and registered with one or more of the Payment Card Brands and is therefore subject to specific requirements and conditions. Noncompliance with these requirements would prohibit the individual facilities of the Company from producing Financial Payment Cards for these entities’ payment card issuers.

In the fourth quarter of 2018, the Company entered into a definitive agreement to sell the Company’s Canadian subsidiary to Allcard Limited, a provider of card solutions to the gift and loyalty sectors. The sale agreement did not include the portions of the business relating to Financial Payment Cards, as that business migrated to the Company’s operations in the Debit and Credit segment or to other service providers in 2019. The transaction closed on April 1, 2019, and the Company received cash proceeds of $1,451.  After the payment of liabilities and transaction costs, including employee termination costs, the sale did not have a significant impact on cash, and no significant loss on sale.  The Canadian subsidiary was not a significant operating segment and was part of the Other reportable segment.

 

 

COVID-19 Update

 

In December 2019, a novel coronavirus disease (“COVID-19”) was reported and in January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic. Further, on March 13, 2020, the President of the United States declared the COVID-19 pandemic a national emergency, invoking powers under the Stafford Act – the legislation that directs federal emergency disaster response.

 

The broader and long-term implications of COVID-19 on the Company’s results of operations and overall financial performance remain uncertain. The adverse effects of the COVID-19 pandemic have become widespread, including in the locations where the Company operates and its customers and suppliers conduct business. The health and safety of CPI’s employees remains paramount, and the Company continues to follow the safety precautions and other appropriate measures recommended by the Centers for Disease Control and Prevention.  All of CPI’s operations remain open and continue to provide direct and essential support to the financial services industry.  However, the Company may experience constrained supply or curtailed customer demand that could materially adversely impact the business, results of operations and overall financial performance in future periods. While CPI’s net sales and net income in the first quarter of 2020 has increased over the first quarter of 2019, the effect of the COVID-19 pandemic will not be fully reflected in the Company’s results of operations and overall financial performance until future periods. See Risk Factors for further discussion of the possible impact of the COVID-19 pandemic on the business.

 

As the COVID-19 pandemic unfolds, the Company continues to provide essential support to its customers and execute on its strategic plan, while carefully managing spending.  However, there can be no assurance that such strategies will be successful in effectively managing the Company’s resources and mitigating the negative impact of the COVID-19 on the business and operating results.

 

              On March 27, 2020, the President of the United States signed the Coronavirus Aid Relief, and Economic Security (CARES) Act into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, changes in net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. CPI is evaluating the applicability of the CARES Act to the Company, and the potential impacts on the business. While the Company may determine to apply for, or otherwise participate in, such programs, there is no guarantee that CPI will meet any eligibility requirements to participate in certain programs or, even if the Company is able to participate, that such programs will provide meaningful benefit to the business.

 

 

Basis of Presentation

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for the fair statement of the results of the interim periods presented. The Condensed Consolidated Balance Sheet as of December 31, 2019 is derived from the audited financial statements as of that date. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

 

Use of Estimates

 

Management uses estimates and assumptions relating to the reporting of assets and liabilities in its preparation of the condensed consolidated financial statements. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and intangible assets, leases, valuation allowances for inventories and deferred taxes, revenue recognized for work performed but not completed, and uncertain tax positions. Actual results could differ from those estimates.

 

 Recent Accounting Standards

 

Recently Adopted Accounting Standards

 

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Codification (“ASC”) Topic 842, Leases (“ASC 842”), which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets. ASC 842 is effective for annual and interim periods beginning after December 15, 2018 (the Company’s fiscal year 2019) with early adoption permitted. The guidance required a modified retrospective approach, with an option to apply the transition provisions of the new guidance at the adoption date without adjusting the comparative periods presented. In July 2018, the FASB issued additional accounting standard updates clarifying certain provisions, as well as providing for a second transition method allowing entities to initially apply the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. The Company adopted the new guidance on January 1, 2019 and used the adoption date as the date of initial application as allowed under ASC 842. Refer to Note 10, Financing and Operating Leases.

 

Recently Issued Accounting Standards

 

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). This ASU changes the model for the recognition of credit losses from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected loss model, which requires the Company to estimate the total credit losses expected on the portfolio of financial instruments. The effective date of ASU 2016-13 was amended by ASU 2019-10, Credit Losses Effective Dates. CPI is a smaller reporting company and adoption of this accounting standard is effective for the Company for fiscal years beginning after December 15, 2022, and interim periods therein, with early adoption permitted.  The Company has elected not to early adopt this accounting standard in the current fiscal year 2020.  The Company is evaluating the impact of adoption of this standard, and does not anticipate the application of ASU 2016-13 will have a material impact on the Company’s consolidated financial position and results of operations.     

v3.20.1
Net Sales
3 Months Ended
Mar. 31, 2020
Net Sales.  
Net Sales

2. Net Sales

 

 

The Company disaggregates its net sales by major source as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2020

 

 

 

Products

 

Services

 

Total

 

Debit and Credit

 

$

42,911

 

$

16,928

 

$

59,839

 

Prepaid Debit

 

 

 —

 

 

14,540

 

 

14,540

 

Other

 

 

 —

 

 

 —

 

 

 —

 

Intersegment eliminations

 

 

(410)

 

 

 —

 

 

(410)

 

Total

 

$

42,501

 

$

31,468

 

$

73,969

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

 

 

Products

 

Services

 

Total

 

Debit and Credit

 

$

32,844

 

$

16,085

 

$

48,929

 

Prepaid Debit

 

 

 —

 

 

16,744

 

 

16,744

 

Other

 

 

397

 

 

1,282

 

 

1,679

 

Intersegment eliminations

 

 

(484)

 

 

(2)

 

 

(486)

 

Total

 

$

32,757

 

$

34,109

 

$

66,866

 

 

Products Net Sales

“Products” net sales are recognized when obligations under the terms of a contract with a customer are satisfied. In most instances, this occurs over time as cards are manufactured for specific customers and have no alternative use and the Company has an enforceable right to payment for work performed. For work performed but not completed and unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts. Items included in “Products” net sales are manufactured Financial Payment Cards, including contact-EMV®, Dual-Interface EMV, contactless and magnetic stripe cards, Second WaveTM, metal, private label credit cards and retail gift cards. Card@Once® printers and consumables are also included in “Products” net sales, and their associated revenues are recognized at the time of shipping. The Company includes gross shipping and handling revenue in net sales, and shipping and handling costs in cost of sales.

EMV® is a registered trademark in the U.S. and other countries and an unregistered trademark elsewhere. The EMV trademark is owned by EMVCo, LLC .

 

Services Net Sales

 

Net sales are recognized for “Services” as the services are performed. Items included in “Services” net sales include the personalization and fulfillment of Financial Payment Cards, providing tamper-evident secure packaging and fulfillment services to Prepaid Debit Card program managers and software as a service personalization of instant issuance debit and credit cards.  The Company also generates “Services” net sales from usage-fees generated from the Company’s patented card design software, known as MYCA®, which provides customers and cardholders the ability to design cards on the internet and customize cards with individualized digital images. For work performed but not completed and unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts.

 

Customer Contracts

The Company often enters into Master Services Agreements (“MSAs”) with its customers. Generally, enforceable rights and obligations for goods and services occur only when a customer places a purchase order or statement of work to obtain goods or services under an MSA. The contract term as defined by ASC 606,  Revenue from Contracts with Customers, is the length of time it takes to deliver the goods or services promised under the purchase order or statement of work. As such, the Company's contracts are generally short term in nature.

v3.20.1
Discontinued Operation
3 Months Ended
Mar. 31, 2020
Discontinued Operation  
Discontinued Operation

3. Discontinued Operation

 

On August 3, 2018, the Company completed the sale of its three facilities in the United Kingdom that produced retail cards, such as gift and loyalty cards, for customers in the United Kingdom and continental Europe, and provided personalization, packaging and fulfillment services. The facilities sold included Colchester, Liverpool and Derby locations. The Company reported the U.K. Limited reporting segment as discontinued operations and restated the comparative financial information for all periods presented in conformity with GAAP. Unless otherwise indicated, information in these notes to the unaudited condensed consolidated financial statements relate to continuing operations. The Company did not retain significant continuing involvement with the discontinued operation subsequent to the disposal.    The impact of the discontinued operations was insignificant to the Company’s condensed consolidated statement of operations for the three months ended March 31, 2020 and 2019.

 

v3.20.1
Accounts Receivable
3 Months Ended
Mar. 31, 2020
Accounts Receivable  
Accounts Receivable

4. Accounts Receivable

 

Accounts receivable consisted of the following:

 

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

 

 

 

 

 

 

    

Trade accounts receivable

 

$

38,525

 

$

39,004

Unbilled accounts receivable

 

 

5,603

 

 

4,223

 

 

 

44,128

 

 

43,227

Less allowance for doubtful accounts

 

 

(338)

 

 

(395)

 

 

$

43,790

 

$

42,832

 

v3.20.1
Inventories
3 Months Ended
Mar. 31, 2020
Inventories  
Inventories

5.  Inventories

 

Inventories consisted of the following:

 

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

 

 

 

 

 

 

 

Raw materials

 

$

16,634

 

$

16,492

Finished goods

 

 

4,384

 

 

5,047

Inventory reserve

 

 

(1,872)

 

 

(1,347)

 

 

$

19,146

 

$

20,192

 

v3.20.1
Plant, Equipment, Leasehold Improvements and Operating Lease Right-of-Use Assets
3 Months Ended
Mar. 31, 2020
Plant, Equipment, Leasehold Improvements and Operating Lease Right-of-Use Assets  
Plant, Equipment, Leasehold Improvements and Operating Lease Right-of-Use Assets

6. Plant, Equipment, Leasehold Improvements and Operating Lease Right-of-Use Assets

 

Plant, equipment, leasehold improvements and operating lease right-of-use assets consisted of the following:

 

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

 

 

 

 

 

 

 

Machinery and equipment

 

$

52,270

 

$

52,212

Machinery and equipment under financing leases

 

 

8,507

 

 

8,256

Furniture, fixtures and computer equipment

 

 

4,646

 

 

4,749

Leasehold improvements

 

 

14,914

 

 

14,905

Construction in progress

 

 

756

 

 

455

 

 

 

81,093

 

 

80,577

Less accumulated depreciation and amortization

 

 

(47,121)

 

 

(44,801)

Operating lease right-of-use assets, net of accumulated amortization

 

 

5,956

 

 

6,312

 

 

$

39,928

 

$

42,088

 

Depreciation expense of plant, equipment and leasehold improvements, including depreciation of assets under financing leases, was $3,029 and $3,059 for the three months ended March 31, 2020 and 2019, respectively.

Operating lease right-of-use assets, net of accumulated amortization, are further described in Note 10, Financing and Operating Leases.

v3.20.1
Goodwill and Other Intangible Assets
3 Months Ended
Mar. 31, 2020
Goodwill and Other Intangible Assets  
Goodwill and Other Intangible Assets

7. Goodwill and Other Intangible Assets

 

The Company reports all of its goodwill in its Debit and Credit segment at March 31, 2020 and December 31, 2019.  Goodwill is tested for impairment at least annually on October 1 or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable.  The Company did not identify a triggering event requiring a quantitative test for impairment as of March 31, 2020.  The implications of COVID-19, and a decline in the Company’s total fair value of invested capital and financial performance for reporting units with goodwill, could require the Company to perform a quantitative test for goodwill impairment in future quarters. 

 

Intangible assets consist of customer relationships, technology and software, trademarks and non-compete agreements. Intangible amortization expense was $1,149 and $1,164 for the three months ended March 31, 2020 and 2019, respectively.

 

At March 31, 2020 and December 31, 2019, intangible assets, excluding goodwill, were comprised of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

December 31, 2019

 

Weighted Average

 

 

 

 

Accumulated

 

Net Book

 

 

 

 

Accumulated

 

Net Book

 

Life (Years)

    

Cost

    

Amortization

    

Value

    

Cost

    

Amortization

    

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

17.2

 

$

55,454

 

$

(29,684)

 

$

25,770

 

$

55,454

 

 

(28,865)

 

$

26,589

Technology and software

 8

 

 

7,101

 

 

(5,184)

 

 

1,917

 

 

7,101

 

 

(4,952)

 

 

2,149

Trademarks

8.7

 

 

3,330

 

 

(1,364)

 

 

1,966

 

 

3,330

 

 

(1,266)

 

 

2,064

Non-compete agreements

 5

 

 

491

 

 

(491)

 

 

 —

 

 

491

 

 

(491)

 

 

 —

Intangible assets subject to amortization

 

 

$

66,376

 

$

(36,723)

 

$

29,653

 

$

66,376

 

$

(35,574)

 

$

30,802

 

The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of March 31, 2020 was as follows:

 

 

 

 

 

2020

 

$

3,446

2021

    

 

4,352

2022

 

 

3,867

2023

 

 

3,867

2024

 

 

3,530

Thereafter

 

 

10,591

 

 

$

29,653

 

v3.20.1
Fair Value of Financial Instruments
3 Months Ended
Mar. 31, 2020
Fair Value of Financial Instruments  
Fair Value of Financial Instruments

8. Fair Value of Financial Instruments

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In determining fair value, the Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

    Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

 

    Level 2— Observable inputs other than Level 1 prices, such as quoted prices in active markets for similar assets and liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term for the assets or liabilities.

 

    Level 3— Valuations based on unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

 

The Company’s financial assets and liabilities that are not required to be re-measured at fair value in the Condensed Consolidated Balance Sheets were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Value as of 

 

Fair Value as of 

 

Fair Value Measurement at March 31, 2020

 

 

March 31, 

 

March 31, 

 

 (Using Fair Value Hierarchy)

 

 

2020

 

2020

 

Level 1

 

Level 2

 

Level 3

Liabilities:

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

First Lien Term Loan

 

$

312,500

 

$

201,563

 

$

 —

 

$

201,563

 

$

 —

Senior Credit Facility

 

$

30,000

 

$

30,000

 

$

 

 

$

 

 

$

30,000

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Value as of

 

Fair Value as of

 

Fair Value Measurement at December 31, 2019

 

 

December 31, 

 

December 31, 

 

 (Using Fair Value Hierarchy)

 

 

2019

 

2019

 

Level 1

 

Level 2

 

Level 3

Liabilities:

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

First Lien Term Loan

 

$

312,500

 

$

234,375

 

$

 

$

234,375

 

$

 

The aggregate fair value of the Company’s First Lien Term Loan, as defined in Note 11, Long-Term Debt, was based on bank quotes. The fair value measurement associated with the Senior Credit Facility is based on significant unobservable Level 3 inputs, which require significant management judgment and estimation.  The fair value approximates its carrying value as of March 31, 2020, given the facility ranks senior in priority to the Company’s First Lien Term Loan, and the close proximity to the date the Company entered into the Senior Credit Facility on March 6, 2020

 

The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable each approximate fair value.

v3.20.1
Accrued Liabilities
3 Months Ended
Mar. 31, 2020
Accrued Liabilities  
Accrued Liabilities

 

9. Accrued Liabilities

 

Accrued liabilities consisted of the following:

 

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

 

 

 

 

 

 

    

Accrued payroll and related employee expenses

 

$

4,743

 

$

3,954

Accrued employee performance bonus

 

 

1,497

 

 

3,920

Accrued interest

 

 

4,740

 

 

4,951

Operating and financing lease liability (current portion)

 

 

4,675

 

 

4,494

Other

 

 

5,318

 

 

5,501

Total accrued expenses

 

$

20,973

 

$

22,820

 

v3.20.1
Financing and Operating Leases
3 Months Ended
Mar. 31, 2020
Financing and Operating Leases  
Financing and Operating Leases

10. Financing and Operating Leases

 

CPI adopted ASC 842 effective January 1, 2019.  The Company elected the ‘package of practical expedients’, which permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification, and initial direct costs.  Right-of-use (“ROU’) represents the right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. A lease is deemed to exist when the Company has the right to control the use of identified property, plant or equipment, as conveyed through a contract, for a certain period of time and consideration paid. The right to control is deemed to occur when the Company has the right to obtain substantially all of the economic benefits of the identified assets and the right to direct the use of such assets. As a result of the adoption of ASC 842 the Company recorded $8,025 of operating ROU assets, and corresponding operating lease liabilities of $8,813 on January 1, 2019, relating to existing real estate operating leases.

 

The components of operating and finance lease costs were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

March 31, 2020

    

March 31, 2019

Total operating lease costs

 

671

 

 

643

 

 

 

 

 

 

Finance lease cost:

 

 

 

 

 

Right-of-use amortization expense

$

327

 

$

123

  Interest on lease liabilities

 

129

 

 

22

  Total financing lease costs

$

456

 

$

145

 

 

 

 

 

 

 

The following table reflects balances for operating and financing leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

    

December 31, 2019

Operating leases

 

 

 

 

 

   Operating lease right-of-use assets, net of amortization

$

5,956

 

$

6,312

 

 

 

 

 

 

   Operating lease liability (current)

$

2,401

 

$

2,283

   Long-term operating liability

 

4,548

 

 

5,067

     Total operating lease liabilities   

$

6,949

 

$

7,350

 

 

 

 

 

 

Financing leases

 

 

 

 

 

   Property, equipment and leasehold improvements

$

8,507

 

$

8,256

   Accumulated depreciation

 

(1,421)

 

 

(1,094)

     Total property, equipment and leasehold improvements, net 

$

7,086

 

$

7,162

 

 

 

 

 

 

  Financing lease liability (current)

$

2,274

 

$

2,211

  Long-term financing liability

 

3,460

 

 

3,886

     Total financing lease liabilities

$

5,734

 

$

6,097

 

 

 

 

 

 

 

 

Finance and operating lease right-of-use assets are recorded in “Plant, equipment, leasehold improvements, and operating lease right-of-use assets, net”.  Financing and operating lease liabilities are recorded in “Accrued expenses” and “Other long-term liabilities”.

 

Future cash payment with respect to lease obligations as of March 31, 2020 were as follows:

 

 

 

 

 

 

 

 

 

 

 

Operating

 

 

Financing

 

 

 

Lease

 

 

Leases

Year Ended

 

 

 

 

 

 

2020

 

 

2,186

 

$

2,038

2021

 

 

2,700

 

 

2,128

2022

 

 

1,428

 

 

1,641

2023

 

 

1,106

 

 

693

2024

 

 

607

 

 

 —

  Total lease payments

 

 

8,027

 

 

6,500

Less imputed interest

 

 

(1,078)

 

 

(766)

  Total 

 

$

6,949

 

$

5,734

 

 

 

 

 

 

 

 

v3.20.1
Long-Term Debt
3 Months Ended
Mar. 31, 2020
Long-Term Debt.  
Long-Term Debt

11. Long-Term Debt

 

At March 31, 2020 and December 31, 2019, long-term debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

    

Interest

    

 

March 31, 

    

December 31, 

 

 

Rate (1)

 

 

2020

 

2019

First Lien Term Loan

 

6.38

%  

 

$

312,500

 

$

312,500

Senior Credit Facility

 

9.50

%  

 

 

30,000

 

 

 —

Unamortized discount

 

 

 

 

 

(2,951)

 

 

(1,770)

Unamortized deferred financing costs

 

 

 

 

 

(5,659)

 

 

(2,952)

Total Long-term debt

 

 

 

 

$

333,890

 

$

307,778

Less current maturities

 

 

 

 

 

 —

 

 

 —

Long-term debt, net of current maturities

 

 

 

 

 

333,890

 

 

307,778


(1)  Interest Rate on the First Lien Term Loan was 6.38%, and 6.71% as of March 31, 2020, and December 31, 2019, respectively. The interest rate on the Senior Credit Facility, which was entered into on March 6, 2020, was 9.50% as of March 31, 2020.   

 

On August 17, 2015, the Company entered into a first lien credit facility (the “First Lien Credit Facility”) with a syndicate of lenders providing for a $435,000 first lien term loan (the “First Lien Term Loan”) and a $40,000 revolving credit facility (the “Revolving Credit Facility”). The First Lien Term Loan matures August 17, 2022 and the Revolving Credit Facility was terminated concurrently with the Company entering into a new senior credit facility on March 6, 2020. 

 

On March 6, 2020, the Company and its wholly owned subsidiary, CPI Acquisition, Inc. (the “Borrower”), entered into a super senior credit agreement with Guggenheim Credit Services, LLC (“Guggenheim”), Vector Capital Credit Opportunity Master Fund, L.P. (“Vector”), Guggenheim, as administrative agent and collateral agent, and certain other lenders from time to time party thereto (the “Senior Credit Agreement” and together with all ancillary documents thereto, the “Senior Credit Facility”).  The Senior Credit Facility matures on May 17, 2022, and provides for the extension of credit to the Borrower in the form of super senior term loans in an aggregate principal amount of $30,000, which ranks senior in priority to the Company’s First Lien Term Loan, which has $312,500 outstanding as of March 31, 2020. 

 

The Senior Credit Facility and the First Lien Term Loan are secured by substantially all of the Company’s assets constituting equipment, inventory, receivables, cash and other tangible and intangible property.

 

The Senior Credit Facility and the First Lien Term Loan contain customary representations, covenants and events of default, including certain covenants that limit or restrict the Company’s and certain of its subsidiaries’ ability to incur indebtedness, grant certain types of security interests, incur certain types of liens, sell or transfer assets or enter into a merger or consolidate with another company, enter into sale and leaseback transactions, make certain types of investments, declare or make dividends or distributions, engage in certain affiliate transactions, or modify organizational documents, among other restrictions and subject to certain exceptions.  In accordance with the Senior Credit Facility, the Company is also required to maintain adjusted EBITDA, as defined in the agreement, of $25,000 for the previous four consecutive fiscal quarters in total, as measured each quarterly period ending on or after March 31, 2020.    As of March 31, 2020, the Company was in compliance with all covenants under the First Lien Term Loan and the Senior Credit Facility.

 

The Senior Credit Facility and the First Lien Term Loan also require prepayment in advance of the maturity date upon the occurrence of certain customary events, including based on an annual excess cash flow calculation, pursuant to the terms of the agreement, with any required payments to be made after the issuance of the Company’s annual financial statements. The Company was not required to make any prepayments of the First Lien Term Loan with respect to our 2019 annual financial statements.

 

Interest rates under the Senior Credit Facility are based, at the Company's election, on a Eurodollar rate, subject to an interest rate floor of 1.0%, plus a margin of 8.5% or a base rate plus a margin of 7.5%.  The maturity date of the Senior Credit Facility is May 17, 2022, and prepayments made prior to February 15, 2022 are subject to a make-whole premium.    Interest rates under the First Lien Term Loan are based, at the Company’s election, on a Eurodollar rate, subject to an interest rate floor of 1.0%, plus a margin of 4.50%, or a base rate plus a margin of 3.50%. 

 

The term loans made under the Senior Credit Facility would be accelerated and become immediately due and payable if an event of default (as defined in the Senior Credit Agreement) were to occur. Tricor Pacific Capital Partners (Fund IV), Limited Partnership and Tricor Pacific Capital Partners (Fund IV) US, Limited Partnership (collectively, the “Tricor Funds”), own approximately 37% and 22% of the Company’s common stock, respectively, as of December 31, 2019. If the Tricor Funds were to sell or otherwise dispose of more than 25% of CPI’s outstanding common stock, or otherwise cease to own at least 30% of CPI’s outstanding common stock, other than by means of distributing CPI common stock to the participants in Tricor Funds, a “change of control” event of default would occur. Additionally, certain proposed changes to the Senior Credit Facility require the consent of lenders representing more than 50% of the outstanding term loans, and if a lender does not consent to such proposed changes, then, among other options, CPI may be required to pre-pay the non-consenting lender’s portion of the loan, including accrued interest, fees and other amounts payable, as well as a make-whole premium.

 

The proceeds of the Senior Credit Facility may be used by the Company to provide for the working capital and general corporate requirements of the Company and its subsidiaries, including to pay any fees and expenses in connection with the Senior Credit Facility and other related loan documents.

 

Deferred Financing Costs and Discount

 

Certain costs and discounts incurred with borrowings or the establishment or modification of credit facilities are reflected as a reduction to the long-term debt balance. These costs are amortized as an adjustment to interest expense over the life of the borrowing using the effective-interest rate method.  The discount on the Senior Credit Facility was $1,400, and financing costs were $3,215, and were recorded as a reduction to the long-term debt balance in the quarter ended March 31, 2020.  The net discount and debt issuance costs on the Senior Credit Facility as included within financing activities on the condensed consolidated statement of cash flows relates to cash flows during the quarter ended March 31, 2020.

v3.20.1
Income Taxes - Continuing Operations
3 Months Ended
Mar. 31, 2020
Income Taxes - Continuing Operations  
Income Taxes - Continuing Operations

12. Income Taxes – Continuing Operations

 

During the three months ended March 31, 2020, the Company recognized an income tax benefit of $943 on a pre-tax income of $1,500, compared to an income tax expense of $403 on a pre-tax loss of $2,694 for the prior year period.  

For the three months ended March 31, 2020 and 2019, the effective tax rate differs from the U.S. federal statutory income tax rate as follows:

 

 

 

 

 

 

 

 

 

March 31,

 

 

 

2020

    

2019

 

Tax at federal statutory rate

 

21.0

%

21.0

%

State Taxes, net

 

33.9

 

(0.8)

 

Valuation allowance

 

70.4

 

(31.2)

 

Permanent Items

 

34.6

 

(2.1)

 

Tax benefit CARES Act

 

(238.6)

 

 —

 

Other

 

15.8

 

(1.9)

 

Effective income tax rate

 

(62.9)

%

(15.0)

%

 

In March 2020, the CARES Act was signed into law. The CARES Act allows companies with net operating losses (NOLs) originating in 2018, 2019, or 2020 to carry back those losses for five years and temporarily eliminates the tax law provision that limits the use of NOLs to 80% of taxable income.  The CARES Act increases the Internal Revenue Code Section 163(j) interest deduction limit for 2019 and 2020, and allows for the acceleration of refunds of alternative minimum tax credits.  For the quarter ended March 31, 2020, the Company estimated a tax benefit for certain provisions in the CARES Act including the carryback of losses and the increase to the interest deduction limitation, resulting in a tax rate benefit of 238.6%.  In addition, the Company recorded a partial valuation allowance with a tax rate impact of 70.4%, due to the limitation on the deductibility of interest expense.  The Company’s income tax receivable on the condensed consolidated balance sheet as of March 31, 2020, relates primarily to U.S. federal income tax receivables relating to prior tax years including NOL carrybacks.  In the prior year quarter ended March 31, 2019, the effective tax rate differs from the federal U.S. statutory rate primarily due to the impact of tax expense recorded related to the partial valuation allowance due to the limitation on the deductibility of interest expense. 

v3.20.1
Stockholders' Deficit
3 Months Ended
Mar. 31, 2020
Stockholders’ Deficit  
Stockholders’ Deficit

 

13. Stockholders’ Deficit

 

Common Stock

 

Common Stock has a par value of $0.001 per share. Holders of common stock are entitled to receive dividends and distributions subject to the participation rights of holders of all classes of stock at the time outstanding, as such holders have prior rights as to dividends pursuant to the rights of any series of Preferred Stock. Upon any liquidation, dissolution, or winding up of the Company, after required payments are made to holders of any series of Preferred Stock, any remaining assets of the Company will be distributed ratably to the holders of Common Stock. Holders of Common Stock are entitled to one vote per share. 

 

v3.20.1
Income (Loss) per Share
3 Months Ended
Mar. 31, 2020
Income (Loss) per Share  
Income (Loss) per Share

14. Income (Loss) per Share

 

Basic and diluted income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period.

 

The following table sets forth the computation of basic and diluted income (loss) per share:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2020

    

2019

Numerator:

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

2,443

 

$

(3,097)

Net (loss) income from discontinued operation

 

 

(26)

 

 

42

Net income (loss)

 

$

2,417

 

$

(3,055)

 

 

 

 

 

 

 

Denominator: 

 

 

 

 

 

 

Basic weighted-average common shares outstanding

 

 

11,224,500

 

 

11,160,473

Dilutive shares

 

 

37,859

 

 

 —

Diluted weighted-average common shares outstanding

 

 

11,262,359

 

 

11,160,473

 

 

 

 

 

 

 

Net income (loss) per share from continuing operations - Basic:

 

$

0.22

 

$

(0.28)

Net income (loss) per share from discontinued operations - Basic:

 

 

(0.00)

 

 

0.01

Net income (loss) per share - Basic:

 

$

0.22

 

$

(0.27)

 

 

 

 

 

 

 

Net income (loss) per share from continuing operations - Diluted:

 

$

0.22

 

$

(0.28)

Net income (loss) per share from discontinued operations - Diluted:

 

 

(0.01)

 

 

0.01

Net income (loss) per share - Diluted:

 

$

0.21

 

$

(0.27)

 

 

 

 

 

 

 

The Company reported a net loss for the three months ended March 31, 2019. Accordingly, the potentially dilutive effect of 893,238 stock options and 67,592 restricted stock units were excluded from the computation of diluted earnings per share as of March 31, 2019, as their inclusion would be anti-dilutive.

v3.20.1
Commitments and Contingencies: Litigation Settlement
3 Months Ended
Mar. 31, 2020
Commitments and Contingencies: Litigation Settlement.  
Commitments and Contingencies: Litigation Settlement

15. Commitments and Contingencies; Litigation Settlement 

 

Contingencies 

 

In accordance with applicable accounting guidance, the Company establishes an accrued liability when loss contingencies are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. As a matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. Once the loss contingency is deemed to be both probable and estimable, the Company will establish an accrued liability and record a corresponding amount of litigation-related expense. The Company expenses professional fees associated with litigation claims and assessments as incurred.

 

Heckermann v. Montross et al., Case No. 1:17-CV-01673 (D. Del.) (the “Derivative Suit”)

On November 20, 2017, a purported CPI stockholder filed a stockholder derivative complaint in the United States District Court for the District of Delaware (the “Court”) against certain of CPI’s former officers and current and former directors, along with the sponsors of CPI’s October 2015 initial public offering (“IPO”). CPI is also named as a nominal defendant. The derivative complaint asserts claims under §§10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 and seeks, among other things, injunctive relief, damages and costs. It alleges false or misleading statements and omissions in the Registration Statement filed by CPI in connection with its IPO and subsequent public filings and statements. The derivative complaint also asserts claims for purported breaches of fiduciary duties, unjust enrichment, mismanagement and waste of corporate assets.

On December 18, 2019, the parties filed a Stipulation and Agreement of Settlement to resolve and dismiss the Derivative Suit, and on April 1, 2020, the Court granted final approval of the settlement set forth therein and dismissed with prejudice all claims (the “Settlement”). Under the Settlement, (i) all claims that were or could have been asserted in the Derivative Suit were resolved and discharged, (ii) the Company agreed to implement certain corporate governance reforms, and (iii) the Company’s insurer agreed to pay fees and expenses awarded to the plaintiff’s counsel in the amount of $343 and a service award to the plaintiff of a nominal amount. No liability associated with the Settlement has been recorded by the Company as of March 31, 2020, or December 31, 2019.

 

In addition to the matters described above, the Company is subject to routine legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of these matters will not have a material adverse effect on its business, financial condition or results of operations.

 

Litigation Settlement

CPI Card Group Inc. v. Multi Packaging Solutions, Inc., et al. Second Case

During the summer of 2017, the Company and its subsidiary, CPI Card Group – Minnesota, Inc. (together, the “Company Plaintiffs”), commenced a lawsuit in the United States District Court for the District of Minnesota against a former employee, Multi Packaging Solutions, Inc. (“MPS”), and two MPS employees as individuals (collectively, the Defendants).  On June 12, 2019, the Company Plaintiffs and the Defendants reached a settlement pursuant to which the case was resolved and dismissed by mutual agreement on terms that provided for, among other things, a cash payment to the Company.  The Company received a $6,000 cash settlement payment during the second quarter of 2019, and recorded the gain within income from operations, in the Other segment.  The case was dismissed in its entirety, with prejudice, by court order on July 12, 2019.

 

v3.20.1
Stock Based Compensation
3 Months Ended
Mar. 31, 2020
Stock Based Compensation  
Stock Based Compensation

16. Stock-Based Compensation

 

CPI Card Group Inc. Omnibus Incentive Plan

 

During October 2015, the Company adopted the CPI Card Group Inc. Omnibus Incentive Plan (the “Omnibus Plan”) pursuant to which cash and equity based incentives may be granted to participating employees, advisors and directors. The Company had reserved 800,000 shares of common stock for issuance under the Omnibus Plan. Effective March 25, 2017, the Omnibus Plan was amended and restated, providing for an increase in the number of shares of common stock authorized for issuance thereunder by 400,000. The increase was made effective in the fourth quarter of 2017 by stockholder approval in accordance with applicable law, after which the Company had reserved 1,200,000 shares of common stock for issuance. As of March 31, 2020, there were 336,731  shares available for grant under the Omnibus Plan. 

During the three months ended March 31, 2020,  and during the fiscal year ended December 31, 2019, the Company did not grant any awards of non-qualified stock options. The following is a summary of the activity in outstanding stock options under the Omnibus Plan:

 

 

 

 

 

 

 

 

 

    

 

    

 

    

Weighted-

 

 

 

 

Weighted-

 

Average

 

 

 

 

Average

 

Remaining

 

 

 

 

Exercise

 

Contractual Term

 

 

Options

 

Price

 

(in Years)

Outstanding as of December 31, 2019

 

793,084

 

$

14.91

 

 

Forfeited

 

(57,741)

 

$

13.20

 

 

Outstanding as of March 31, 2020

 

735,343

 

$

15.05

 

7.16

Options vested and exercisable as of March 31, 2020

 

515,964

 

$

19.24

 

6.93

Options vested and expected to vest as of March 31, 2020

 

735,343

 

$

15.05

 

7.16

 

The following is a summary of the activity in unvested stock options under the Omnibus Plan:

 

 

 

 

 

 

 

 

 

 

 

Weighted-Average

 

    

Options

    

Grant-Date Fair Value

 

 

 

 

 

 

Unvested as of December 31, 2019

 

250,571

 

$

1.90

Forfeited

 

(7,923)

 

 

1.60

Vested

 

(23,269)

 

 

3.49

Unvested as of March 31, 2020

 

219,379

 

$

1.74

 

Unvested options as of March 31, 2020, will vest as follows:

 

 

 

 

 

 

 

2020

 

172,502

2021

 

46,877

Total unvested options as of March 31, 2020

 

219,379

 

 

 The following table summarizes the changes in the number of outstanding restricted stock units: